Retirement rate hikes could cost UA millions

By Natasha Bhuyan
Arizona Daily Wildcat
Thursday, February 24, 2005

Retirement contribution rates will rise this summer, but the state Legislature is staying mum on whether they will make up the expenses, which could cost the UA up to $4 million.

The Arizona State Retirement System, announced in November, plans to require state employees and employers to increase contributions for retirement and long-term disability coverage, forcing both to pay more to retirement packages, from 5.7 percent to 8.25 percent, said Keith Meredith, chairman of the ASRS board of trustees.

If the Legislature fails to cover the additional expenses, the UA will have to pay $4 million in retirement plans, but administrators are unsure of where that money would come from, said President Peter Likins.

Lack of funds from the Legislature will also increase Employee Related Expense rates, said Dick Roberts, director of the budget office.

"It would be a major problem for us," Roberts said. "If this happens, we would have to have a major discussion, and it would result in restructuring the budget."

In her fiscal year 2005-06 budget proposal, Democratic Gov. Janet Napolitano allotted $8,145,400 to cover increases in state employer and employee expenses.

Although the Legislature identified retirement expenses as an important issue, they have not disclosed whether they will make up for the losses, said Greg Fahey, associate vice president of government relations.

"If you don't get the money for it, it becomes a budget cut," said Fahey, who is lobbying the Legislature on the issue.

Provost George Davis said that although the UA has no contingency plan to deal with the potential loss, administrators are discussing budget reallocation methods in the face of decreased state funding.

"These are big hits," Davis said. "It's hard overnight to secure some source of revenue."

On top of a universitywide budget cut of $4 million, Likins said UA employees in ASRS will have to take a pay cut of the same amount to make up the other $4 million, since the actual shortfall is $8 million.

The UA is only required to fund the employer expenses, not the employee.

Likins chose not to make up the employee expense because few faculty members are in ASRS.

Administrators faced a similar situation in June when the Legislature failed to relieve the university of rising healthcare costs, resulting in a $12.4 million shortfall. Although central administration was able to absorb half the cost, Likins had to cut budget across the board by 2 percent, or $6.2 million, to make up for the remaining expenses, according to Likins' financial bulletins.

Davis said that along with less funding, the state is also trying to offload some investment costs on state agencies, resulting in unfunded mandates.

Last week, administrators announced 17 ideas on how to reallocate the budget to deal with the continuing decrease of state funding. Roberts said that since the proposals would reallocate funds internally, they do not address retirement rates.

The UA is not the only entity concerned about retirement contribution increases. All state agencies will be adversely impacted if the Legislature cannot make up the expenses, Roberts said.

Meredith, a UA retiree of educational psychology, said the Legislature is considering a range of ideas to combat the problem, such as capping contribution rates. However, Meredith pointed out such a move would only result in more increases in the future.

The financial increase is due to factors such as a longer life expectancy for people and lower than expected mid-term investment returns, Meredith said.

Although the ASRS contribution rates will rise on July 1 through June 20, 2007, Meredith said they will continue to increase in the future because of a constitutional requirement to keep the retirement fund stable.

Roberts said he does not expect the Legislature to release their budget until May, but the looming budget cuts have made retirement expenses a priority in the UA's lobbying efforts.

"It's a very important issue to us," Fahey said. "We are working on it every day."