Arizona State Senate

ARIZONA STATE SENATE RESEARCH STAFF ALANNA BENDEL ASSISTANT RESEARCH ANALYST TO: JOINT LEGISLATIVE AUDIT COMMITTEE MOLLY GRAVER DATE: January 2, 2020 LEGISLATIVE RESEARCH ANALYST FINANCE COMMITTEE Telephone: (602) 926-3171 SUBJECT: Sunset Review of the Arizona State Board of Investment ______

Attached is the final report of the sunset review of the Arizona State Board of Investment, which was conducted by the Senate Finance Committee of Reference.

This report has been distributed to the following individuals and agencies:

Governor of the State of Arizona The Honorable Douglas A. Ducey

President of the Senate Speaker of the House of Representatives Senator Karen Fann Representative Russell Bowers

Senate Members Senator J.D. Mesnard, Chair Secretary of the Senate Senator Lela Alston Senate Resource Center Senator Sean Bowie Senate Republican Staff Senator Paul Boyer Senate Democratic Staff Senator Lupe Contreras Senate Research Staff Senator David C. Farnsworth Office of the Chief Clerk Senator Vince Leach House Republican Staff Senator David Livingston House Democratic Staff Senator Martin Quezada House Research Staff Senator Michelle Ugenti-Rita

Arizona State Board of Investment Arizona State Library, Archives and Public Records

Senate Finance Committee of Reference Report

Arizona State Board of Investment

Background

The Arizona State Board of Investment (BOI) reviews investments of treasury monies, serves as trustees of the permanent land funds and provides management of the assets of the funds consistent with specific conditions (Ariz. Const. art. 10 § 7).

BOI membership consists of the following: 1) the Arizona State Treasurer, who serves as the BOI chairman; 2) the Director of the Arizona Department of Administration (ADOA); 3) the Superintendent of Financial Institutions; 2) a member appointed by the Arizona State Treasurer who has verifiable expertise in investment management; and 4) a member appointed by the Arizona State Treasurer who represents a public entity with current deposits in a local government investment pool (A.R.S. § 35-311). Laws 2019, Chapter 252 modified BOI membership to allow a designee in the place of the Director of ADOA and to replace the Superintendent of Financial Institutions with the Director of the Department of Insurance and Financial Institutions or its designee, effective July 1, 2020.

The BOI is set to terminate on July 1, 2020, unless legislation is enacted for its continuation (A.R.S. § 41-3020.17).

Committee of Reference Sunset Review Procedure

The Senate Finance Committee of Reference conducted a public meeting on Tuesday, December 17, 2019, to consider the BOI's response to the sunset factors and receive public testimony.

Committee Recommendations

The Senate Finance Committee of Reference recommended that the BOI be continued for eight years until July 1, 2028.

Attachments

A. Meeting Notice B. Minutes of the Senate Finance Committee of Reference C. Chairman’s Letter requesting the BOI's response to the agency factors D. BOI's response to the agency factors pursuant to A.R.S. § 41-2954, subsection F

MG/AB/gs

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Interim agendas can be obtained via the Internet at http://www.azleg.gov/Interim-Committees

ARIZONA STATE SENATE

INTERIM MEETING NOTICE OPEN TO THE PUBLIC

SENATE FINANCE COMMITTEE OF REFERENCE FOR THE SUNSET REVIEWS OF THE ARIZONA DEPARTMENT OF INSURANCE, THE ARIZONA DEPARTMENT OF REVENUE AND THE ARIZONA STATE BOARD OF INVESTMENT AND THE REVIEW OF THE LEGISLATIVE PROPOSAL TO ESTABLISH ARIZONA FERTILITY INSURANCE COVERAGE

Date: Tuesday, December 17, 2019

Time: 8:30 A.M.

Place: SHR 1

AGENDA 1. Call to Order 2. Roll Call 3. Legislative Proposal to Establish Arizona Fertility Insurance Coverage • Overview of the Sunrise Application to Establish Arizona Fertility Insurance Coverage • Public Testimony • Discussion • Recommendations by the Committee of Reference 4. Sunset Review of the Arizona Department of Insurance • Presentation by the Office of the Auditor General • Response by the Arizona Department of Insurance • Public Testimony • Discussion • Recommendations by the Committee of Reference 5. Sunset Review of the Arizona Department of Revenue • Presentation by the Office of the Auditor General • Response by the Arizona Department of Revenue • Public Testimony • Discussion • Recommendations by the Committee of Reference 6. Sunset Review of the Arizona State Board of Investment • Presentation by the Office of the Auditor General • Response by the Arizona State Board of Investment • Public Testimony • Discussion • Recommendations by the Committee of Reference 7. Adjourn Page 1 of 2

Members:

Senator J.D. Mesnard, Chair Senator Lela Alston Senator Sean Bowie Senator Paul Boyer Senator Lupe Contreras Senator David C. Farnsworth Senator Vince Leach Senator David Livingston Senator Martin Quezada Senator Michelle Ugenti-Rita

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For questions regarding this agenda, please contact Senate Research Department. Persons with a disability may request a reasonable accommodation such as a sign language interpreter, by contacting the Senate Secretary’s Office: (602) 926-4231 (voice). Requests should be made as early as possible to allow time to arrange the accommodation.

Page 2 of 2 ARIZONA STATE SENATE

Minutes of the Meeting December 17, 2019 8:30 a.m., Senate Hearing Room 1

Members Present: Senator J.D. Mesnard, Chair Senator Lela Alston Senator Sean Bowie Senator David C. Farnsworth Senator Martin Quezada Senator Michelle Ugenti-Rita

Members Excused: Senator Paul Boyer Senator Lupe Contreras Senator Vince Leach Senator David Livingston

Staff: Molly Graver, Senate Research Analyst Alanna Bendel, Senate Research Assistant Analyst

Chairman Mesnard announced that the Committee would begin to hear testimony and eventually the Committee will officially start with the review of the Sunset process.

LEGISLATIVE PROPOSAL TO ESTABLISH ARIZONA FERTILITY INSURANCE COVERAGE

Overview of the Legislative Proposal to Establish Arizona Fertility Insurance Coverage

Molly Graver, Legislative Research Analyst, Finance Committee, gave an overview of the Legislative process for a legislative proposal to establish Arizona Fertility Insurance Coverage.

Senate Finance Committee of Reference December 17, 2019 Page 1 Public Testimony

Elizabeth Marshall, representing herself, distributed a handout entitled "Letters in Support of Proposal to Establish Arizona Fertility Insurance Coverage" (Attachment A) and testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Dr. Jesse Hade, Boston IVF, Arizona Center, distributed a handout entitled "Access to Fertility Care Benefits" (Attachment B) and testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Dr. H. Randall Craig, Fertility Specialist, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Chairman Mesnard called the meeting to order at 9:15 a.m. and attendance was noted.

Tyler Webb, representing himself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Kerri Lopez-Howell, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Nicole Smith, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Rachel Wilgoren, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Jullian Lenehan, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Hannah Israelsen, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Jovan Heusser, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Jennifer Klein, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Kathryn Fiore, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Marc Osborn, representing America's Health Insurance Plans (AHIP), Blue Cross Blue Shield of Arizona, testified in opposition to the proposal to establish Arizona Fertility Insurance Coverage and answered questions posed by the Committee.

Senate Finance Committee of Reference December 17, 2019 Page 2 Brian Hummell, representing American Cancer Society, Cancer Action Network, testified in support of the proposal to establish Arizona Fertility Insurance Coverage and answered questions posed by the Committee.

Ms. Marshall offered additional testimony and answered questions posed by the Committee.

Ms. Smith answered questions posed by the Committee.

Ms. Lenehan offered further comments.

Ms. Heusser offered further comments.

Mr. Osborn answered additional questions posed by the Committee.

Discussion

Senator Mesnard offered comments.

The Committee discussed and shared comments on the proposal to establish Arizona Fertility Insurance Coverage.

Ms. Graver answered questions posed by the Committee.

Ms. Marshall gave additional testimony and answered additional questions posed by the Committee.

Ms. Graver answered additional questions posed by the Committee.

Recommendations by the Committee of Reference

Senator Bowie moved that the Committee of Reference make the recommendation that the Legislature explore the topic of fertility insurance coverage further in the 2020 session.

Senator Alston made a substitute motion that the Committee on Finance give a positive recommendation to the Sunrise application on the issue of establishment of Arizona Fertility Insurance Coverage.

Senator Mesnard stated that the Committee would be voting on the substitute motion first.

The motion FAILED by show of hands 3-3-0.

Senator Mesnard stated that the Committee would vote on the underlying motion by show of hands.

Senate Finance Committee of Reference December 17, 2019 Page 3 The motion FAILED by show of hands 2-4-0.

The Committee discussed their recommendation.

Chris Kleminich, Senate Rules Attorney, answered questions posed by the Committee.

The Committee further discussed their concerns, shared comments and suggested to change the language on the recommendation.

Senator Bowie moved that the Committee of Reference make the recommendation that the Legislature consider the topic of fertility insurance coverage further in the 2020 session. The motion CARRIED by show of hands of 6-0-0.

SUNSET REVIEW OF THE ARIZONA STATE BOARD OF INVESTMENT

Fareed Bailey, Director, Legislative Affairs, Arizona State Treasurer's Office, gave an overview of the Arizona State Board of Investment.

Senator Mesnard called for questions. No questions were offered.

Discussion

No discussion was offered by the Committee of Reference.

Recommendations by the Committee of Reference

Senator Bowie moved that the Committee of Reference recommend that the Arizona State Board of Investment be continued for eight years until July 01, 2028. The motion CARRIED by voice vote.

SUNSET REVIEW OF THE ARIZONA DEPARTMENT OF INSURANCE

Presentation by the Office of the Auditor General

Rosa Ellis, Office of the Auditor General, gave an overview of the performance audit and subsequent outlined recommendations in the Sunset Review of the Arizona Department of Insurance. Ms. Ellis answered questions posed by the Committee.

Response by the Arizona Department of Insurance

Keith Schraad, Director, Arizona Department of Insurance, addressed the findings of the audit, agreed with the findings and stated that the Department has already taken substantial steps to address the issues. Mr. Schraad answered questions posed by the Committee.

Senate Finance Committee of Reference December 17, 2019 Page 4 Public Testimony

Senator Mesnard called for public testimony, however, no one came forward.

Discussion

No discussion was offered by the Committee of Reference.

Recommendations by the Committee of Reference

Senator Bowie moved that the Committee of Reference recommend that the Arizona Department of Insurance and Financial Institutions be continued for five years until July 1, 2025. The motion CARRIED by voice vote.

SUNSET REVIEW OF THE ARIZONA DEPARTMENT OF REVENUE

Presentation by the Office of the Auditor General

Jeremy Weber, Auditor General's Office, distributed a copy of the Arizona Department of Revenue Performance Audits and Sunset Review (Attachment C) and gave an overview of the findings.

Response by the Arizona Department of Revenue

Grant Nülle, Deputy Director, Arizona Department of Revenue, addressed the findings of the audit and that the Arizona Department of Revenue has been actively working on all the findings. Mr. Nülle answered questions posed by the Committee.

Public Testimony

Senator Mesnard called for public testimony, however, no one came forward.

Discussion

No discussion was offered by the Committee of Reference.

Recommendations by the Committee of Reference

Senator Bowie moved that the Committee of Reference recommend that the Arizona Department of Revenue be continued for eight years until July 1, 2028. The motion CARRIED by voice vote.

Senate Finance Committee of Reference December 17, 2019 Page 5 Attached is a list noting the individuals who registered their position on the agenda items (Attachment D).

There being no further business, the meeting was adjourned at 11:36 a.m.

Respectfully submitted,

Toy Brown Committee Secretary

(Audio recordings and attachments are on file in the Secretary of the Senate’s Office/Resource Center, Room 115. Audio archives are available at http://www.azleg.gov)

Senate Finance Committee of Reference December 17, 2019 Page 6

OFFICE OF THE ARIZONA STATE TREASURER

KIMBERLY YEE TREASURER

August 27, 2019

The Honorable J.D. Mesnard Chair, Senate Finance Committee of Reference Arizona State Senate 1700 West Washington Phoenix, AZ 85007

Dear Chairman Mesnard,

Enclosed please find responses to the questions regarding the sunset review referenced in your letter dated June 11, 2019. On behalf of the members of the Arizona State Board of Investment (BOI), I respectfully request a favorable review and continuation of the BOI.

If you or your staff have any questions or require further information, please contact me or my staff at (602) 542-7800.

Sincerely,

The Honorable Kimberly Yee, State Treasurer Chairwoman, Arizona State Board of Investment

cc: Representative Ben Toma, House Ways & Means Committee, Chairman Vince Perez, House Ways & Means Committee, Analyst Molly Graver, Senate Finance Committee, Analyst

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1. The objective and purpose in establishing the agency and the extent to which the objective and purpose are met by private enterprises in other states.

The establishment of the State Board of Investment (BOI) is mandated by Article X, Section 7 of the Arizona State Constitution (Arizona Constitution). Statutory authority for the BOI can be found under A.R.S. § 35-311, which prescribes the BOI’s powers and duties and outlines its membership as follows: 1) the State Treasurer, as BOI Chair; 2) the Director of the Department of Administration; 3) the Superintendent of the Department of Financial Institutions (DFI); and 4) two individuals appointed by the State Treasurer with one having verifiable expertise in investment management and the other representing a public entity who is a participant in the Office of the State Treasurer’s Local Government Investment Pool program. Laws 2019, Chapter 252, effective July 1, 2020, alters the BOI’s membership by replacing the Superintendent of DFI spot with that of the Director of the newly-consolidated Department of Insurance and Financial Institutions.

Pursuant to A.R.S. § 35-311, the BOI is responsible for: 1) reviewing investments of treasury monies; 2) serving as trustees of the Permanent State Land Funds and providing management for the assets of these Funds consistent with the requirements of Article X, Section 7 of the Arizona Constitution; and 3) serving as trustees of any state, tribal and political subdivision long-term endowment funds established pursuant to A.R.S. § 35-314.03. BOI meetings are held monthly and are open to the public. Notices of future meetings are posted in advance pursuant to Arizona Open Meeting Law.

The objective and purpose which the BOI serves resembles that of similarly- constituted public bodies that oversee governmental investments in other states. It is common for states to entrust oversight authority of investment policies and decisions to an elected and/or appointed public official or body (e.g., state treasurer, state investment board, public pension fund board of trustees, etc.).

2. The extent to which the agency has met its statutory objective and purpose and the efficiency with which it has operated.

The BOI has been effective in serving as trustees and providing investment oversight for the Permanent Land Trust Funds, Local Government Investment Pools and State Agency Funds. BOI meetings, during which an investment performance report is presented to the BOI members, are generally held on the last Tuesday of every month. After review and discussion, each report is adopted by the BOI. Per the Investment Policy Statement adopted by the BOI, this report contains the following information: • Earnings distributed for each Investment Fund and the state General

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Fund, compared to the same period from the prior year as well as management fees collected per Fund; • Net earnings, monthly yield, yield-to-date, and comparisons to benchmarks; • Weighted average life, duration, maturity and rating for each Fund; • Percentage breakdown of assets by duration, rating, sector and allocation; • Average invested balance of operating monies compared to the previous two years; • Permanent Land Trust Fund performance, including the total return for the current month, trailing three-, five- and 10-year returns, as well as since Fund inception; • Equity investments summarized by industry sectors compared to benchmarks specified in each index; • Separately managed accounts; and • Broker activity report.

3. The extent to which the agency serves the entire state rather than specific interests.

The BOI provides a public service to the entire state by reviewing investments of state, local government and land trust monies and approving the policies under which these funds are invested. Investments overseen by the BOI benefit numerous public institutions that serve Arizona residents, including state agencies, schools, community colleges, universities, counties, cities and towns.

4. The extent to which rules adopted by the agency are consistent with the legislative mandate.

In recent history, the BOI has adopted only one rule which can be found under Title 2, Chapter 13 of the Arizona Administrative Code (A.A.C.), R2-13-101 through R2- 13-103. This rule established the logistical framework within which the provisions of A.R.S. § 35-315(B), relating to the payment of state servicing bank charges from state General Fund interest earnings, may be carried out.

5. The extent to which the agency has encouraged input from the public before adopting its rules and the extent to which it has informed the public as to its actions and their expected impact on the public.

During a public meeting held on May 16, 1996, the BOI (then known as the Board of Deposit) approved the above mentioned rule, allowing the Office of the State Treasurer to adopt procedures for the receipt and deposit of state General Fund

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interest earnings and invoice from, and payment to, the state servicing bank.

6. The extent to which the agency has been able to investigate and resolve complaints that are within its jurisdiction.

The BOI is not a regulatory agency and thus has no authority to investigate or resolve complaints.

7. The extent to which the attorney general or any other applicable agency of state government has the authority to prosecute actions under the enabling legislation.

The enabling legislation establishes no such authority.

8. The extent to which agencies have addressed deficiencies in their enabling statutes that prevent them from fulfilling their statutory mandate.

Laws 2019, Chapter 35 (H.B. 2078) specified that any Arizona political subdivision is eligible to participate in the Office of the State Treasurer’s Local Government Investment Pool program which the BOI oversees. This change clarifies a previously existing ambiguity in how the program statute was drafted.

Laws 2019, Chapter 82 (S.B. 1142) required monthly distributions from the Permanent Land Trust Funds, which the BOI also oversees, to be made on or before the last business day of each month. This change corrects an unintended consequence created by a previously-enacted law, ensuring that the Office of the State Treasurer is able to maximize monthly investment earnings for the beneficiaries of these Funds.

9. The extent to which changes are necessary in the laws of the agency to adequately comply with the factors listed in A.R.S. § 41-2954.

As with all other agencies, periodic statutory updates may be needed to ensure that the BOI continues to provide efficient investment oversight and stewardship of taxpayer dollars.

10. The extent to which the termination of the agency would significantly affect the public health, safety and welfare.

The BOI serves a critical function that is in the public interest. Removing the independent oversight that the BOI currently provides could place the investments made by the Office of the State Treasurer at risk. The Office of the State Treasurer has more than $16 billion in assets under management. These assets are divided

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among three primary groups: 1) Permanent State Land Funds; 2) Local Government Investment Pools; and 3) State Agency Pools. The Arizona Constitution requires a state board of investment to be constituted for the benefit of the PLETF.

11. The extent to which the level or regulation exercised by the agency compares to other states and is appropriate and whether less or more stringent levels of regulation would be appropriate.

The BOI is not a regulatory agency and thus exercises no regulatory authority.

12. The extent to which the agency has used private contractors in the performance of its duties as compared to other states and how more effective use of private contractors could be accomplished.

The BOI itself does not utilize private contractors in the performance of its duties.

13. The extent to which the agency potentially creates unexpected negative consequences that might require additional review by the committee of reference, including increasing the price of goods, affecting the availability of services, limiting the abilities of individuals and businesses to operate efficiency and increasing the cost of government.

The BOI’s existence, along with the objective and purpose which it serves, in no way create such consequences. The BOI provides a public service to the entire state by reviewing investments of state, local government and land trust monies and approving the policies under which these funds are invested. This service is both necessary and cost-efficient, utilizing existing staff and resources of the Office of the State Treasurer without incurring additional government costs in the performance of BOI duties.

Additional Questions

1. Identify the problem or the needs that the agency is intended to address.

The BOI provides independent investment oversight for the more than $16 billion of assets under management held by the Office of the State Treasurer.

2. State, to the extent practicable, in quantitative and qualitative terms, the objectives of the agency and its anticipated accomplishments.

The BOI provides independent investment oversight focusing on the protection and safe growth of taxpayer dollars. This is reflected in the BOI’s investment strategy as

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an agency which emphasizes safety before liquidity before yield.

3. Identify any other agencies having similar, conflicting or duplicative objectives, and an explanation of the manner in which the agency avoids duplication or conflict with other such agencies.

There are no other agencies having conflicting or duplicative objectives to that of the BOI. The Arizona State Retirement System (ASRS) and the Public Safety Personnel Retirement System (PSPRS) Boards of Trustees have similar objectives in that they also oversee as trustee funds that are invested by a state agency. ASRS and PSPRS, however, are pension funds that have different investment strategies than funds overseen by the BOI.

4. Assess the consequences of eliminating the agency or of consolidating it with another agency.

The BOI is a constitutionally-manded public body and eliminating it could place the investments made by the Office of the State Treasurer at risk. The Office of the State Treasurer has more than $16 billion in assets under management. These assets are divided among three primary groups: 1) Permanent State Land Funds; 2) Local Government Investment Pools; and 3) State Agency Pools. Consolidating the BOI with boards of entities having similar functions would compromise the level of oversight currently provided due to the varying investment strategies and objectives carried out by other agencies.

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