HB 985 would increase the normal cost and the actuarial accrued liability of the Employees’ Retirement System (ERS) since the value of the annuity received under the option in the legislation is not fully offset by the reduction in the annuity amounts. The normal cost of ERS would increase by .001%, from 12.709% to 12.710%. The actuarial accrued liability will increase by $.9 million as the net asset balance would decrease from $129.0 million to $128.1 million. If more or fewer members retire under this temporary service retirement option than assumed by the modified retirement rates, the change in the actuarial accrued liability would differ from the results shown.

This bill, to be effective September 1, 2003, would provide the following changes:

• Provides for certain employee class members employed by the legislature or an agency in the legislative branch, with at least five years of service credit and who are eligible to retire on or before August 31, 2005, a temporary service retirement option using up to 60 months of additional service credit to meet eligibility requirements for service retirement.

• Establishes the retirement dates under the option between September 1, 2003 and September 1, 2005.
• Reduces the annuity for a member retiring under the option by 1% for each 12 months or fraction thereof of the additional eligibility service credit.

Currently, employee class members are eligible for a retirement and an annuity if the member is at least 60 years of age with at least five years of service credit, or if the member has at least five years of service credit and the sum of the member’s age and service credits is at least 80 (Rule of 80). HB 985 would provide up to an additional 60 months of service credit for the purpose of satisfying the rule of 80.

Due to the recognition of previously unrecognized assets losses and the depletion of the net asset balance, the current state contribution rate of 6.0%, based on the current benefit structure, will not adequately finance ERS obligations beginning in fiscal year 2004. Benefit changes that do not increase the obligations of ERS will not require additional state contributions beyond 6.0%. The benefit change proposed in HB 985 would require a state contribution equal to the normal cost plus an amount necessary to amortize the unfunded liabilities of the new benefit over a 31-year period. To maintain compliance with the requirements of state funding laws, the state contribution rates would have to increase to 7.023% of payroll in fiscal year 2004 and to 7.691% for fiscal year 2005.

The ERS actuary notes that as of the February 28, 2003 update of the August 31, 2002 actuarial valuation, the ERS actuarial value of assets exceeded the actuarial accrued liability and the contribution rate was less than the normal cost. The actuarial value of asset method smoothes unexpected asset gains and losses at a rate of 20% per year. As a result, the asset losses that have not been recognized in the February 28, 2003 updated valuation will be smoothed in over the next five years. In addition to the current state contribution rate not adequately financing ERS obligations beginning in fiscal year 2004, regardless of benefit structure changes, if the investment return rate on the market value of assets is 8% per annum for fiscal years beginning with the last six months of 2003 and all other actuarial assumptions are met, the actuarial accrued liability will exceed the actuarial value of assets producing an infinite unfunded liability period.

The analysis relies on new assumed rates of retirement to reflect the earlier service retirement eligibility. The new assumed retirement rates are the same as the current rates for a member of the same age, but with service credit equal to the sum of the actual service credit of the member eligible for the option under this bill. According to the PRB actuary, the actuarial assumptions and methods appear to be reasonable. All actuarial projections have a degree of uncertainty because they are based on the probability of occurrence of future contingent events. Accordingly, actual results will be different from the results contained in the analysis to the extent actual future experience varies from the experience implied by the assumptions. The analysis considers only those changes contained in the proposal and cautions that the combined economic impact of several proposals currently under consideration could exceed the economic impact of each such proposal considered individually.

Actuarial Analysis by Steven R. Rusher, Actuary, Towers Perrin, April 10, 2003

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April 11, 2003

Normal Cost-- the current cost as a percentage of payroll that is necessary to pre-fund pension benefits adequately during the course of an employee's career.

Unfunded Liability-- the amount of total liabilities that are not covered by the total assets of a retirement system. Both liabilities and assets are measured on an actuarial basis using certain assumptions including average annual salary increases, the investment return of the retirement fund, and the demographics of retirement system members.

Amortization Period-- the number of years required to pay-off the unfunded liability. Public retirement systems have found that amortization periods ranging from 20 to 40 years are acceptable. State law prohibits changes in TRS, ERS, or JRS-2 benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.