A Glossary of Actuarial Terms is provided at the end of this impact statement.

Assuming 1,000 members of TRS were eligible to each purchase 3 years of Peace Corps service, HB 1664 would increase the Teacher Retirement System (TRS) unfunded actuarial liability (UAAL) by $11 million, from $3,287 million to $3,298 million. The TRS actuary expects no increase in the normal cost. Because the TRS normal cost is greater than the current contribution rate and the UAAL is greater than zero both before and after the change, the funding period would remain infinite. State contribution rates of 7.15% of pay under the current structure, and 7.16% under the proposed structure, will amortize the unfunded actuarial accrued liability over a 30-year period.

The PRB actuary notes that the difference between the actuarial present value of the benefits attributable to the service credit which is established, and the contribution members pay to establish such credit could be significant at the participant level. The actuarial present value of the benefits attributed to the established service credit exceeds the value of the contributions and fees paid by the member to establish the service credit on average by about $4,000 for each year of service purchased.

HB 1664, to be effective September 1, 2003, would provide the following changes:

• Allows a member of TRS who has at least two years of Peace Corps service to purchase TRS membership service credit for each year of that service.
• Restricts the number of years that may be purchased to no more than five years and establishes the price for each year purchased as equal to the member contribution in the first full year of service before or after the Peace Corps service.
• Provides that the purchase cannot be made until at least five years of service credit in TRS have actually been rendered.
• Provides that an 8% interest charge will be assessed for delaying the purchase after first eligibility.

Since the funding period of TRS already exceeds 30.9 years, passage of this bill without additional funding would violate statutory requirements.

The purchase price of the additional service to the member is less than the value of the benefit received. Therefore, the provisions of the bill will add to the TRS UAAL each time a purchase is made. The exact monetary effect on the UAAL of TRS cannot be determined until the number of participants electing the service purchase option is known.

There are currently $16 billion in deferred asset losses from FY 2001 and FY 2002, which have not yet been recognized in the actuarial value of assets. Market value of assets was $71.7 billion, while actuarial value of assets was $86 billion on August 31, 2002. As these losses are recognized in future valuations, the effect will be to increase the required contributions. Finally, the analysis assumes no further changes are made to TRS and cautions that the combined effect of several changes can exceed the effect of each change considered individually.

In valuing the actuarial impact of this bill, the TRS actuary assumed that there are approximately 1,000 members of TRS who are eligible. The TRS actuary also assumed that these members would purchase an average of three years of service, that the purchase would be made at the time of first eligibility, average pay would remain the same for current members entering the system, and there would be no change to normal cost.

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2002 actuarial valuation of TRS. 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.

• Actuarial Analysis by Lewis Ward, Consultant and W. Michael Carter, Actuary, Gabriel, Roeder, Smith & Company, March 13, 2003
• Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 14, 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.