The potential earlier commencement of service retirement benefits under HB 2037 will increase the actuarial accrued liability and the normal cost for the Employees' Retirement System (ERS). The proposal will increase normal cost .053% of payroll, from 12.709% of payroll to 12.762% of payroll. The ERS actuarial accrued liability will increase approximately $42.3 million. Under current law, the net asset balance is expected to drop from a net asset balance of $459.6 million on September 1, 2002 to an unfunded liability of $533.7 million on September 1, 2005. This projection assumes an 8% return on assets at market and the absence of net gains from sources other investments. Under the proposal the unfunded liability is projected at $583.2 million on September 1, 2005.

The availability of unreduced service retirements at younger ages under HB 2037 and the assumed increase in retirement rates at these ages will increase the actuarial accrued liability and the normal cost for the Law Enforcement Custodial Officers' Supplemental Retirement Fund (LECOSRF). The proposal will increase normal cost .025% of payroll, from 1.753% of payroll to 1.778% of payroll. The LECOSRF actuarial accrued liability will increase approximately $6 million. Under current law, the net asset balance is expected to drop from a net asset balance of $129.8 million on September 1, 2002 to a net asset balance of $64.2 million on September 1, 2005. This projection assumes an 8% return on assets at market and the absence of net gains from sources other investments. Under the proposal the net asset is projected at $56.5 million on September 1, 2005.

Provisions of this bill will affect a significant number of members, allowing them to receive unreduced benefits earlier than under current law. Because the ERS portion of the member's service retirement benefit begins at the member's normal retirement age (NRA), the date when unreduced benefits are payable, HB 2037 will provide for earlier commencement of benefits payable from ERS for many members.

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

• Allows LECOSRF members with at least 20 years of service and at least 25 years of employee class service credit to retire under ERS and LECOSRF plans with unreduced benefits.

In the absence of net gains, the current 6% ERS State contribution rate will not be adequate starting September 1, 2003 under the current structure. As long as a benefit change does not increase ERS obligations, additional State contributions to ERS in excess of 6% are not required under the law. The ERS/LECOSRF actuary states that ERS will remain actuarially sound only if the state contribution is increased to 6.892% of payroll for fiscal year 2004 and to 7.366% of payroll for fiscal year 2005.

Under the current structure, LECOSRF will remain actuarially sound provided state contributions are made at the rate of 1.753% of payroll starting when the net asset is depleted. Under the proposal, LECOSRF will remain actuarially sound provided state contributions are made at the rate of 1.778% of payroll starting when the net asset is depleted.

The ERS/LECOSRF actuary notes that as 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 smooths 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 August 31, 2002 valuation will be smoothed in over the next five years. As these losses are recognized, in the absence of outstanding market gains, the plan will cease to be self-sufficient, even if no benefit improvements are granted. 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.

For the actuarial analysis of HB 2037, the ERS/LECOSRF actuary changed the assumed retirement rates for LECOSRF members with at least 20 years of LECOSRF service and 25 or more years of employee class service credit to be 20% for all ages under age 50 to reflect the availability of unreduced benefits at these ages under the bill. Retirement age assumptions were not changed for members at ages 50 and above or for members under age 50 with less than 25 years of employee class service credit.

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2002 actuarial valuations of ERS and LECOSRF. According to the PRB actuary, the actuarial assumptions and methods, as well as the plan level conclusions, 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.

The numbers in this impact statement may need to be updated after the results of the February 28, 2003 actuarial valuation update is available.

Actuarial Analysis by Steven R. Rusher, Actuary, Towers Perrin, March 20, 2003

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 20, 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.