The potential earlier commencement of service retirement benefits under HB2215 will increase the actuarial accrued liability and the normal cost for the Employees' Retirement System (ERS). The proposal will increase normal cost 0.026% of payroll, from 12.709% of payroll to 12.735% of payroll. The ERS actuarial accrued liability will increase approximately $52.6 million. Under current law, the net asset balance is expected to drop from a net asset balance of $129.0 million on September 1, 2002 to a net liability balance of $945.2 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 liability balance is projected at $1,002.6 million on September 1, 2005. The amortization period based on the current 6.0% state contribution rate will go from 0.0 years for fiscal year 2003 to infinite beginning in fiscal year 2004, regardless of the passage of this bill.

HB 2215 increases the actuarial accrued liability and the normal cost of ERS because the value of the earlier commencement of service retirement annuities is not fully offset by the reduction in the annuity amounts. The ERS actuary notes that the changes in this bill would have no material impact on the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF) because there would be very few members potentially meeting the eligibility requirements.

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

• Provides a temporary service retirement option for employee class members who have at least five years of service credit and who are eligible to retire on or before August 31, 2005 using up to 60 months of additional service credit to meet eligibility under the Rule of Eighty (age plus service equals at least 80).
• Establishes the timeframe for the temporary service retirement option for those who qualify on or after September 1, 2003 and before September 1, 2005 using the additional service credit only to meet the service retirement eligibility requirements.
• Reduces the annuity of a member who retires under this option by 1% for each 12-month period or fraction thereof of the additional eligibility service credit received under this bill.

HB2215 would allow certain members who are not eligible for service retirement to retire with a reduced annuity during the temporary service retirement option period. The annuity of a member retiring under this option is not determined using any additional service credit under this bill.

Due to the recognition of previously unrecognized asset losses, and the eventual depletion of the net asset balance, the 6.0% state contribution rate will not adequately finance ERS obligations starting with fiscal year 2004, based on the current benefit structure. However, 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 proposal increases ERS obligations, which would require an increase in State contributions to ERS. Under the current structure, the 30-year amortization contribution rates for fiscal years 2004 and 2005 are increased to 7.020% and 7.689% of payroll respectively, while under the proposal the rates increase to 7.106% and 7.774%.

While the proposal is expected to accelerate retirement among eligible ERS members, a corresponding acceleration of retirement among eligible LECOSRF members is not expected. Accordingly, the proposal will not have a material impact on the LECOSRF benefit obligations.

The ERS/LECOSRF actuary notes that as of the September 1, 2002 actuarial valuation, updated February 28, 2003, 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 August 31, 2002 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, 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 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.

To evaluate this proposal, the retirement rates were revised to reflect the earlier retirement eligibility. The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the September 1, 2002 actuarial valuations, updated February 28, 2003, of ERS and LECOSRF. 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.