Employees' Retirement System (ERS): HB 2356 would increase the normal cost and the actuarial accrued liability of ERS. The normal cost of ERS would increase by .302%, from 12.709% to 13.011%. The actuarial accrued liability will increase by $270.8 million, as the net asset balance would decrease from $129.0 million to -$141.8 million.

Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): HB 2356 would decrease the normal cost and the actuarial accrued liability of LECOSRF. The normal cost of LECOSRF would decrease by .012%, from 1.753% to 1.741%. The actuarial accrued liability would decrease by $2 million, as the net asset balance would increase from $118.2 million to $120.2 million.

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

• Changes the normal retirement age for ERS members to the Rule of 75 (age plus service credit equals at least 75).
• Changes the normal retirement age for LECOSRF members to the earliest of: age 50 with 20 years of service credit or the Rule of 75 (age plus service credit equals at least 75).

The bill would allow for earlier retirement of ERS members under the Rule of 75 service retirement eligibility. The bill would also allow LECO members with at least 20 years of LECO service and with age plus service credit at least equal to 75 to retire under the ERS and the LECOSRF with unreduced benefits. Currently, 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). Members are eligible to retire and receive a combined service retirement annuity if the member is at least 50 years old and has at least 20 years of service credit as a law enforcement or custodial officer, or if the member’s age plus years of service credit in the employee class (at least 20 of such years must be service as a law enforcement or custodial officer) is at least 80. HB 2356 would amend the Rule of 80 to make the calculation based on the Rule of 75.

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 2356 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 for ERS. To maintain compliance with the requirements of state funding laws, the state contribution rates would have to increase to 7.635% of payroll in fiscal year 2004 and to 8.298% for fiscal year 2005. With regard to LECOSRF, the benefit change proposed in HB 2356 would require a state contribution equal to the normal cost of payroll starting when the net asset is depleted.

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 retirement rate assumptions to recognize earlier retirement eligibility. For all age and service combinations for which the member’s age plus service credit is at least 75 but the member would not be eligible for service retirement under current law, assumed retirement rates were established at 10% for male regular state employees and 20% for all other employee class members. 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.