Based on the analysis of the Employees' Retirement System (ERS) actuary, the changes proposed in HB2358 would have no material actuarial impact on ERS. According to the ERS actuary, the bill only applies to such military service occurring before state employment, so relatively few members would be eligible.

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

• Allows members of ERS to purchase military service for service in the Texas National Guard or the reserves of the U.S. armed forces at a rate of one month for each three-months served.
• Requires honorable release to qualify to purchase military service.

When military service is purchased, it generates an actuarial loss to ERS, currently at a rate of $5 million per year. Members will use the service purchase option to their advantage. Accordingly, contributions made to establish service credit will be less than the actuarial present value of the incremental benefit attributable to the service which is established, resulting in losses as the option is exercised. The proposal will increase the losses. Such losses may not be significant at the Plan level. From the perspective of the member exercising the option, the amount may be significant.

The PRB actuary points out that due to the recognition of previously unrecognized asset losses, and the eventual depletion of the net asset balance, the current state contribution rate will eventually not adequately finance ERS obligations starting in fiscal year 2004. 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 actuary certifies that the changes in HB2358 would allow ERS to comply with the requirements of Section 811.006 of the Government Code.

The ERS 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. 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.

The ERS actuary notes that the purchase of military service is not explicitly anticipated by the actuarial assumptions. The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the September 1, 2002 actuarial valuation, updated February 28, 2003, of ERS. 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.