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

HB2359 proposes changes that would not have a material effect on the actuarial soundness of the Employees' Retirement System (ERS), the Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF), or the Judicial Retirement System Plan Two (JRS II).

ERS & LECOSRF: HB2359, to be effective September 1, 2003, would provide the following changes:

• Eliminates the option of temporary employees over age 65 to defer membership in the system.
• Enables the Board of Trustees to determine the amount and timing of future supplemental payments to retirees.
• Eliminates consideration of certain Railroad Commission service for the purpose of retirement at age 55 with 10 years of such service.

JRS II: HB2359, to be effective September 1, 2003, would provide the following changes:

• Allows service credit to be established by members who are no longer contributing to the system.

The changes in the service purchase and membership eligibility requirements are not anticipated to have a material impact on any system because they would affect very few members. The current actuarial valuations of ERS and LECOSRF do not anticipate any future supplemental payments, so the changes to the supplemental payment rules would have no current actuarial impact.

The PRB actuary notes that the provision of the bill that allows non-contributing members to establish service credit by the payment of a contribution equaling 6% of the current monthly state compensation plus applicable interest is not based upon the actuarial present value of the incremental benefit. Accordingly, the PRB actuary would expect this feature to produce actuarial losses. The losses may not be significant at the Plan level, but may be significant at the member level.

The ERS, LECOSRF, JRSII actuary certifies that the changes in HB2359 would allow ERS to comply with the requirements of Section 811.006 of the Government Code because the change does not materially increase the actuarial cost of ERS. 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. 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 actuary also certifies that this bill would allow LECOSRF to remain actuarially sound based on the current 0% contribution rate for the next biennium. At some point, the actuarial accrued liability is expected to exceed the actuarial value of assets.

The ERS, LECOSRF, JRSII actuary certifies that the changes in HB2359 would allow JRS II to remain actuarially sound and to comply with the requirements of Section 840.106 of the Government Code for the next biennium. The current State contribution rate of 16.83% of payroll is expected to increase starting in fiscal year 2008. The increase reflects the recognition of previously unrecognized asset losses and depletion of the net asset balance, which exist on August 31, 2002, and a 31-year amortization period.

Based upon the August 31, 2002 actuarial valuation, the Employees Retirement System of Texas 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 relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2002 actuarial valuations of ERS, LECOSRF and JRS II. The actuarial valuation will be updated as of February 28, 2003 to reflect changes in the system's assets and membership since the prior valuation. This update may change the results shown above. The analysis assumes no further changes are made to these systems and cautions that the combined effect of several changes can exceed the effect of each change considered individually.

Finally, 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 Steven R. Rusher, Actuary, Towers Perrin, March 28, 2003

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 28, 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 II benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.