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

HB2549 will increase annual state appropriations to the Judicial Retirement System Plan One (JRS I). The appropriation is estimated to increase by $100,000, $200,000, $300,000, $300,000 and $400,000 per year respectively, under the proposal for fiscal years 2004 through 2008. Information is not provided for fiscal years beyond 2008. The impact the proposal may be expected to have on the JRS I normal cost and accrued liability is not contained in the analysis. The analysis does not express an opinion on the actuarial status of JRS I since it is not advance funded.

In the case of JRS II, the proposal will increase normal cost 0.88% of payroll, from 22.88% to 23.76%, increase the actuarial accrued liability $4.1 million, and reduce the net asset balance $4.1 million. State contributions should be expected to increase starting in 2008 under the current structure, and starting in 2005 under the proposed structure, to 17.77% of pay. Otherwise, the amortization period will exceed 31 years.

HB2549 would provide the following changes for JRS I and JRS II:

• Allows members to elect to continue making contributions after 20 years of service credit, up to a maximum of 10 additional years. Members with 20 or more years of service credit would contribute 6% of pay in the case of JRS I, and 2% of pay in the case of JRS II.
• Increases the service retirement annuity for such electing members by 2% of the applicable state salary for each such additional year of member contributions.
• Sets the maximum service retirement annuity under the proposal to 80% of applicable state salary.

The JRS actuary states this change would allow the JRS II to remain actuarially sound for the next biennium based on a State contribution rate of 16.83% of payroll in 2004 and a state contribution rate of 17.77% of payroll in 2005. The PRB actuary notes that in the case of JRS II, State contributions should be expected to increase starting in 2008 under the current structure, and starting in 2007 under the proposed structure, in the absence of gains from investments or other sources. Otherwise, the amortization period will exceed 31 years.

The estimated actuarial impact may need to be updated, depending on the results of a February 28, 2003 actuarial valuation update of JRS II.

The improvements in this bill are expected to increase future JRS I benefit payments, which are paid directly by the State. Because the JRS I is not advance funded, this analysis does not offer an actuarial opinion on the effect of this proposed legislation.

In consideration of HB1354, the JRS I/II actuary changed their actuarial assumptions to assume that all members will continue to contribute after 20 years of service to receive the benefit increase, because the benefit increase is significantly greater in value than the additional member contributions. For JRS II, this will increase the actuarial accrued liability and the normal cost. The net asset balance is projected to be eliminated by fiscal year 2005, resulting in an increase in the State contribution.

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 JRS I and JRS II. 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. Finally, the analysis assumes no further changes are made to JRS II and cautions that the combined effect of several changes can exceed the effect of each change considered individually.

Actuarial Analysis by Steven R. Rusher, Actuary, Towers Perrin, March 27, 2003

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 31, 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.