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

In the case of JRS I, the annual state appropriations to JRS I will increase if the proposal is adopted. For fiscal years prior to 2006, the proposal is not expected to increase the State appropriation. For fiscal years 2006, 2007 and 2008, the appropriation is estimated to increase by $400,000, $500,000, and $600,000 per year respectively, under the proposal. 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, HB2753 will increase normal cost 1.21% of payroll, from 22.88% to 24.09%, increase the actuarial accrued liability $5.6 million, and reduce the net asset balance $5.6 million. Due to the realization of prior asset losses, state contributions should be expected to increase starting in 2008 under the current structure. Under the proposed structure, starting in 2005 it is anticipated that state contributions will need to rise to 18.27% of pay. Otherwise, the amortization period will exceed 31 years.

HB2753 would provide the following changes for JRS I and JRS II:

• Allows members to elect to make contributions after 20 years of service credit (YCS), beginning September 1, 2005 provided the members still holds the judicial office on that date.
• Increases the service retirement benefits for JRS I and JRS II by 3% of the applicable State salary for each year that the member makes contributions after 20 YCS, up to a maximum of 81% of the applicable salary.

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.

For JRS II, this proposal 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 JRS actuary certifies that this change would allow the JRS II to remain actuarially sound and to comply with Section 840.106 of the Government Code only if the State contribution rate is increased to at least 18.27% of payroll for fiscal year 2005.

The actuarial impact described above may potentially need to be revised depending on a February 28, 2003 valuation update.

In consideration of HB2753, the JRS I/II actuary changed their actuarial assumptions to assume that all members will continue to contribute after 20 YCS to receive the benefit increase, because the benefit increase is significantly greater in value than the additional member contributions.

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 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.