HB 2916 is not anticipated to directly have a material effect on the actuarial soundness of the Judicial Retirement System II (JRS II). This change would allow the JRS II to remain actuarially sound for the next biennium and to comply with the requirements of Texas Government Code Section 840.106. The current state contribution rate is 16.83% of payroll and is expected to increase starting in fiscal year 2008. This increase reflects the recognition of previously unrecognized asset losses and depletion of the net asset balance which exists on August 31, 2002.

HB2916 would, effective September 1, 2003, provide the following changes for JRS II:

• Allows members with at least 10 years of actual membership service to establish up to an additional 60 months of service.

This legislation allows members to purchase additional service credits by depositing with the system the actuarial present value of the additional standard retirement annuity benefits attributable to that additional service. Although it is not anticipated to be significant, this bill may result in some anti-selection due to unisex mortality tables or based on health.

An additional concern is that if actual investment returns for the fund are below the rate used in the actuarial assumptions (currently 8%), there would be additional losses to the fund directly attributable to the purchasing of additional service credits. If it were anticipated that returns would be lower than the actuarial assumption for some time, a significant number of members may to choose to exercise this option. If the returns actually were lower than the assumptions, substantial losses to the fund could occur.   

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 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.