Employees' Retirement System (ERS): HB 3208 would increase the normal cost and the actuarial accrued liability of ERS. The normal cost of ERS would increase by .011%, from 12.709% to 12.720% in 2003, though this increase is temporary. The actuarial accrued liability will increase by $32.1 million in 2003, as the net asset balance would decrease from $129.0 million to $96.9 million. The net asset balance would be decreased by a total of $34.5 million by 2005.

Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): HB 3208 would increase the normal cost and the actuarial accrued liability of LECOSRF. The normal cost of LECOSRF would temporarily increase by .001%, from 1.753% to 1.754%. The actuarial accrued liability will increase by $2.5 million in 2003, as the net asset balance would decrease from $118.2 million to $115.7 million. The net asset balance would be decreased by a total of $2.9 million by 2005.

The analysis assumes the 25% lump sum payment under the proposal will be made from resources other than ERS assets.

Due to the recognition of previously unrecognized asset losses, and the eventual depletion of the net asset balance, the current state contribution rate will 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 the current 6% contribution rate are not required. In the case of the proposal, ERS obligations will increase, but the increase is attributable to an expectation of accelerated retirement, not a benefit increase. Accordingly, the proposal will not trigger a state contribution increase.

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

• Allows a member of ERS who is eligible for service retirement on or after August 31, 2003 and before September 1, 2005 to receive a lump sum payment equal to 25% of the member’s salary for the prior 12 months. To be eligible for this payment, the member must be eligible to retire as of August 31, 2003 and must retire on that date. A member who is eligible to retire after August 31, 2003 and before September 1, 2005 must retire in the month that the member first becomes eligible.

The bill provides an incentive for ERS members who are eligible for service retirement during the period from August 31, 2003 through August 31, 2005 to retire when first eligible during that period. The assumed retirement rates have been changed to reflect the service retirement incentive included in the bill. The assumption changes will alter the actuarial accrued liability and the normal cost of ERS and LECOSRF. If more members retire than assumed, the accrued liability would be higher than the results shown. However, if fewer members retire than assumed, the accrued liability would be lower than the results shown.

For ERS, the 30-year amortization contribution rates for fiscal years 2004 and 2005 are 7.020% and 7.689% respectively, under the proposal the state contribution rates would have to increase to 7.068% of payroll in fiscal year 2004 and to 7.727% for fiscal year 2005. Currently, LECOSRF will remain actuarially sound provided state contributions are made at the rate of 1.753% of payroll starting when the net asset is depleted. Under the proposal, LECOSRF will remain actuarially sound provided state contributions are made at the rate of 1.754% of payroll starting when the net asset is depleted.

The ERS actuary notes that as of the February 28, 2003 update of the August 31, 2002 actuarial valuation, 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 February 28, 2003 updated valuation will be smoothed in over the next five years. If the investment return rate on the market value of assets is 8% per annum for fiscal years beginning with the last six months of 2003 and all other actuarial assumptions are met, the actuarial accrued liability will exceed the actuarial value of assets producing an infinite unfunded liability period.

The analysis relies on new assumed rates of retirement to reflect the service retirement incentive. The new assumed retirement rates are 10% greater than the current rates for the employee class during the incentive period that the member becomes eligible for the lump sum payment. The retirement rates for elected class members was not changed to reflect the retirement incentive. The analysis also assumes that the incentive would not cause an elected official to retire from elected office. 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, 21 2003

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April, 21 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.