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

According to the TRS actuary, the proposal would potentially significantly increase the Teacher Retirement System (TRS) unfunded actuarial accrued liability (UAAL). Limiting TRS’ asset allocation would have a potentially significant impact on the long-term rate of return for the TRS. A decrease in the long-term rate of return would result in an increase in the UAAL of the system. By requiring divestiture of certain securities by January 1, 2004, TRS could face investment losses that would increase the UAAL of the system.

This bill, to be effective September 1, 2003, would:

• Prohibit the board of trustees of TRS from investing in any security of a corporation or other entity that is not headquartered in the United States.

• Require TRS divestiture from any security of a corporation or other entity that is not headquartered in the United States by January 1, 2004.

The TRS actuary could not quantify the actuarial impact of the bill, but the impact is expected to be negative. The TRS actuary states the provisions of the bill could impair the ability of the TRS board of trustees to exercise its fiduciary duty.

The TRS actuary expressed concern that the analysis does not account for the $19.2 billion in deferred asset losses from FY 2001 and FY 2002 and the first 6 months of 2003 which have not yet been recognized in the actuarial value of assets.  As these losses are recognized in future valuations, the effect will be to increase the required contributions. 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.

The TRS actuary states the creation of additional actuarial liabilities and additional contribution requirements will only add to the strain on the State’s budget outlook. If, due to external budget and revenue issues, the increased contribution requirements are not met, the long-term funding position of TRS will be hurt.

The analysis and calculations are based on the member data of TRS as of August 31, 2002, the actuarial value of assets updated as of February 28, 2003, and the actuarial assumptions and methods in use as of August 31, 2002 for valuing the actuarial condition of TRS. The analysis is based on all other provisions of TRS in effect as of August 31, 2002. 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 Lewis Ward, Consultant and W. Michael Carter, Actuary, Gabriel, Roeder, Smith & Company, April 3, 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.