CSHB3361 would potentially change the amount of leave that an employee can accrue and accumulate by a relatively small amount. Based upon the benefit provisions, data, actuarial assumptions and actuarial funding methods as of August 31, 2002, the changes proposed by HB3361 would not have a material effect on the actuarial soundness of the Employees' Retirement System (ERS) or the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF).

CSHB3661 would provide the following changes:

• Changes the rules for paid leave for members of the State military forces or reserve components of the armed forces and for members called to active duty.
• Allows employees activated for military service to use any combination of paid leave to continue to accrue ERS retirement service credit by receiving a minimum of one hour of State pay during each month of active military service.

The proposal revises the miscellaneous leave provisions for state employees. As revised, ERS and LECOSRF will make additional benefit payments to members compared to the benefits that would be made absent the proposal. The Pension Review Board (PRB) actuary expects that the additional payments would be relatively small at both the member level and the Plan level.

The current actuarial valuations of ERS and LECOSRF assume that the total accumulated unused sick leave and annual leave of employee class members will increase credited service at retirement by 2.3%. The ERS actuary does not anticipate that the changes in this bill would materially change the amount of additional service attributable to unused accumulated paid leave at retirement. Additionally, the State and member retirement contributions to ERS would continue for employees who are called to active duty, and receives paid leave or differential pay.

The ERS actuary certifies that the changes in CSHB3661 would allow ERS to comply with the requirements of Section 811.006 of the Government Code because the change does not materially increase the actuarial cost of ERS. LECOSRF would remain actuarially sound based on the current 0% contribution point for the next biennium. However, at some point, the ERS actuary anticipates that the actuarial accrued liability will exceed the actuarial value of assets.

The analysis is based upon the assumption that the bill will take effect on September 1, 2003, and relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2002 actuarial valuations of ERS and LECOSRF. According to the PRB actuary, the actuarial assumptions and methods, as well as the plan level conclusions, 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 ERS 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, April 9, 2003

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April 9, 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.