CSHJR 54 would apply to retirement systems that are not statewide systems, except a fire and police plan in San Antonio would be excluded. Under the resolution, accrued benefits could not be reduced or impaired for retirees and active members eligible to retire prior to any proposed change in benefits. If fund balances were insufficient to pay benefits, costs would be the responsibility of the political subdivision which is the plan sponsor.

If, for affected systems, the current assumptions prove to be reasonably accurate for the long term, and unfunded actuarial accrued liabilities do not increase from values in past valuations, the resolution may have only minimal actuarial impact. If circumstances suggest changes in assumptions were necessary, especially economic assumptions,  plan costs and unfunded liabilities might rise significantly. Currently, plans may adjust their benefits as experience changes. Plans would no longer be able to make even minor adjustments to plan design that resulted in any loss of accrued benefits for the protected members, i.e. retirees and those eligible for regular or early retirement.

For some plans, 80 percent of the actuarial accrued liability (AAL) would be directly protected by the amendment, for many others somewhat less than 70 percent of the AAL would be directly protected. The protected liability includes liability for retirees, active members eligible to retire, and for our calculation, liability for those eligible to retire in the next two years, since for these plans any reductions would be unlikely take effect prior to the end of the next legislative session. Plans which have generous early retirement eligibility, especially fire and police plans, would be more greatly affected; some allow early retirement at age 45 with 5 years of service. If such a plan reduced benefits for all non-protected members by a fairly significant amount, say 25 percent, under current and projected funding ratios below they may only reduce their unfunded liabilities by an eighth. Other plans with less generous early retirement provisions would be able to have a somewhat greater impact on their unfunded liabilities by reducing benefits for non-protected members. The best funded plans would be able to have a somewhat greater impact on unfunded liabilities with benefit changes, while the least well funded plans would have less ability to have an impact on unfunded liabilites with benefit changes.

The stock market losses of the past few years, combined with relatively weak economic forecasts, low yields on fixed income, and low inflation, all suggest changed economic circumstances. A sampling of 12 major municipal plans affected by the resolution reveals that on a market basis, at the end of 2002, not a single plan has a funding ratio (assets/liabilities times 100) over 80 (a standard for a reasonably well funded plan), most are in the 60s and two have funding ratios in the low 50s. If plans make their assumed interest rates on market values of assets, and other experience is as expected, their actuarial funding ratios, based on a smoothed value of assets, will quickly approach these market based funding ratios. In fact, if future experience exactly follows assumptions, the actuarial funding ratios will become worse than these market ratios due both to deferred contribution increases, and not paying interest on market based unfunded liabilities. It is estimated that if these plans' experience follows assumptions over the next five years, their market based unfunded liabilities will increase by roughly 50 percent. 

If interest returns continue to fall below assumptions for the next few years, the plans' actuarial health will further deteriorate.  Under a test scenario of 5 years at 4.5 percent interest return (with increases in contributions deferred till after the 5 year period), the funding ratios are estimated to range from 0.41 to 0.63.  It is anticipated that similar figures will occur if plans achieve a more modest return of say 6 percent, but make some adjustments to their economic assumptions- many plans made multiple assumption changes in the mid to late 1990s, a period of unusually high real returns.  More favorable experience is possible, but it is not certain, and modest returns appear to be likely given current economic circumstances. 

The proposal would limit the ability of plans to make benefit changes to assist in improving the actuarial health of the fund and would end their ability to increase member contributions. Some plans have statutory provisions which reduce benefits if fund balances are insufficient to pay benefits; these provisions would no longer apply. Many plans are already facing relatively poor actuarial health, especially on the basis of funding ratios. The lowered flexibility under the proposal may lead some plans towards significantly poorer actuarial health than they would otherwise face. In the long run this may affect the ability of the plans to pay benefits.