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

The changes provided by SB1442 are generally expected to have no immediate actuarial effect or to be actuarially cost neutral. SB1442 authorizes the Austin Police Retirement System (APRS) Board of Trustees to change some benefit obligations, which could be significant. Under current law, such changes would require legislative approval.

SB1442, to be effective September 1, 2003, would provide the following changes:

• Authorizes the Board to modify or eliminate the RETRO DROP provisions.
• Allows the board to establish additional requirements persons must meet in order to receive qualified military credit. The proposal also authorizes the Board to discontinue the equivalent military service feature prospectively.
• Provides for a feature under which a member or surviving spouse may establish creditable service. Such service is established by making a contribution equal to the actuarial present value of the incremental benefit attributable to such service.
• Establishes a separate retiree death benefit fund for the existing $7500 benefit payable in the event of the death of a retired member.

Under the provisions of SB1442, the APRS Board of Trustees is given the authority to change the APRS benefit obligations, in other words the authority to expand the RETRO DROP feature. Such changes to the benefits structure of APRS could be significant. Under current law, such changes would require legislative approval. This change would permit the APRS Board by rule adoption to modify or eliminate the RETRO DROP option only if the change or modification meets the following conditions:

1. Approved by the Board's actuary
2. Would not cause the retirement system's amortization period of the unfunded actuarial liability to exceed the maximum adopted by the Governmental Accounting Standards Board.

The APRS actuary certifies that provisions authorizing changes to the benefit obligations would have no immediate effect on the actuarial condition of APRS since any change would require future action by the APRS Board of Trustees.

Anti-selection would be likely to occur in the provision which allows purchase of service credit by paying the actuarial present value of the service credit, especially if the cost were far below the purchase cost of an equivalent annuity from the private sector. This could add to the long-term costs of the plan.

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the December 31, 2001 actuarial valuation of APRS. 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 APRS and cautions that the combined effect of several changes can exceed the effect of each change considered individually.

• Actuarial Analysis by Robert M. May, Actuary, and Rebecca B. Morris, Actuary, Rudd & Wisdom, Inc., March 20, 2003
• Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April 1, 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.