Employees' Retirement System (ERS): SB 1482 would decrease the normal cost and the actuarial accrued liability of ERS. The normal cost of ERS would decrease by .002%, from 12.709% to 12.707%. The actuarial accrued liability will decrease by $1.3 million, as the net asset balance would increase from $129.0 million to $130.3 million.

Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): SB 1482 would increase the normal cost and the actuarial accrued liability of LECOSRF. The normal cost of LECOSRF would increase by .065%, from 1.753% to 1.818%. The actuarial accrued liability will increase by $13.9 million in 2003, and by $17.0 million in 2005. The net asset balance would decrease from $118.2 million to $104.3 million in 2003.

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 decrease. Accordingly, the proposal will not trigger a state contribution increase.

Currently, the net asset balance for LECOSRF is expected to drop from $118.2 million to $57.0 million for fiscal year 2005. This projection assumes an 8% return on assets at market and the absence of net gains from sources other than investments. Under the proposal, the net asset balance is projected at $40 million for fiscal year 2005.

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

• Increases the benefit formula for law enforcement officers who retire with at least 30 years of law enforcement service credit and at least three years of that service occurs after August 31, 2003 from 2.8% (a 2.3% benefit factor for all membership service plus .5%) to 3.05% (a 2.3% benefit factor plus .75%), applicable to all years of law enforcement officer service credit.

The bill would increase the benefit formula for law enforcement officers who retire with at least 30 years of law enforcement officer service credit and at least three years of that service occurs after August 31, 2003. The increase in the benefit factor applies to all years of service credit for retiring members.

For ERS, the 30-year amortization contribution rates for fiscal years 2004 and 2005 are 7.020% and 7.689% respectively, and would decrease under the proposal to 7.017% and 7.685% 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 1.818% 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 for members to delay retirement until 30 years of service credit have been accrued. For members who could accrue at least 30 years of law enforcement service credit before attaining the age of 70, the analysis assumes a reduced rate of retirement for members with less than 30 years of service and an increased rate for members with 30 or more years of service credit. For members with less than 25 years of service credit, the analysis assumes that retirement rates are 50% of the current rates. For members with at least 25 years but less than 30 years of service credit, the analysis assumes retirement rates that are 25% of the current rates. For members with 30 or more years of service credit, the analysis assumes retirement rates that are twice the current rates. For all members with at least 27 years of service credit, the analysis assumes that no members would retire in the next three years. The analysis uses ERS data that indicates that approximately 14% of the covered payroll for all law enforcement officers and custodial officers is attributable to the law enforcement officers who would be affected by the proposal.

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, 23 2003

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April, 23 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.