SJR 38 would apply to retirement systems that are not statewide systems, and the Statewide Emergency Services Retirement Fund. Under the resolution, payment of retirement benefits that a person has accrued (and increases that the legislature may authorize) is a contractual obligation of the retirement system and may not be reduced or impaired.  

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 increase retirement age, or even make minor adjustments to plan design that resulted in any loss of accrued benefits.

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 circumstances. A sampling of 13 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 or 6.5 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 may limit 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 lack of 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.