The analysis and data for the Employees Retirement System does not reflect changes adopted during the 79^th Legislature, specifically Senate Bill 1176, which has been signed into law.

Projected for Fiscal Year 2006

*Under current law, the state contribution rate would need to increase from 6.0% of payroll to 7.044% of payroll for fiscal year 2006 to achieve a 31-year funding for ERS. Under the proposal, the fiscal year 2006 state contribution would increase to 7.123% of payroll.

The analysis and data for the Judicial Retirement System Plan One and Plan Two includes the effect of House Bills 617, 831 and 1114 passed during the 79^th Legislature and signed into law.

Projected for Fiscal Year 2006

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

ACTUARIAL EFFECTS:

Employees' Retirement System (ERS): SB 11 will increase, by .016% of payroll, the normal cost of ERS, from 12.450% to 12.466%. The unfunded actuarial accrued liability (UAAL) will increase by $52.9 million in fiscal year 2006. Under current law, the net liability balance is expected to be $506.0 million on September 1, 2005.  Under the proposal, the UAAL is projected at $558.9 million on September 1, 2005. The current contribution rate is not sufficient to fund the normal cost and amortize the UAAL over 31 years. In order to achieve a 31-year funding period under current law, a state contribution rate of 7.044% of payroll would be necessary in fiscal year 2006. Under the proposal, to achieve a 31-year funding period, the state contribution would increase to 7.123% of payroll for fiscal years 2006.

 Judicial Retirement System Plan One (JRS I): JRS I is financed by a combination of member contributions (currently 6% of a judicial officer’s state compensation ceasing in general after 20 years of service), plus state contributions. The annual state contribution is the amount necessary to pay benefits when due. Under the proposal, the annual state contributions will increase by $3.69 million, $3.81 million, $3.91 million, $4.06 million, and $4.20 million for fiscal years 2006, 2007, 2008, 2009 and 2010 respectively. The proposal will also increase member contributions by $656,000 in fiscal year 2006, $165,000 in fiscal year 2007, $137,000 in fiscal year 2008, $113,000 in fiscal year 2009, and $93,000 in fiscal year 2010. Information is not provided for fiscal years beyond 2010. The impact the proposal may be expected to have on the JRS I normal cost and accrued liability is not contained in the analysis.

Judicial Retirement System Plan Two (JRS II): SB 11 will increase, by 0.87% of payroll, the normal cost of JRS II, from 19.58% to 20.45%. The proposal will decrease the net asset balance by $32.1 million in fiscal year 2006. Under current law, the net asset balance is expected to increase from $25.7 million on September 1, 2005 to $29.3 million on September 1, 2006.  Under the proposal the net asset balance is projected to be a net liability balance of $6.4 million on September 1, 2005. Under the proposal, the current contribution rate is sufficient to fund the normal cost and amortize the unfunded actuarial accrued liability over 31 years through the next biennium.

SYNOPSIS OF PROVISIONS

SB 11 would, effective November 1, 2005, provide the following changes:

·         Sets the annual salary of a district court judge to $125,000 for the period of November 1, 2005 through August 31, 2007. The annual salary of a justice of a court of appeals other than the chief justice is 110% of the annual salary of a district court judge. The annual salary of a justice of the Supreme Court other than the chief justice or a judge of the court of criminal appeals other than the presiding judge is 120% of the annual salary of a district court judge. The annual salary of the chief justice or presiding judge of an appellate court is $2,500 more than the annual salary provided for other justices or judges of the court.

·         Establishes the standard service retirement annuity for elected class membership service as the service credited in the elected class, times 2.3% of the state salary of a district court judge. This is not a change to current practice, as the board made this change by rule 4 years ago.

·         Provides that retirees and beneficiaries of JRS II would have their annuities recalculated based on the increase in judicial salaries contained in the bill.

·         Requires the Office of Court Administration to report on judicial turnover and compensation.

FINDINGS AND CONCLUSIONS

The analysis provided for SB 11 includes the actuarial effects of changes in HB 617, HB 831 and HB 1114, passed during the 79^th Legislature and signed into law. Those provisions are as follows: (1) Allowing JRS I and JRS II members to elect to continue contributions to the system after 20 years of service credit, up to an additional 10 years of service at a rate of 6% of the applicable state salary. The retirement annuity will be increased by 2% of the state salary for each additional year that a member makes the additional contribution after 20 years of creditable service, up to a maximum of 80% of the applicable state salary. (2) Changing the final eligibility requirement to the sum of age and service credit equals at least 70 and served at least 12 years on an appellate court, regardless of currently holding judicial office. (3) Allowing JRS II members who have served 12 years on an appellate court and whose age plus service credit equals at least 70 (Rule of 70) could cease making member contributions. Also, appellate court members who elect to continue making contributions after serving 12 years on an appellate court and reaching the Rule of 70 could do so for up to an additional 10 years of service. For each such year, the member contribution rate would be 6% of salary, and the service retirement benefit would be increased by 2% of the applicable State salary, up to a maximum of 80% of the applicable salary.

SB 11 increases the salaries of the judges and justices who are members of JRS I and JRS II. For JRS I, this would increase benefit payments and member contributions. The annual state contribution is the amount necessary to pay benefits when due. Under the proposal, the annual state contributions will increase by $3.69 million, $3.81 million, $3.91 million, $4.06 million, and $4.20 million for fiscal years 2006, 2007, 2008, 2009 and 2010 respectively. SB 11 will increase, by 0.87% of payroll, the normal cost of JRS II, from 19.58% to 20.45%. The proposal will decrease the net asset balance by $32.1 million in fiscal year 2006.

SB 11 will increase, by .016% of payroll, the normal cost of ERS, from 12.450% to 12.466%. The unfunded actuarial accrued liability (UAAL) will increase by $52.9 million in fiscal year 2006. Under current law, the UAAL is expected to be $506.0 million on September 1, 2005.  Under the proposal, the UAAL is projected at $558.9 million on September 1, 2005.

The ERS actuary notes that the current contribution rate is not sufficient to fund the normal cost and amortize the UAAL over 31 years. In order to achieve a 31-year funding period under current law, a state contribution rate of 7.044% of payroll would be necessary in fiscal year 2006. Under the proposal, the state contribution rate would need to be 7.123% of payroll for fiscal year 2006.

Under the proposal, the current contribution rate for JRS II is sufficient to fund the normal cost and amortize the unfunded actuarial accrued liability over 31 years through the next biennium. The improvements in this bill are expected to increase future JRS I benefit payments, which are paid directly by the State.  Because the JRS I is not advance funded, the analysis does not offer an actuarial opinion on the effect of this proposed legislation.

METHODOLOGY AND STANDARDS

The analysis assumes no further changes are made to ERS, JRS I, and JRS II and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually. The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2005 update of the August 31, 2004 actuarial valuations of ERS and JRS II. According to the PRB actuary, the actuarial assumptions, methods and procedures 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.

SOURCES:

Actuarial Analysis by Steven R. Rusher, Actuary, Towers Perrin, May 18, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., June 22, 2005

GLOSSARY OF ACTUARIAL TERMS:

Normal Cost-- the current annual cost as a percentage of payroll that is necessary to pre-fund pension benefits adequately during the course of an employee's career.

Net Asset / Net Liability--This is the difference between the Actuarial Value of Assets and the Actuarial Accrued Liability. A Net Asset (also called the "Overfunded Actuarial Liability) exists only when the Actuarial Value of Assets exceeds the Actuarial Accrued Liability, and is the amount of this excess. This only occurs when a plan is overfunded. A Net Liability (also called the Unfunded Actuarial Liability) exists only when the Actuarial Accrued Liability exceeds the Actuarial Value of Assets. This only occurs when a plan is underfunded.

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 II benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.