Fiscal Year 2006

Fiscal Year 2007

*The current contribution rate is insufficient to amortize the unfunded liability over a 30-year period. Currently, the state contribution rate necessary to maintain a 30-year funding period is 8.11% of payroll.

**Not available in the actuarial analyis.

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

ACTUARIAL EFFECTS: HB 346 would increase the state contribution rate to the Teacher Retirement System (TRS) for fiscal years 2006 and 2007. The amounts specified to be appropriated for fiscal year 2006 represent an estimated state contribution rate of 7.0% of payroll, an increase of 1.0% of payroll from the current state contribution rate of 6.0%. The amounts to be appropriated for fiscal year 2007 represent an estimated state contribution rate of 8.0% of payroll, an increase of 2.0% of payroll from the current state contribution rate of 6.0%.

SYNOPSIS OF PROVISIONS

This bill, to be effective September 1, 2005, would provide the following changes:

·         Appropriate an estimated amount based on a state contribution rate of 7.0% of payroll for fiscal year 2006 and an estimated amount based on a state contribution rate of 8.0% of payroll for fiscal year 2007.

FINDINGS AND CONCLUSIONS

HB 346 proposes to appropriate amounts to TRS based on an estimated state contribution rate of 7.0% of payroll and 8.0% of payroll for fiscal years 2006 and 2007, respectively. Under current law, the necessary state contribution rate to achieve a 30-year funding period for TRS is 8.11% of payroll.

According to the TRS actuary, the estimated state contribution rate, under the proposal, necessary to achieve a 30-year funding period for the period between fiscal years 2008 through 2034 would be 8.20% of payroll. The funding period to amortize the unfunded actuarial accrued liability (UAAL) at a rate of 8.0% of payroll for fiscal year 2008 and beyond is 35-years. The analysis does not indicate the amortization period of TRS if the state contribution rate for fiscal year 2008 and beyond returns to 6.0% of payroll. The normal cost, under the proposal, is not affected and remains at 11.72% of payroll. The analysis does not contain information regarding the change in the UAAL in fiscal years 2006 and 2007 under the proposal. The actuarial analysis also does not indicate what the contribution rate would need to be starting in 2008 if the current 6% is contributed for 2006 and 2007, however it would be more than the 8.20% indicated if the bill is passed.

METHODOLOGY AND STANDARDS

The analysis assumes no further changes are made to TRS 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 TRS.  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 Analyses by Lewis Ward & W. Michael Carter, Gabriel, Roeder, Smith & Co. April 8, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April 11, 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-2 benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.