* For fiscal year 2007, a state contribution of 1.282% of payroll will be necessary to comply with applicable funding requirements. Under the proposal, the contribution rate in fiscal year 2007 will increase to 1.393% of payroll.

**Normal cost as a percentage of payroll doesn’t increase, however the dollar amount of normal cost will increase $60,000.

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

ACTUARIAL EFFECTS:

HB 829 will not change the normal cost rate of the Law Enforcement Custodial Officers’ Supplemental Retirement Fund (LECOSRF).   Although the normal cost as a percentage of covered payroll does not change for LECORSRF, the total covered payroll of the LECOSRF would increase, generating an increase in the dollar amount of the normal cost (approximately an increase of $60,000 for the LECOSRF for fiscal year 2005). The LECOSRF actuarial accrued liability will increase approximately $1.1 million.  Under current law, the net asset balance is expected to drop from a net asset balance of $57.7 million on September 1, 2004 to a net asset of $31.8 million on September 1, 2006 and to be depleted by fiscal year 2007.  A 1.282% of payroll state contribution rate for fiscal year 2007 will be necessary to comply with applicable funding requirements. Under the proposal, the net asset balance is projected at $56.6 million on September 1, 2005 and a net asset balance at $30.6 million on September 1, 2006. The fiscal year 2007 state contribution, under the proposal, is projected to be 1.393% of payroll, an increase of 0.111% of payroll.

SYNOPSIS OF PROVISIONS:

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

·         Expands the definition of law enforcement officer to include law enforcement commissions granted by the Attorney General.

FINDINGS AND CONCLUSIONS:

The provisions of the bill provide for an expanded definition for law enforcement officers. Approximately 78 members would be involved, according to ERS staff. Normal cost as a percentage of payroll does not change, but the total covered payroll of the LECOSRF would increase. The current state contribution rate of 0% is sufficient for LECOSRF to remain actuarially sound only through fiscal year 2006. Under current law, the net asset balance is expected to drop from a net asset balance of $57.7 million on September 1, 2004 to a net asset balance of $31.8 million on September 1, 2006 and to be depleted by fiscal year 2007.  A 1.282% of payroll state contribution rate for fiscal year 2007 will be necessary to comply with applicable funding requirements. If the provisions of this bill are enacted, it is anticipated that contributions for LECOSRF will need to increase to 1.393% of payroll for fiscal year 2007 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006.

METHODOLOGY AND STANDARDS:

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2004 actuarial valuation of LECOSRF. 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. The analysis considers those changes contained in the proposal and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually.

SOURCES:

Actuarial Analysis by Steven R. Rusher, Actuary, Towers Perrin, February 17, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., February 23, 2005

GLOSSARY OF ACTUARIAL TERMS:

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.

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.

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.