*Assumes an increase in the state contribution from 16.83% to 24.42% of payroll for fiscal year 2005, otherwise the amortization period of the fund would be infinite.

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

ACTUARIAL EFFECTS:

HB 939 would increase the normal cost for the Judicial Retirement System Plan Two (JRS II) by 7.32% of payroll, from 19.58% to 26.90%.  The net asset balance of $21.6 million would become an unfunded liability of $30.6 million, a difference of $52.2 million. To comply with Section 840.106 of the Government Code which states that any benefit improvements that increase the actuarial cost of JRS II will require a state contribution necessary to amortize the unfunded liabilities of the new benefit over a 31-year period, state contributions must increase from 16.83% to 25.03% of payroll in fiscal year 2006.

SYNOPSIS OF PROVISIONS

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

·         Changes the retirement annuities of JRS II members such that the annuity would be based on the state salary, as adjusted from time to time, of a judge of the court from which the retiring member last served. The change applies to current and future JRS II annuitants.

FINDINGS AND CONCLUSIONS

Currently, the standard service retirement annuity for JRS II ranges from 40% to 50% of the state salary being paid to a judge of a court of the same classification of the retiring member at the time the member retires. The standard service retirement is increased by 10% for members who on the effective date of retirement have not been out of judicial office for more than one year or who have served as a visiting judge within the year prior to retirement.

The bill provides increases in the annuities of JRS II members whenever the sate salaries of judges are increased. The current net asset balance of $21.6 million would drop to a net liability of $30.6 million, an increase in the actuarial accrued liability of $52.2 million. The provisions of the bill will also increase the normal cost by 7.32% of payroll, from 19.58% to 26.90%. The changes proposed will require a higher contribution to fund the normal cost plus amortize the unfunded actuarial accrued liability over a 31-year period. To comply with Section 840.106 of the Government Code which states that any benefit improvements that increase the actuarial cost of JRS II will require a state contribution necessary to amortize the unfunded liabilities of the new benefit over a 31-year period, state contributions must increase from 16.83% to 25.03% of payroll in fiscal year 2006, and 25.16% of payroll in fiscal year 2007.

METHODOLOGY AND STANDARDS

The JRS II actuary assumed that the annuity benefits would increase at an annual rate of 4% beginning September 1, 2005, which is the same rate of increase currently assumed for the state salaries of judges.

The analysis assumes no further changes are made to 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 August 31, 2004 actuarial valuations of 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, February 23, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., February 24, 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 II benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.