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

ACTUARIAL EFFECTS:

HB 1114 would increase the normal cost of the Judicial Retirement System Plan Two (JRS II)  by 0.60% of payroll, from 19.58% to 20.18%. The net asset balance would decrease from a total of $21.6 million to $17.2 million, a difference of $4.4 million. Under current law, the net asset balance is expected to increase from a net asset balance of $21.6 million on September 1, 2004 to $23.0 million on September 1, 2005.  Under the proposal, the net asset balance is projected at $17.9 million on September 1, 2005. The JRS II actuary certifies that this change in this bill would allow the JRS II to remain actuarially sound through the next biennium based on the current state contribution rate of 16.83% of payroll.

SYNOPSIS OF PROVISIONS

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

·         Allow 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 2% 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.

FINDINGS AND CONCLUSIONS

The bill allows JRS II members to continue making contributions after 20 years of service credit in return for an increase in the service retirement annuity. Currently, JRS II members contribute 6% of salary and the member contributions cease when the member attains 20 years of service credit. The service retirement is 50-60% of the applicable salary for members who have accrued 20 years of service credit. The proposal will allow members to continue to contribute to the system after 20 years of service credit at a rate of 2% of salary for an additional 10 years of service. The retirement benefit will be increased by 2% of the applicable state salary for each year that a member makes the additional contribution after 20 years or service, up to a maximum of 80% of the applicable state salary.

The analysis relies on the assumption that all members will elect to continue to contribute after 20 years of service to receive the benefit increase because the benefit increase is significantly greater in value than the additional member contributions. Moreover, the analysis assumes that members who accrue the maximum benefit of 80% of pay will retire at that point. For JRS II, the provisions of the bill will increase the normal cost and the actuarial accrued liability. The JRS II actuary certifies that this change in this bill would allow the JRS II to remain actuarially sound through the next biennium based on the current state contribution rate of 16.83% of payroll. 

METHODOLOGY AND STANDARDS

In consideration of HB 1114, the JRS II actuary assumed that all members will elect to continue to contribute after 20 years of service to receive the benefit increase because the benefit increase is significantly greater in value that the additional member contributions. The actuary changed the assumed retirement rate for the analysis: members who accrue the maximum benefit of 80% of pay will retire at that point.

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.