Projected for Fiscal Year 2006

*Under current law, a state contribution rate of 7.044% of payroll is needed for fiscal year 2006 to achieve a 31-year funding for ERS under the requirements of Section 811.006 of Texas Government Code. Under the proposal, a state contribution rate of 7.044% of payroll in fiscal year 2006 and 7.071% of payroll in fiscal year 2007 is needed to achieve a 31 year funding period.

ACTUARIAL EFFECTS:

Currently, the purchase of service for periods not covered by ERS is not explicitly anticipated by the actuarial assumptions. When such uncovered service is purchased, it would generate actuarial losses for ERS. This bill would allow the purchase of federal peace officer service on terms very similar to the current terms for members to purchase military service. The total net actuarial losses for the purchase of military service during fiscal year 2004 were estimated to be $4.0 million. Similar amounts of net actuarial losses occurred in prior years. Allowing members to purchase federal police officer service would be expected to result in additional net actuarial losses in future years. The expected impact for this proposal would result in net actuarial losses of approximately $200,000 per year (approximately 5% of the amount of annual net actuarial losses expected for military service).

SYNOPSIS OF PROVISIONS:

Under the proposal, members would be eligible to establish credit in ERS for service as a federal peace officer. Such credit would be established upon payment by the member of an amount determined under current rules applicable to the purchase of credit for military service.

FINDINGS AND CONCLUSIONS:

ERS is currently inadequately financed by member and state contributions. The proposal will trigger an increase in the state contribution rate to ERS under Section 811.006 from 6.0% of payroll to 7.044% of payroll for fiscal year 2006 and to 7.071% of payroll for fiscal year 2007. Under the proposal ERS will become adequately financed and comply with Section 811.006 only if state contributions are increased as discussed above.

According to the analysis provided by the ERS actuary, the proposal may be expected to generate actuarial losses at the Plan level of approximately $200,000 per year. From the perspective of the members who would establish credit under the proposal, the value of the net incremental benefit attributable to such service would likely be significant for such members.

METHODOLOGY AND STANDARDS:

The ERS/LECOSRF actuary assumed that all current and future commissioned law enforcement service of active officers of the Texas Department of Insurance and the State Fire Marshall would be treated as law enforcement service for LECOSRF. The analysis further assumed that this group will have similar patterns of pay increases, terminations, and retirements as other law enforcement officers.

The analysis assumes no further changes are made to ERS and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually. Except as otherwise noted, 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 valuation of ERS. 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, April 12, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April 13, 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.