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

ACTUARIAL EFFECTS:

SB 1088 will increase, by 0.09%, the normal cost of the San Antonio Fire and Police Pension Fund (SAFPPF) from 28.53% to 28.62%. The proposal will increase the unfunded actuarial accrued liability from $298.1 million to $312.6 million, a total increase of $14.5 million. The proposal will extend the expected period to amortize the unfunded actuarial accrued liability by 1.4 years from 19.5 years to 20.9 years. The impact of unrealized investment losses of approximately $47.0 million could result in the extension of the amortization period beyond 30 years if the losses are included under the current benefit structure and assuming no growth in the number of active members over the next ten years. 

SYNOPSIS OF PROVISIONS:

SB 1088 would, effective September 1, 2005, provide the following changes:

·         Allow the use of a participant’s salary beyond 34 years of service for the purposes of a Back DROP (Deferred Retirement Option Program) benefit calculation.

·         Increase the Cost-of-Living Adjustment (COLA) from 75% to 100% of the Cost-of-Living Index for those who retired October 1, 1991 through September 30, 1993.

·         Increase the service allowed in determining the spousal Back DROP lump-sum from 27 to 30 years.

·         Guarantee no less than 5 years of pension payments less the number of DROP participation years.

·         Allow a retiree who marries after the date of retirement to elect to receive an actuarially reduced benefit during the retiree’s lifetime and provide a death benefit annuity to the surviving spouse.

·         Calculate the death benefit for an active member, with no beneficiary, paid to the deceased member’s estate based on five times the annuity calculation with the credited service and salary at time of death or refund the member’s contributions that were picked up by the municipality, whichever is greater.

FINDINGS AND CONCLUSIONS:

The proposed legislation would improve the Back DROP, the COLA, and death benefits for the estates of active and retired members provided under current law. The proposal also contains provisions making administrative changes or conforming the law to current practice.

SB 1088 will increase the normal cost by 0.09% and increase the unfunded actuarial accrued liability by $14.5 million. The proposal would extend the expected period to amortize the unfunded actuarial accrued liability from 19.5 years to 20.9 years.

The bill would allow a retiree who marries after the date of retirement to elect to receive a reduced benefit to provide for a death benefit annuity for the surviving spouse. The provision could allow for anti-selection without the presence of certain guidelines (requiring the retiree to pass a physical prior to election) designed to prevent such selection. Anti-selection will increase the benefit obligation over time.

The PRB actuary stated that the analysis does not consider, as it should, the impact of unrealized investment losses of approximately $47.0 million. The potential extension of the amortization period beyond 30 years could result if the losses are included under the current benefit structure and assuming no growth in the number of active members over the next ten years.  The analysis does not consider the proposed improvement in the death benefit in the case of estates, though this should be of minimal cost for SAFPPF.

METHODOLOGY AND STANDARDS:

The analysis assumes no further changes are made to SAFPPF 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 October 1, 2004 actuarial valuation of SAFPPF. According to the PRB actuary, the actuarial assumptions, methods, procedures, and conclusions appear to be reasonable, except as otherwise noted. 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 Leon F. Joyner Jr., Actuary, Segal, March 10, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 16, 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.