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

ACTUARIAL EFFECTS:

Teacher Retirement System (TRS): HB 2975 will increase the projected normal cost as a percentage of payroll of TRS for fiscal year 2006 by 0.14%, from 11.72% to 11.86%. The estimated TRS unfunded actuarial accrued liability for fiscal year 2006 will decrease by $278.0 million, from $11,053.0 million to $10,775.0 million.  However, the present value of all future normal costs will increase by $292 million for a net increase of liabilities of $14 million over time. This result is due to the fact that, as discussed below, most newly hired or rehired teachers will still earn a full year of service during their first year, while 90 days worth of contributions are lost. This net increase in liabilities occurs for each class of newly hired teachers, so a net increase in costs of $10 to $20 million will occur each year.

SYNOPSIS OF PROVISIONS:

HB 2975, to be effective immediately if receiving required votes or if not, September 1, 2005, would provide the following changes:

·         The current 90-day waiting period for new or re-employed state employees or officers to become members of TRS, applicable to those hired or rehired through August 31, 2005, is extended to those hired or rehired after August 31, 2005.

FINDINGS AND CONCLUSIONS:

HB 2975 would extend the 90-day waiting period for membership in TRS to employees hired or rehired after August 31, 2005. TRS rules allow for a member, who contributes for 4.5 months of a school year, to still receive a year of credited service, while members who contribute for less than 4.5 months of a school year receive no credited service for that year, but are allowed to buy back the year of service at the full actuarial cost. This TRS rule provision taken in the context of the proposal of HB 2975 means that new hires or rehires who are not members of TRS during the first 90 days, but still contribute for 4.5 months of that school year receive credited service for the first 90 days.

According to the TRS actuary, under the structure of TRS rules, the proposal will increase the present value of the additional normal costs for all current participants by $292 million. Though the proposal would generate cost savings by reducing the unfunded actuarial accrued liability by $278 million, the offset of the increase in the present value of all future normal costs results in a cost of $14 million. The TRS actuary further states in the analysis that each group of new hires impacted by the proposal will have a cost of approximately $10-$20 million depending on the size of the new hires group and upon how many are hired at the beginning of the school year versus later in the school year. The cost is created as most of the new hires will earn a full year of service while only contributing for seven months of their initial ten month contract.

HB 2975 is expected to result in smaller benefits as compared to benefits determined under current law for certain members who join TRS under the proposal. The bill will also reduce the state and member contributions to TRS, but the reduction in such contributions is expected to exceed the actuarial present value of the benefit reduction. The proposal will increase the projected normal cost as a percentage of payroll of TRS for fiscal year 2006 by 0.14%, from 11.72% to 11.86%. The estimated TRS unfunded actuarial accrued liability for fiscal year 2006 will decrease by $278.0 million, from $11,053.0 million to $10,775.0 million. However, the present value of all future normal costs will increase by $292 million for a net increase of liabilities of $14 million over time.

The current contribution rate for TRS is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 30 years. Under current law, the state contribution rate would need to increase from 6.0% of payroll to 8.11% of payroll in fiscal year 2006 to achieve a 30-year funding for TRS. Under the proposal, the necessary state contribution for 31-year funding would increase to 8.19%.

METHODOLOGY AND STANDARDS:

The TRS actuary assumed in the analysis that 25% of new entrants would not receive a year of credited service as they would contribute for less than 4.5 months of the school year, while 75% of new entrants would receive a year of credited service since they would contribute for at least 4.5 months of the school year.  

The analysis assumes no further changes are made to TRS 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 TRS. 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 Lewis Ward & W. Michael Carter, Gabriel, Roeder, Smith & Co. April 18, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April 20, 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.