Projected for Fiscal Year 2006

* While the contribution percentage increases slightly, the actual dollar amount of the contribution decreases since the covered payroll decreases.

Projected for Fiscal Year 2006

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

ACTUARIAL EFFECTS:

Employees' Retirement System (ERS): HB 3540 will reduce the normal cost, actuarial liability, and contribution requirements for ERS slightly in future years. However, since the proposal reduces covered payroll, the normal cost as a percentage of pay and the 31-year contribution as a percentage of pay will increase slightly even though the dollar amount of these items is decreasing.

Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): HB 3540 will reduce the normal cost, actuarial liability, and contribution requirements for LECOSRF slightly in future years. However, since the proposal reduces covered payroll, the normal cost as a percentage of pay will increase slightly even though the dollar amount of these items is decreasing.

SYNOPSIS OF PROVISIONS:

HB 3540, 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 ERS and LECOSRF, applicable to those hired or rehired through August 31, 2005, is extended to those hired or rehired after August 31, 2005. This is the only provision with any significant actuarial impact.

·         Require that state employees, who are receiving an annuity from a public retirement system based on state service, are not eligible for longevity pay or benefit replacement pay. The proposal also would require that an employee or state-paid judge, who has left state employment after August 31, 1995, for at least 30 consecutive days is ineligible for benefit replacement pay. Currently, if an employee or state-paid judge leaves employment for 12 consecutive months, the employee or state-paid judge would be ineligible for benefit replacement pay.

·         Require that vacation leave would be determined based only on the length of state employment after the retirement date.

FINDINGS AND CONCLUSIONS:

HB 3540 would extend the 90-day waiting period for membership in ERS and LECOSRF for state employees and officers hired or rehired beyond August 31, 2005. The waiting period will decrease the covered payroll for future years and decrease the actuarial accrued liability; however, it will also decrease the value of assets in the future because fewer contributions are received. The waiting period extension will also cause future ERS and LECOSRF normal cost rates to increase slightly because the entry age of future members will be higher. The higher normal cost rates will be applied to a lower covered payroll, thus resulting in a lower dollar amount of normal cost in the future. The net liability balance is amortized as a level percentage of future payroll and the amortization amount as a percentage of payroll will be higher because the amount will be amortized against a lower future payroll.

The proposal will not change the projected normal cost as a percentage of payroll of ERS for fiscal year 2006. The estimated ERS net liability balance for fiscal year 2006 will remain $506.0 million.  The provisions will not change the normal cost as a percentage of payroll of LECOSRF in fiscal year 2006 and the projected net asset balance of LECOSRF in fiscal year 2006 will remain $49.5 million. Though the proposal does not change normal cost for the two systems in fiscal year 2006, it will increase normal cost slightly during the next several years because the entry age of future members will be higher. In fiscal year 2007, the projected normal cost for ERS would increase by .004% of payroll from 12.450% to 12.454%. Under the proposal, the projected normal cost for fiscal year 2007 for LECOSRF would increase by .001% of payroll from 1.621% to 1.622%.

The current contribution rate for ERS is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Under current law, the state contribution rate would need to increase from 6.0% of payroll to 7.044% of payroll in fiscal year 2006 to achieve a 31-year funding for ERS. Under the proposal, the necessary state contribution for 31-year funding would increase to 7.055%. LECOSRF will remain actuarially sound at the current state contribution rate through fiscal year 2007. According to the ERS/LECOSRF actuary, it is anticipated that at some point in fiscal year 2008 that the actuarial accrued liability will exceed the actuarial value of assets for LECOSRF. A state contribution of 1.621% of payroll will be required when the net asset balance is depleted.

METHODOLOGY AND STANDARDS:

The analysis assumes no further changes are made to ERS and LECOSRF 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 February 28, 2005 update of the August 31, 2004 actuarial valuation of ERS and LECOSRF. 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 11, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April 18, 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.