*Under current law, the state contribution rate would need to increase from 6.0% of payroll to 7.121% of payroll in fiscal year 2005 and to 7.483% of payroll 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, the fiscal year 2005 state contribution would increase to 7.195% of payroll and the fiscal year 2006 state contribution would increase to 7.561% of payroll.

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

ACTUARIAL EFFECTS:

Employees' Retirement System (ERS): SB 368 will increase, by .016% of payroll, the normal cost of ERS, from 12.450% to 12.466%. The unfunded liability will increase from $555.2 million to $603.5 million, a total increase of $48.3 million. Under current law, the unfunded liability is expected to increase from $555.2 million on September 1, 2005 to $888.8 million on September 1, 2006.  Under the proposal, the unfunded liability is projected at $941.7 million on September 1, 2006. The current contribution rate is not sufficient to fund the normal cost and amortize the unfunded actuarial accrued liability over 31 years. In order to achieve a 31-year funding period, a state contribution rate of 7.121% of payroll would be necessary in fiscal year 2005. For fiscal year 2006, the state contribution rate would need to be 7.483% of payroll and in fiscal year 2007, a state contribution rate of 7.806% of payroll is necessary. Under the proposal, to achieve a 31-year funding period, the state contribution would increase to 7.195%, 7.561%, and 7.887% of payroll for fiscal years 2005, 2006, and 2007 respectively.

 Judicial Retirement System Plan One (JRS I): JRS I is financed by a combination of member contributions (currently 6% of a judicial officer’s state compensation ceasing in general after 20 years of service), plus state contributions. The annual state contribution is the amount necessary to pay benefits when due. Under the proposal, the annual state contributions will increase by $2.05 million, $3.66 million, $3.71 million, $3.76 million, and $3.79 million for fiscal years 2006, 2007, 2008, 2009 and 2010 respectively. The proposal will also increase member contributions by $2,000 in fiscal year 2006, $4,000 in fiscal year 2007, and $2,000 per year for fiscal years 2008 through 2010. Information is not provided for fiscal years beyond 2010. The impact the proposal may be expected to have on the JRS I normal cost and accrued liability is not contained in the analysis.

Judicial Retirement System Plan Two (JRS II): SB 368 will decrease, by .02% of payroll, the normal cost of JRS II, from 19.58% to 19.56%. Though the normal cost decreases as a percentage of payroll, the absolute total normal cost will increase as the smaller percentage is applied against a larger payroll. The proposal will decrease the net asset balance by $14.9 million, lowering it from $21.6 million to $6.7 million. Under current law, the net asset balance is expected to increase from $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 $7.1 million on September 1, 2005. Under the proposal, the current contribution rate is sufficient to fund the normal cost and amortize the unfunded actuarial accrued liability over 31 years through the next biennium.

SYNOPSIS OF PROVISIONS

SB 368 would, effective September 1, 2005, provide the following changes:

·         Sets the annual salary of a district court judge to $113,350 for the period from September 1, 2005 through August 31, 2006 and to $125,000 thereafter. The annual salary of a justice of a court of appeals other than the chief justice is 110% of the annual salary of a district court judge. The annual salary of a justice of the Supreme Court other than the chief justice or a judge of the court of criminal appeals other than the presiding judge is 120% of the annual salary of a district court judge. The annual salary of the chief justice or presiding judge of an appellate court is $2,500 more than the annual salary provided for other justices or judges of the court.

·         Establishes the standard service retirement annuity for elected class membership service as the service credited in the elected class, times 2.3% of the state salary of a district court judge for state prosecutors, or times 2.3% of the state salary of the governor for other elected class members. 

FINDINGS AND CONCLUSIONS

SB 368 increases the salaries of the judges and justices who are members of JRS I and JRS II. For JRS I, this would increase benefit payments and member contributions. For JRS II, the proposal will increase the actuarial liabilities and decrease the net asset balance. The bill would also change the compensation definition for the determination of the standard service annuity for elected class membership. Currently, the determination is made by reference to the state salary, as adjusted from time to time, being paid a district court judge. Under the proposal, the compensation base is the state salary, as adjusted from time to time, being paid the governor, except in the case of state prosecutors.

The ERS actuary notes that the current contribution rate is not sufficient to fund the normal cost and amortize the unfunded actuarial accrued liability over 31 years. In order to achieve a 31-year funding period, a state contribution rate of 7.121% of payroll would be necessary in fiscal year 2005. For fiscal year 2006, the state contribution rate would need to be 7.483% of payroll and in fiscal year 2007, a state contribution rate of 7.806% of payroll is necessary. Under the proposal, to achieve a 31-year funding period, the state contribution would increase to 7.195%, 7.561%, and 7.887% of payroll for fiscal years 2005, 2006, and 2007 respectively.

Under the proposal, the current contribution rate for JRS II is sufficient to fund the normal cost and amortize the unfunded actuarial accrued liability over 31 years through the next biennium. The improvements in this bill are expected to increase future JRS I benefit payments, which are paid directly by the State.  Because the JRS I is not advance funded, the analysis does not offer an actuarial opinion on the effect of this proposed legislation.

METHODOLOGY AND STANDARDS

The analysis assumes no further changes are made to ERS, JRS I, and 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 ERS, JRS I, and 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 22, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 3, 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