*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 2006 state contribution would increase to 7.561% of payroll and the fiscal year 2007 state contribution would increase to 7.888% of payroll.

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

ACTUARIAL EFFECTS:

Employees' Retirement System (ERS): CSSB 368 will increase, by .016% of payroll, the normal cost of ERS, from 12.450% to 12.466%. The unfunded liability  will increase by $53.3 million in fiscal year 2006. 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 $942.1 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 under current law, 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 7.561%, and 7.888% of payroll for fiscal years 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 $3.62 million, $3.73 million, $3.83 million, $3.92 million, and $4.0 million for fiscal years 2006, 2007, 2008, 2009 and 2010 respectively. The proposal will also increase member contributions by $683,000 in fiscal year 2006, $188,000 in fiscal year 2007, $155,000 in fiscal year 2008, $126,000 in fiscal year 2009, and $105,000 in fiscal year 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): CSSB 368 will increase, by 0.61% of payroll, the normal cost of JRS II, from 19.58% to 20.19%. The proposal will decrease the net asset balance by $22.0 million in fiscal year 2006. 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 $1.0 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

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

·         Sets the annual salary of a district court judge to $125,000 for the period from September 1, 2005 through August 31, 2007. 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.

·         Allow JRS I and JRS II members to elect to continue contributions to the system after 20 years of service credit, up to an additional 10 years of service at a rate of 6% of the applicable state salary. The retirement annuity will be increased by 2% of the state salary for each additional year that a member makes the additional contribution after 20 years of creditable service, up to a maximum of 80% of the applicable state salary.

·         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.  This is not a change to current practice, as the board made this change by rule 4 years ago.

FINDINGS AND CONCLUSIONS

CSSB 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 allows JRS I and JRS II members to continue making contributions after 20 years of service credit in return for an increase in the service retirement annuity. Currently, JRS II members contribute 6% of salary and the member contributions cease when the member attains 20 years of service credit. The service retirement is 50-60% of the applicable salary for members who have accrued 20 years of service credit. The proposal will allow members to continue to contribute to the system after 20 years of service credit at a rate of 6% of salary for an additional 10 years of service. The retirement benefit will be increased by 2% of the applicable state salary for each year that a member makes the additional contribution after 20 years or service, up to a maximum of 80% of the applicable state salary.

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 under current law, 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 7.561% and 7.888% of payroll for fiscal years 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

In consideration of CSSB 368, the ERS/JRS II actuary assumed that all members will elect to continue to contribute after 20 years of service to receive the benefit increase because the benefit increase is significantly greater in value that the additional member contributions. The actuary changed the assumed retirement rate for the analysis: members who accrue the maximum benefit of 80% of pay will retire at that point.

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, March 18, 2005

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