*The current contribution rate is insufficient to amortize the unfunded liability over a 30-year period. Currently, the total contribution rate necessary to maintain a 30-year funding period is 13.42% of payroll. Under the proposal, the required 30-year amortization rate would increase by 0.58% of payroll to 14.00%.

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

ACTUARIAL EFFECTS:

HB 469 will increase, by .40% of payroll from 10.40% to 10.80%, the normal cost of the Teacher Retirement System (TRS). The unfunded actuarial accrued liability will increase under the proposal by $684 million, from $13.694 billion to $14.378 billion. Currently, a total contribution rate of 13.42% of payroll is necessary to amortize the unfunded actuarial accrued liability over 30 years. The proposed change would require an increase to 14.00% of payroll to amortize the unfunded actuarial accrued liability over 30 years. HB 469, if enacted without additional funding, would violate TRS funding statutes since the TRS funding period already exceeds 30 years by one or more years.

SYNOPSIS OF PROVISIONS

This bill, to be effective September 1, 2007, would provide the following changes:

·         Decreases the period used for averaging a member’s annual compensation from the highest five years to the highest three years for TRS members who retire after September 1, 2007.  The change would be effective for all types of benefits.

FINDINGS AND CONCLUSIONS

HB 469 proposes to change the calculation of a TRS member’s retirement annuity from a highest five year salary to a highest three year salary.  Prior to the 79^th Legislative Session, the period for determining a member’s final average compensation was three years.  During the 79^th Legislative Session the period was changed from three years to five years for members who were not grandfathered and for all future new entrants into TRS.

HB 469 would increase the normal cost by .40% of payroll from 10.40% to 10.80%. The unfunded actuarial accrued liability would increase under the proposal by $684 million, from $13.694 billion to $14.378 billion. Currently, a total contribution rate of 13.42% of payroll is necessary to amortize the unfunded actuarial accrued liability over 30 years. The proposed change would require an increase to 14.00% of payroll to amortize the unfunded actuarial accrued liability over 30 years. HB 469, if enacted without additional funding, would violate TRS funding statutes since the TRS funding period already exceeds 30 years by one or more years

METHODOLOGY AND STANDARDS

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2006 actuarial valuations of TRS. The analysis assumes no further changes are made to 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 Analyses by Lewis Ward & W. Michael Carter, Gabriel, Roeder, Smith & Co. January 11, 2007.

Actuarial Review by Mr. Richard E. White, & Robert L. Schmidt, Actuaries, Milliman, February 14, 2007

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.