*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 0.56% of payroll to 13.98%.

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

ACTUARIAL EFFECTS:

HB 1259 would not increase the normal cost of the Teacher Retirement System (TRS). The unfunded actuarial accrued liability would increase under the proposal by $2.425 billion, from $13.694 billion to $16.119 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 13.98% of payroll to amortize the unfunded actuarial accrued liability over 30 years.  HB 1259, 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:

·          A five percent ad hoc increase in the monthly benefit for all members receiving monthly benefit payments. The increase would apply only to benefits paid on or after January 1, 2008 and only members receiving payments in January 2008 will receive an increase. Members who retire after January 2008 would not be entitled to the ad hoc increase. 

FINDINGS AND CONCLUSIONS

HB 1259 proposes to provide a five percent ad hoc increase in the amount of the monthly benefit for all members receiving monthly benefit payments. The increase would apply only to benefits paid on or after January 1, 2008 and only members receiving payments in January 2008 would receive an increase. Members who retire after January 2008 would not be entitled to the ad hoc increase. 

HB 1259 would not increase the normal cost of the Teacher Retirement System (TRS). The unfunded actuarial accrued liability would increase under the proposal by $2.425 billion, from $13.694 billion to $16.119 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 13.98% of payroll to amortize the unfunded actuarial accrued liability over 30 years. HB 1259, if enacted without additional funding, would violate TRS funding statutes since the TRS funding period already exceeds 30 years by one or more years.

The TRS actuary states that the retirement rates have not been modified to reflect a higher incidence of retirement between the date of the bill’s passage and the date of the ad hoc increase. If the availability of the ad hoc increase encourages more TRS members to retire than expected by the actuarial assumptions, the cost impact of the bill would be larger.  

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, Actuaries, Gabriel, Roeder, Smith & Co. March 12, 2007.

Actuarial Review by Mr. Richard E. White, & Robert L. Schmidt, Actuaries, Milliman, March 13, 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.