*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 13.00% of payroll. Under the proposal, the required 30-year amortization rate would increase by .01% of payroll to 13.01%.

**This increases for effected employees.  There is no mention in the TRS analysis of how much this will increase.

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

In addition to the impact on the current TRS retirement trust fund presented above, the following table describes the actuarial condition of a Peace Officer's Supplemental Trust Fund which the bill would create:

The contribution rate to the supplemental fund to maintain a 30-year funding period is 4.92%.

ACTUARIAL EFFECTS

The TRS actuary indicates that the impact on individual peace officers in TRS would be significant. The normal cost for these members would increase from 10.40% to 13.05%.  However, since these employees comprise a small portion of the overall TRS active population, the total normal cost of the plan would only increase 0.01%, from 10.40% to 10.41%. The Unfunded Actuarial Accrued Liability (UAAL) would increase by $1 million and the amortization period for the UAAL would increase from 76.9 years to 81.3 years. The TRS actuary indicates that because the bill would increase the amortization period of the UAAL and that period exceeds 31 years, passage of the bill without additional funding would violate statutory requirements.  

SYNOPSIS OF PROVISIONS

The bill provides for enhanced benefits through TRS and a supplemental plan for peace officers.

The bill would allow peace officers to retire with a service retirement annuity once they have attained age 55 with 10 years of service as a peace officer. Officers with 20 years of service as a peace officer would have benefits calculated using the highest 36 months of compensation and the standard multiplier increased from 2.3% to 2.8%. Peace officers would pay an increased member contribution rate of 7% of pay, and receive enhanced disability and death benefits. The changes would be effective for benefit payments commencing after the effective date of the bill.

The State would contribute 2.13% of pay to the supplemental plan for peace officers, plus money necessary for the administration of that supplemental plan.

Specific health care coverage for retired peace officers would be offered effective September 1, 2008, and apply beginning with the 2008- 2009 school year.

Except as noted, the bill would be effective September 1, 2007, and apply beginning with the 2007-2008 school year.

FINDINGS AND CONCLUSIONS

The TRS actuary indicates that there are approximately 1,800 members of TRS who would qualify as peace officers, or approximately 0.25% of the TRS active member population. Because of the enhanced benefits for peace officers, the TRS actuary developed new retirement rate assumptions. These rates were generally based on the assumptions for the current Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF) under the Employees Retirement System (ERS). Peace officers who have 18 or 19 years of service were assumed to delay retirement until they attain 20 years of service. Individual data on the peace officers was not available. The TRS actuary used the approximation that the age, service and salaries of the peace officers were distributed in the same fashion as the TRS population as a whole.

If the bill is passed, the Supplemental fund would need its own actuarial valuation.  The TRS actuary estimated the Normal Cost rate for the new supplemental fund to be 1.86% of pay. The Actuarial Accrued Liability (AAL) is estimated to be $32.6 million. The contribution rate needed for 30-year funding of the AAL is estimated to be 4.92% of pay. Accordingly, the 2.13% contribution rate specified by the bill is not adequate to fund the AAL over 30 years.

The bill as drafted will cause the number of years required to amortize the UAAL to increase, and since the funding period of TRS already exceeds 30 years by one or more years, passage of this bill without additional funding would violate statutory requirements. For this bill to be enacted, in order to not violate statutory requirements the state contribution rate would at a minimum need to be increased to a rate of 6.61%.

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 valuation and the actuarial value of assets as of February 28, 2007 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. Finally, the analysis assumes no further changes are made to TRS and cautions that the combined effect of several changes can exceed the effect of each change considered individually.

SOURCES:

Actuarial Analyses by Lewis Ward & W. Michael Carter, Actuaries, Gabriel, Roeder, Smith & Co. April 11, 2007.

Actuarial Review by Mr. Richard E. White, & Robert L. Schmidt, Actuaries, Milliman, April 11,2007

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