Projected for Fiscal Year 2010

* The current contribution rate is insufficient to amortize the unfunded liability over a 31-year period. Currently, the total contribution rate necessary to maintain a 31-year funding period is 19.41% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.04% of payroll to 19.45%. If the provisions of this bill are enacted, it is anticipated that total contributions for ERS will need to increase to 19.45% of payroll for fiscal year 2010 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006.

* The current contribution rate is insufficient to amortize the unfunded liability over a 31-year period. Currently, the total contribution rate necessary to maintain a 31-year funding period is 3.13% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.03% of payroll to 3.16%. If the provisions of this bill are enacted, it is anticipated that contributions for LECOSRF will need to increase to 3.16% of payroll for fiscal year 2010 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006.

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

ACTUARIAL EFFECTS:

Employees’ Retirement System (ERS):  HB 479 would increase, by $19.2 million, the projected August 31, 2009 unfunded actuarial accrued liability (UAAL). The provisions of the bill would decrease, by 0.06%, the projected funded ratio from 85.24% to 85.18%; and increase, by 0.02% of payroll, the total normal cost rate from 13.37% to 13.39%. The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Currently, the total contribution rate necessary to maintain a 31-year funding period is 19.41% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.04% of payroll to 19.45%. If the provisions of this bill are enacted, it is anticipated that total contributions for ERS will need to increase to 19.45% of payroll for fiscal year 2010 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006.

Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF):  HB 479 would increase, by $3.0 million, the projected August 31, 2009 unfunded actuarial accrued liability (UAAL) and increase, by 0.03% of payroll, the total normal cost rate from 3.13% to 3.16%. The provisions of the bill would decrease, by 0.28%, the projected funded ratio from 84.2% to 83.9%; and increase, by 0.01% of payroll, the total normal cost rate from 2.18% to 2.19%. The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Currently, the total contribution rate necessary to maintain a 31-year funding period is 3.13% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.03% of payroll to 3.16%. If the provisions of this bill are enacted, it is anticipated that contributions for LECOSRF will need to increase to 3.16% of payroll for fiscal year 2010 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006.

SYNOPSIS OF PROVISIONS:

HB 479, to be effective immediately if receiving required votes or if not, September 1, 2009, would provide the following changes:

Would allow certain peace officers or corrections officers who work overtime during a month to accrue additional sick leave for the month as follows:

• Less than 20 hours of overtime earns an hour of sick leave,

• At least 20 hours, but less than 40 hours of overtime earns two hours of sick leave,

• At least 40 hours, but less than 60 hours of overtime earns three hours of sick leave,

• At least 60 hours, but less than 80 hours of overtime earns four hours of sick leave, and

• 80 hours or more of overtime earns five hours of sick leave.

FINDINGS AND CONCLUSIONS:

HB 479 would allow certain peace officers or corrections officers who work overtime during a month to accrue additional sick leave for the month.  Granting additional sick leave accruals will likely increase the amount of unused sick leave that terminating members will have at termination. As the unused sick leave of terminating members may be converted to service for both eligibility and benefit accrual purposes, the granting of additional sick leave for certain peace officers and corrections officers will likely result in increased cost for ERS and LECOSRF.

The analysis from ERS and LECOSRF assumed that approximately half of all Law Enforcement and Custodial Officers (LECO) members of LECOSRF work overtime and are eligible to earn additional hours of sick leave under this bill. Additionally, eligible members are assumed to work 25 hours of overtime a month on average which results in approximately two additional hours of sick leave earned per month or three days of additional sick leave per year.  According to the reviewing actuary, the actuarial analysis is sensitive to the underlying actuarial assumptions and methods.  If all of the employees rather than half work 25 hours of overtime per month, or the half assumed to work overtime work 50 hours of overtime per month instead of the assumed 25 hours, the cost would double.  The cost would be less if members work less overtime or if members use their additional sick time rather than accumulate additional unused sick time.

The proposal would for ERS increase, by $19.2 million, the projected August 31, 2009 unfunded actuarial accrued liability (UAAL) and increase, by 0.04% of payroll, the actuarially sound contribution rate from 19.41% to 19.45%. The provisions of the bill would decrease, by 0.06%, the projected funded ratio from 85.24% to 85.18%; and increase, by 0.02% of payroll, the total normal cost rate from 13.37% to 13.39%.The proposal would for LECOSRF increase, by $3.0 million, the projected August 31, 2009 unfunded accrued liability (UAAL) and increase, by 0.03% of payroll, the total normal cost rate from 3.13% to 3.16%. The provisions of the bill would decrease, by 0.28%, the projected funded ratio from 84.2% to 83.9%; and increase, by 0.01% of payroll, the total normal cost rate from 2.18% to 2.19%.

The current contribution rate for ERS is insufficient to amortize the unfunded liability over a 31-year period. Currently, the total contribution rate necessary to maintain a 31-year funding period is 19.41% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.04% of payroll to 19.45%. If the provisions of this bill are enacted, it is anticipated that total contributions for ERS will need to increase to 19.45% of payroll for fiscal year 2010 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006. The current contribution rate for LECOSRF is insufficient to amortize the unfunded liability over a 31-year period. Currently, the total contribution rate necessary to maintain a 31-year funding period is 3.13% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.03% of payroll to 3.16%. If the provisions of this bill are enacted, it is anticipated that contributions for LECOSRF will need to increase to 3.16% of payroll for fiscal year 2010 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006.

METHODOLOGY AND STANDARDS:

The analysis from ERS and LECOSRF assumed that approximately half of all Law Enforcement and Custodial Officers (LECO) members of LECOSRF work overtime and are eligible to earn additional hours of sick leave under this bill. Additionally, eligible members are assumed to work 25 hours of overtime a month on average which results in approximately two additional hours of sick leave earned per month or three days of additional sick leave per year. 

The analysis assumes no further changes are made to ERS/LECOSRF and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually. Aside from the proposed change and the reflection of the estimated asset return of (27.96)% through February 28, 2009, this estimate is based on the same data, assumptions, methods and plan provisions as used for the August 31, 2008 actuarial valuation of ERS/LECOSRF. 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 Richard A. Mackesey, Actuary, Buck Consultants, March 10, 2009

Actuarial Review by Mr. Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board, March 11, 2009

GLOSSARY OF ACTUARIAL TERMS:

Normal Cost-- the current cost as a percentage of payroll that is necessary to pre-fund pension benefits adequately during the course of an employee's career.

Unfunded Liability-- the amount of total liabilities that are not covered by the total assets of a retirement system.  Both liabilities and assets are measured on an actuarial basis using certain assumptions including average annual salary increases, the investment return of the retirement fund, and the demographics of retirement system members.

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 II benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.