ACTUARIAL EFFECTS:

If enacted, CSHB 2796 would allow for increases in employer contributions to the Austin Police Officer's Retirement System in order to fund the additional liabilities incurred due to participation in the Proportionate Retirement Program and the inclusion of 91 employees from Austin Employees Retirement System. The effect of this provision will be to increase the City’s contribution rate to the System, as a percent of covered payroll, from 18.00% to 18.25% effective January 4, 2009, from 18.25% to 18.63% effective October 1, 2009 and from 18.63% to 19.63% effective October 1, 2010. These changes would shorten the period required to amortize the system’s unfunded liability from 23.8 years to 20.4 years and decrease the funded ratio using market value of assets from 72.34% to 71.49% based on the December 31, 2007 valuation.

SYNOPSIS OF PROVISIONS:

CSHB 2796, to be effective September 1, 2009, would provide the following changes:

·         Increases the limit as to the amount of compensation that can be taken into account for the calculation of benefits from $150,000 to $200,000 for non eligible members

·         Provides for increases in the City’s contribution rate in order to reflect the additional cost incurred by the System for participating in the proportionate retirement system

·         Makes changes required by the IRS to the application of the limits on benefits, and to the rollover distribution rules by expanding the definition of “eligible retirement plan” 

FINDINGS AND CONCLUSIONS:

CSHB 2796 would make several technical changes required in order for Austin Police Officers’ Retirement System (APORS) to maintain qualified retirement plan status under the Internal Revenue Code and would adopt a provision that would allow for increases in City contributions in order to offset additional costs incurred from the System participating in the Proportionate Retirement System (PRP) and from the inclusion of 91 employees from Austin Employees’ Retirement System (COAERS).

The only change made by CSHB 2976 that would have a financial effect on the system is the change to the City’s contribution rates. In 2008 both the Austin City Council and the Board of Trustees of the System elected for the System to participate in the PRP in order to ease consolidation of a department of city employees into the Austin Police Department.  Participation in the PRP began on March 1, 2009.  Prior to the City’s election to participate in PRP, the systems actuary determined the increase in the City’s contribution rate that would be required to fund the additional liabilities incurred due to participation in PRP and inclusion of 91 employees from COAERS.

According to the PRB reviewing actuary, the cost of participation in the PRP is equivalent to 0.25% of payroll from January 4, 2009 through September 30, 2009 and 0.63% of payroll after September 30, 2009. This cost is completely offset by an increase in the City’s contribution rate of 0.25% of payroll, from 18.00% to 18.25%, from January 4, 2009 through September 30, 2009 and by 0.63%, or an additional 0.38%, of payroll, from 18.25% to 18.63%, after September 30, 2009. In addition, the City contribution rate would increase by an additional 1.00% of payroll, from 18.63% to 19.63%, on October 1, 2010. It is estimated that the additional contribution would reduce the amortization period by 3.4 years, from 23.8 years as of December 31, 2007 to 20.4 years. Based on experience studies that will be performed by the System’s actuary, following each five years of PRP participation, the System’s actuary will determine whether the City’s contribution rate should be adjusted (increased or decreased).

It should be noted that the financial effect of electing PRP and transferring employees has already occurred because the System now provides PRP coverage and the City’s contribution rate has increased to 18.25% as of January 4, 2009.

The combined effect of these increases in the City’s contribution rate will be to increase the City’s contribution rate to the System, as a percent of covered payroll, from 18.00% to 18.25% effective January 4, 2009, from 18.25% to 18.63% effective October 1, 2009 and from 18.63% to 19.63% effective October 1, 2010.  These contributions increases will shorten the period required to amortize the system’s unfunded liability by 3.4 years.  The funded ratio using the market value of assets as of December 31, 2007 would decrease from 72.34% to 71.49%.

The bill contains additional technical and administrative provisions with no material impact, including changes to comply with Internal Revenue Code Section 401(a) and Section 415.

METHODOLOGY AND STANDARDS:

The analysis assumes no further changes are made to Austin Police Officer’s Retirement System 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 December 31, 2007 actuarial valuation of the Austin Police Retirement System. 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 Robert M. May, Actuary, and Mark R. Fenlaw, Actuary, Rudd and Wisdom, March 10^th 2009

Actuarial Review by Mr. Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board, March 20^th, 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.