The state contribution rate for the Judicial Retirement System Plan Two in the General Appropriations Act as passed by the House is 6.0 percent for 2012 and 2013. If this becomes the state contribution rate for the 2012-13 biennium, JRS II would be actuarially unsound. The passage of this bill would make it more unsound. This contribution rate is not referenced in the actuarial analysis.

Projected for Fiscal Year 2012*

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

*According to the actuarial analysis, if the bill is enacted, the current contribution rate is sufficient to allow JRS II to maintain an amortization period less than 31 years through FY 2012. However, if the bill is enacted, the same contribution rate would not be sufficient to amortize the UAAL in less than 31 years after August 31, 2012 because of current asset losses projected to be recognized by August 31, 2012. In order for JRS II to remain actuarially sound in FY 2013, the actuarial analysis projects the contribution rate would need to increase by 0.47% of payroll, from 22.81% to 23.28% of payroll. Additional recognized gains or losses, other than those projected to be recognized by August 31, 2012, could require a different total contribution rate needed to amortize the UAAL in less than 31 years on August 31, 2012.

ACTUARIAL EFFECTS:

HB 390 would increase the normal cost from 20.19% of payroll to 20.48% of payroll, an increase of 0.29%, for the Judicial Retirement System II (JRS II). Currently, the Unfunded Actuarial Accrued Liability (UAAL) is $25.3 million. HB 390 would increase this amount by $1.8 million, to $27.1 million. The bill does not propose to change contribution rates. According to the actuarial analysis, if the bill is enacted, the current contribution rate is sufficient to allow JRS II to maintain an amortization period less than 31 years through FY 2012. However, if the bill is enacted, the same contribution rate of 22.81% would not be sufficient to amortize the UAAL in less than 31 years after August 31, 2012. In order for JRS II to remain actuarially sound in FY 2013 and in order to satisfy the 31-year funding requirement of Section 840.106, the actuarial analysis projects the contribution rate would need to increase by 0.47% of payroll, from 22.81% to 23.28% of payroll.

SYNOPSIS OF PROVISIONS:

HB 390, to be effective September 1, 2011, would provide the following changes:

Allow an appellate court judge who meets service requirements under Government Code 839.101(a)(4) (has served at least 12 years on an appellate court and the member’s age and service equal or exceeds 70) to use prior state judicial service to increase the creditable service percentage used to calculate retirement benefits in JRS II.

FINDINGS AND CONCLUSIONS:

Currently, the amount of service credit the member earned in the retirement system prior to serving on an appellate court is not used to determine the service retirement annuity of a member qualifying for retirement under Section 839.101(a)(4). Under this proposal, Section 839.102(f) would be amended and Section 839.102(g) would be added to the Texas Government Code to allow an appellate court judge, who has served at least 12 years on an appellate court and the member’s age and service equal or exceeds 70, to use prior state judicial service to increase the creditable service percentage used to calculate retirement benefits in JRS II. This bill would only apply to a person who retires on or after the effective date of this Act.

HB 390 would increase the normal cost by 0.29%, from 20.19% of payroll to 20.48% of payroll, and increase the current UAAL by $1.8 million, from $25.3 million to $27.1 million. At the current contribution rate of 22.81%, the bill would increase the amortization period by 8.1 years, from a current 20.7 years to 28.8 years. Furthermore, the actuarial analysis projects that the cost to make the plan actuarially sound for FY 2013 would be 23.28% of pay, an increase of 0.47% over the current 22.81% contribution rate. The plan would be sound for FY 2012 using the current contribution rate if the bill is enacted.

The state contribution rate for JRS II in the General Appropriations Act as passed by the House is 6.0 percent for 2012 and 2013. If this becomes the state contribution rate for the 2012-13 biennium, JRS II would be actuarially unsound. The passage of this bill would make it more unsound. This contribution rate is not referenced in the actuarial analysis. 

METHODOLOGY AND STANDARDS:

As of August 31, 2010, there were 539 active JRS II members. According to the actuarial analysis and based on information provided by the ERS staff, one appellate court judge with 14 years of non-appellate service and an additional 32 appellate court judges with an assumed average of seven years of non-appellate service would be impacted by this proposal.

The actuarial review mentions that the cost to make the plan actuarially sound is very sensitive to the asset smoothing method. In using the current smoothing method and considering the portion of the unrecognized losses as of August 31, 2011 that can be expected to be recognized during FY 2012 and FY 2013, the additional cost to make JRS II actuarially sound, if the bill is enacted, is 0.47% of payroll for FY 2012 and thereafter.  According to the actuarial analysis, if the bill is enacted, the current contribution rate is sufficient to allow JRS II to maintain an amortization period less than 31 years through FY 2012. However, if the bill is enacted, the same contribution rate would not be sufficient to amortize the UAAL in less than 31 years after August 31, 2012 because of current asset losses projected to be recognized by August 31, 2012. In order for JRS II to remain actuarially sound in FY 2013, the actuarial analysis projects the contribution rate would need to increase by 0.47% of payroll, from 22.81% to 23.28% of payroll. Additional recognized gains or losses, other than those projected to be recognized by August 31, 2012, could require a different total contribution rate needed to amortize the UAAL in less than 31 years on August 31, 2012.

The analysis assumes no further changes are made to the JRS II 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 August 31, 2010 actuarial valuation of JRS II. 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 & R. Ryan Falls, Actuaries, Buck Consultants, January 6, 2011;

Actuarial Review by Mr. Dan P. Moore, Staff Actuary, Pension Review Board, April 15, 2011

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.