In response to your request for an Actuarial Impact Statement on HB 1434 (relating to an increase in employer contributions to the Austin Police Retirement System) the Pension Review Board has determined the following:

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

ACTUARIAL EFFECTS:

If enacted, HB 1434 would increase the employer contribution rate from the current rate of 19% of payroll to 20% of payroll for all pay periods after September 30, 2011 and before October 1, 2012 and increase the employer contribution rate from 20% of payroll to 21% of payroll for all pay periods after September 30, 2012.  The projected amortization period as of December 31, 2011 would decrease from 47 years to 32 years, based on an 8% assumed investment rate of return. HB 1434 would not change any of the benefits or eligibility requirements to receive benefits provided by the System; so there would be no increase in the actuarial present value of future benefits. Consequently, the System’s actuarial condition, as determined by us as the System’s actuaries, would be improved.

SYNOPSIS OF PROVISIONS:

HB 1434 to be effective (immediately if receiving required votes or if not,) September 1, 2011, would provide the following changes:

·         Increase the employer contribution rate to the system from the current rate of 19% of payroll to 20% of payroll for all pay periods after September 30, 2011 and before October 1, 2012 and increase the employer contribution rate from 20% of payroll to 21% of payroll for all pay periods after September 30, 2012.

FINDINGS AND CONCLUSIONS:

If enacted, HB 1434 would increase the employer contribution rate from the current rate of 19% of payroll to 20% of payroll for all pay periods after September 30, 2011 and before October 1, 2012 and increase the employer contribution rate from 20% of payroll to 21% of payroll for all pay periods after September 30, 2012.  The projected amortization period as of December 31, 2011 would decrease from 47 years to 32 years, based on an 8% assumed investment rate of return. Additional amounts of contributions by the City will continue to be provided in accordance with Section 8.01(a)(3). HB 1434 would not change these additional amounts, which are currently 0.63% of basic earnings of each member employed by the City for all periods after September 30, 2009 and before October 1, 2015. On October 1, 2015 this additional 0.63% will be increased or decreased based on an experience study performed by the System’s actuary.

According to the actuarial analysis, the contract between the City of Austin and the Austin Police Association was amended in 2009, including future increases in the city’s contribution rate to APRS of an additional 1% beginning in September 2011 (from 19.63% to 20.63%) and an additional 1% beginning in September 2012 (from 20.63% to 21.63%). Section 3d of the 2009 contract amendment says, “The City agrees that the statute governing the Austin Police Retirement System should be amended to incorporate the increased City contribution rate provided in this Agreement.”

The actuarial analysis also showed the amortization period as of December 31, 2009 was 29 years, and if no changes were made and the system earned 8% per year on its assets, the period would increase to 47 years in 2011 due to recognition of unrealized asset losses. The analysis also shows that due to continuing recognition of deferred asset losses, assuming APRS had 8% return on its assets,  APRS could have its amortization period increase from 32 years to 39 years, even with the changes proposed by HB 1434. 2010 was a good year for investment returns for most plans, so an update of their valuation would likely show lower amortization periods than discussed here.

METHODOLOGY AND STANDARDS:

The analysis assumes no further changes are made to (fund) and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually.  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 Actuarial Analysis by Robert M. May, Actuary, and Mark R. Fenlaw, Actuary, Rudd and Wisdom, February 23, 2011.

Actuarial Review by Dan Moore, Actuary, Pension Review Board, March 9th, 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.