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

ACTUARIAL EFFECTS:

According to the actuarial analysis, the recommended contribution requirement for HB 498 would be the recommended 30-year State contribution of the Teacher Retirement System (TRS) for the February 28, 2013 actuarial valuation update of 8.92%. The analysis assumes current contribution rates of 6.4% from the state and 6.4% from the member. At the current total contribution rate of 12.8% of payroll, the TRS amortization period is infinite and under the proposal, remains infinite going forward.  Therefore under the proposal, no cost of living adjustment (COLA) would be granted.

The actuarial analysis provides a point of reference to a similar COLA increase proposal which was not contingent on the health of the fund and would produce a cost impact that increased the unfunded actuarial accrued liability (UAAL) by $56.5 billion and increased the 30-year State contribution rate to 20.65% of payroll. If changes were made to improve the actuarial health of the fund either by reducing benefits or increasing contributions, then these amounts would be a better measure of the cost of the bill. Since the benefit increase in the bill is contingent on the health of the fund, a discussion of the full cost of the bill should reflect the possibility that the contingency becomes true. 

SYNOPSIS OF PROVISIONS:

HB 498, to be effective immediately if receiving required votes or if not,September 1, 2013, would provide the following changes:

• Provides for an annual cost-of-living adjustment (COLA) equal to the increase in the Consumer Price Index for Urban Wage Earners (CPI-W). The payment of the COLA would be contingent on TRS being actuarially sound. The first COLA would be granted on January 1, 2014 and subsequent COLAs would be granted each year on January 1. COLAs would be granted to current and future retirees.

• Provides that if TRS is determined to be actuarially sound, but that paying out the amount of money necessary to pay the full amount of the COLA would make it unsound, the board of trustees shall pay the largest rate of an adjustment for which sufficient funding is available.

FINDINGS AND CONCLUSIONS:

HB 498 provides for an annual cost-of-living adjustment equal to the increase in the Consumer Price Index for Urban Wage Earners (CPI-W), assumed in the analysis to be equal to the CPI assumption, or 3.0% per annum. The first COLA would be granted on January 1,2014 and subsequent COLAs would be granted each year on January 1. COLAs would be granted to current and future retirees. The provisions of the bill allow for a partial COLA if a full COLA is unavailable.

According to the actuarial analysis, because HB 498 only provides for COLAs when TRS is actuarially sound and under the proposal and current contributions, TRS is never expected to meet that definition, it is assumed that no future COLAs would be granted and thus, the proposal would have no fiscal impact. However, the analysis further states that since the bill does not provide for decreases in benefits but would only provide increases, the bill cannot be defined as cost neutral.

The actuarial analysis provides a point of reference to a similar COLA proposal which was not contingent on the health of the fund and which would produce a cost impact that increased the unfunded actuarial accrued liability (UAAL) by $56.5 billion and increased the 30-year State contribution rate to 20.65% of payroll. If changes were made to improve the actuarial health of the fund either by reducing benefits or increasing contributions, then these amounts would be a better measure of the cost of the bill. Since the benefit increase in the bill is contingent on the health of the fund, a discussion of the full cost of the bill should reflect the possibility that the contingency becomes true. 

The actuarial analysis also points out the under new Governmental Accounting Standards Board standards, if the contingent payment under the bill were made twice in a five year period, the COLA would have to be assumed to be a permanent part of the plan. 

According to the actuarial review, TRS is currently actuarially unsound and the bill, if enacted, will make TRS more actuarially unsound.

METHODOLOGY AND STANDARDS:

The analysis and calculations are based on the member data of TRS as of August 31,2012, the actuarial value of assets as of February 28, 2013, and the actuarial assumptions and methods in use as of August 31, 2012 for valuing the actuarial condition of TRS. Finally, this analysis is based on all other provisions of TRS in effect as of August 31, 2012. The analysis assumes no further changes are made to TRS 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 Lewis Ward,Actuary, Gabriel Roeder Smith & Company, April 19, 2013

Actuarial Review by Dan Moore, Actuary,Pension Review Board, April 19th, 2013.

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.