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

ACTUARIAL EFFECTS:

Judicial Retirement System Plan Two (JRS II ): According to the actuarial analysis, SB 1436 would not increase the normal cost of JRS II, which is currently 20.31% of payroll. The fiscal year 2014 estimated JRS II unfunded actuarial accrued liability (UAAL) would increase approximately $0.2 million, from $26.7 million to $26.9 million. Based on the current plan provisions for JRS II, and the fiscal year 2013 total contribution rate of 12.48% of payroll, the amortization period for JRS II UAAL is greater than 31 years. Section 840.106 of the Texas Government Code states that any legislation that reduces the rate of contributions or interest rates,credits additional service, or provides any benefit improvements that increase the actuarial cost of JRS-II, will require a total contribution at least equal to the normal cost plus an amount necessary to amortize the unfunded liability of the new benefit structure over a 31-year period. The bill considered here improves benefits and has the potential to increase the actuarial costs of this plan; therefore, if this bill is enacted, it is projected that the total contribution rate for fiscal years 2014 and 2015 will need to increase by 10.07%, from 12.48% of payroll to 22.55% of payroll, for the JRS-II plan, in order to become actuarially sound and comply with the requirements of Texas Government Code Section 840.106.

Judicial Retirement System Plan One (JRS I): According to the actuarial analysis of SB 1436, the bill would increase the unfunded actuarial accrued liability (UAAL) by approximately $5,000. There would be no change to the normal cost rate rounded to the nearest basis point. For the JRS-I plan,since the plan is not prefunded, there is no increase in the actuarially sound contribution rate.

SYNOPSIS OF PROVISIONS

SB 1436, to be effective September 1, 2013, would provide the following:

?        Section 834.102(c), 839.102(d), and 839.102(f) of the Texas Government Code would be amended to increase the limit of service retirement annuities from 90% to 100% of the applicable state salary for participants in the Judicial Retirement System of Texas Plan One (JRS-I) and the Judicial Retirement System of Texas Plan Two (JRS-II). This bill would apply only to members retiring on or after September 1, 2013.

FINDINGS AND CONCLUSIONS

Under SB 1436, the fiscal year 2014 estimated JRS II unfunded actuarial accrued liability (UAAL) would increase approximately $0.2 million, from $26.7 million to $26.9 million. Based on the current plan provisions for JRS II, and the fiscal year 2013 total contribution rate of 12.48% of payroll, the amortization period for JRS II UAAL is greater than 31 years. Section 840.106 of the Texas Government Code states that any legislation that reduces the rate of contributions or interest rates, credits additional service, or provides any benefit improvements that increase the actuarial cost of JRS-II, will require a total contribution at least equal to the normal cost plus an amount necessary to amortize the unfunded liability of the new benefit structure over a 31-year period. The bill considered here improves benefits and has the potential to increase the actuarial costs of this plan; therefore, if this bill is enacted, it is projected that the total contribution rate for fiscal years 2014 and 2015 will need to increase by 10.07%, from 12.48% of payroll to 22.55% of payroll, for the JRS-II plan, in order to become actuarially sound and comply with the requirements of Texas Government Code Section 840.106.

According to the actuarial review, JRS-II is currently actuarially unsound.  The bill, if enacted, will make JRS-II more actuarially unsound. 

According to the actuarial analysis of SB 1436, the bill would increase the unfunded actuarial accrued liability (UAAL) by approximately $5,000. There would be no change to the normal cost rate rounded to the nearest basis point. For the JRS-I plan, since the plan is not prefunded, there is no increase in the actuarially sound contribution rate.

METHODOLOGY AND STANDARDS

According to the JRS I and II actuary, the analysis is based on the assumption that no other legislative changes affecting the funding of JRS-I and JRS-II will be adopted. It should be noted that when several proposals are adopted, the effect of each may be compounded, resulting in a cost that is greater (or less) than the sum of each proposal considered independently. This certification complies with the rules adopted by the State Legislature.

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2013 update of the August 31, 2012 valuation of JRS I and JRS II. The PRB actuary reviewed the actuarial assumptions and methods and indicated they appear to be reasonable. The conclusions contained in the analysis seem 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 David L. Driscoll, Actuary, Buck Consultants, April 4, 2013

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, April 4,2013.

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-2 benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.