Actuarial Fiscal Note


Retirement Systems Impacted by Legislation:

PERS, TRS, TDC, SP Plan B & JRS

FUND(S):

2510,2601,2191,2162 & 2140

Sources of Revenue:

General Fund

Legislation creates:

Neither Program nor Fund



Actuarial Note Summary

Impact this measure will have on the liabilities and contributions associated with the retirement system(s).


    The bill modifies the military service provisions for 5 state plans. Each plan is impacted differently dependent on their current military service provisions. The contribution impact varies greatly year to year, with additional costs incurred in the first 10 years and some net savings occurring in later years.
    
    PERS: An initial increase in the UAAL of $3,020,000 with a FY2010 contribution increase of $726,000. The actuarial present value of the change in contributions over the first 10 years is a net savings of $(4,180,000). The current vested member benefit NC rate of 0.52% of pay is replaced by a NC rate of 0.24% for new hires and non-vested members. In FY2010 dollars, the long term NC will reduce from $6,553,000 to $3,024,000.
    
    TRS: An initial increase in the UAAL of $44,339,000 with a FY2010 contribution increase of $7,865,000. The actuarial present value of the change in contributions over the first 10 years is $48,146,000. The current vested member benefit NC rate is expected to be 0.0% within the next 10 years. This is replaced by a NC rate of 0.12% for new hires and non-vested members. In FY2010 dollars, the long term NC will increase from $0 to $1,721,000.
    
    State Police Plan B: An initial decrease in the UAAL of $(744,000) with a FY2010 contribution decrease of $(143,000). The actuarial present value of the change in contributions over the first 10 years is a reduction of $(1,247,000). The current vested member benefit NC rate of 0.82% of pay is replaced by a NC rate of 0.56% for new hires and non-vested members. In FY2010 dollars, the long term NC will reduce from $175,000 to $119,000.
    
    TDC: The Teachers Defined Contribution Plan applies military service to increase vested service credits only. Benefit are only impacted if the member terminates employment prior to 12 years and the additional military service credit changes the employer account vesting percentage. The projected decrease in forfeitures generated additional contributions of $11,000 per year, with an actuarial present value of the first 10 years contributions totaling $46,000.
    
    JRS: The change in military service credits only impacts Judges who retiree under Any Age and 24 Year retirement and apply the military credits in excess of two years to meet the 24 years eligibility. Based on the current JRS membership, the likelihood of this change impacting a Judge in JRS is very unlikely. This change is no cost on an actuarial valuation assumption basis for JRS.
    
    The combined plans’ UAAL increases $46,615,000. The FY2010 contribution increase totals $8,459,000. The actuarial present value of the change in contributions in the first 10 years is an additional $42,765,000. This increase is the net increase for TRS and TDC less the projected savings for PERS and Plan B.
    
    It is noted that additional savings occur beyond 10 years. If projected through FY2035, the actuarial present value of the change in contributions over 26 years is $32,881,000.



Fiscal Detail of Actuarial Impact

Impact on current benefit costs, prior service benefit costs and ongoing contribution requirements following full implementation.


Impact On Following Full Implementation
Increase in Unfunded Actuarial Accrued Liability Initial Impact on Annual Contribution Requirement of System(s) Contribution Increase as a Percentage of Annual Payroll
Total Annual Costs $46,615,000.00 $8,459,000.00 0.50 %
Normal Cost of System N/A $1,909,000.00 0.15 %
Past Service Liabilities $46,615,000.00 $6,550,000.00 0.35 %
Fiscal Year Past Service
Amortization Period Ends
N/A FY2019 N/A


Explanation of above Actuarial estimates:


    Cost estimates were based on the July 1, 2007 and 2008 Actuarial Valuations for each plan and the military service experience reflected in each plan’s last experience study report. Various cost studies were performed for benefit alternatives and the costs for this bill are based on a composite of those studies reflecting the bill’s final provisions.
    
    The transition from current military service provisions to the new 2 year military service credit will take place over the next 20 to 30 years. Initial costs are higher in the aggregate than the previous benefits since current member improvements are included for PERS, TRS and TDC. Future military service costs are reduced as new members replace retiring current vested members in PERS and Plan B. TRS and TDC costs are increased in the long term.
    
    For TRS, the current military service provisions cost was reducing to $0 over the next 8 to 10 years. The new military service benefit is a significant increase for most current and future TRS members. TRS has the greatest cost impact with an increase in the UAAL of $44 million and the actuarial present value of the additional contributions in the next 10 years exceeding $48 million and over the next 26 years exceeding $59 million.
    
    For PERS, the new military service credits generally apply to a different subset of current members, generating the initial UAAL of over $3 million for those members. As new members are phased in, the current benefit costs are reduced in the lower NC amounts. During the first 10 years, the change in contributions has an actuarial present value savings of $(4) million while the sixteen years after that generates additional actuarial present value savings of $(22) million.
    
    For JRS, the likelihood that the change will impact a retiring Judge is actuarially insignificant and no cost change is projected. Judges retiring at age 65 or over are not impacted by the military service change. Only the 24 Year Retirement eligibility might be impacted by the military service change. Since JRS provides a fixed benefit formula, military service impacts retirement eligibility only and not the benefit amount.
    
    For Plan B, the change provides a decrease in benefits for all non-vested members and future members. Actuarial usage assumptions under the bill has been estimated to project short and long term cost savings.
    
    For TDC, military service is being added for employer vesting purposes. This allows some members to meet the 6, 9 or 12 year vesting thresholds by adding the extra military service. The impact for a properly situated member is an increase in the employer account vesting percentage, reducing the forfeiture to the employer in the same amount. A projection of the loss of forfeitures was completed based on forfeiture experience and the reduction in TDC coverage due to the TDC to TRS transfer of over 14 thousand TDC members. The cost impact is projected to be minor at $46 thousand over the next 10 years.

Analysis of Impact on Public Pension Policy:


    The bill provides for the transition of 5 state retirement plans with individualized military service provisions to a new uniform two year military service recognition under each plan. The actual transition will require 20 to 30 years to complete as current vested members retire with credits under the prior provisions, or new provisions if greater, and non vested or new members are only entitled to the new uniform military service provisions.
    
    To avoid federally prohibited benefit cut backs and to meet West Virginia requirements under each plan, members who are vested on the effective date retain rights to elect either their current military service provisions or the new provisions. Non vested members and those first hired on or after the effective date are only eligible for military service under the new provisions.
    
    For PERS and TRS, members with 5 or more years of service on the effective date are treated as vested.
    
    For Plan B, members with 10 or more years are vested in deferred benefits and it is assumed in this Actuarial Note that the provisions of Plan B will be amended to reflect 10 year vesting (instead of 20 years as in the original draft of the bill).
    
    JRS members are treated as vested if they are eligible to retire on the effective date.
    
    TDC members are not currently eligible for any military service credits and therefore are only impacted by the new provisions regardless of vesting or hire date. It is also assumed that military service recognition will be amended to reflect up to 2 years instead of requiring 2 years for a credit and that military service will be recognized regardless of the years of service of the member on the application date for employer vesting determination.



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


    The bill modifies the military service provisions for 5 state plans. Each plan is impacted differently dependent on their current military service provisions. The contribution impact varies greatly year to year, with additional costs incurred in the first 10 years and some net savings occurring in later years.
    
    PERS: An initial increase in the UAAL of $3,020,000 with a FY2010 contribution increase of $726,000. The actuarial present value of the change in contributions over the first 10 years is a net savings of $(4,180,000). The current vested member benefit NC rate of 0.52% of pay is replaced by a NC rate of 0.24% for new hires and non-vested members. In FY2010 dollars, the long term NC will reduce from $6,553,000 to $3,024,000.
    
    TRS: An initial increase in the UAAL of $44,339,000 with a FY2010 contribution increase of $7,865,000. The actuarial present value of the change in contributions over the first 10 years is $48,146,000. The current vested member benefit NC rate is expected to be 0.0% within the next 10 years. This is replaced by a NC rate of 0.12% for new hires and non-vested members. In FY2010 dollars, the long term NC will increase from $0 to $1,721,000.
    
    State Police Plan B: An initial decrease in the UAAL of $(744,000) with a FY2010 contribution decrease of $(143,000). The actuarial present value of the change in contributions over the first 10 years is a reduction of $(1,247,000). The current vested member benefit NC rate of 0.82% of pay is replaced by a NC rate of 0.56% for new hires and non-vested members. In FY2010 dollars, the long term NC will reduce from $175,000 to $119,000.
    
    TDC: The Teachers Defined Contribution Plan applies military service to increase vested service credits only. Benefit are only impacted if the member terminates employment prior to 12 years and the additional military service credit changes the employer account vesting percentage. The projected decrease in forfeitures generated additional contributions of $11,000 per year, with an actuarial present value of the first 10 years contributions totaling $46,000.
    
    JRS: The change in military service credits only impacts Judges who retiree under Any Age and 24 Year retirement and apply the military credits in excess of two years to meet the 24 years eligibility. Based on the current JRS membership, the likelihood of this change impacting a Judge in JRS is very unlikely. This change is no cost on an actuarial valuation assumption basis for JRS.
    
    The combined plans’ UAAL increases $46,615,000. The FY2010 contribution increase totals $8,459,000. The actuarial present value of the change in contributions in the first 10 years is an additional $42,765,000. This increase is the net increase for TRS and TDC less the projected savings for PERS and Plan B.
    
    It is noted that additional savings occur beyond 10 years. If projected through FY2035, the actuarial present value of the change in contributions over 26 years is $32,881,000.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2009
Increase/Decrease
(use"-")
2010
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 8,459,000 8,459,000
Personal Services 0 0 0
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0


Explanation of above Fiscal Note estimates (include possible long-range effect):


    Cost estimates were based on the July 1, 2007 and 2008 Actuarial Valuations for each plan and the military service experience reflected in each plan’s last experience study report. Various cost studies were performed for benefit alternatives and the costs for this bill are based on a composite of those studies reflecting the bill’s final provisions.
    
    The transition from current military service provisions to the new 2 year military service credit will take place over the next 20 to 30 years. Initial costs are higher in the aggregate than the previous benefits since current member improvements are included for PERS, TRS and TDC. Future military service costs are reduced as new members replace retiring current vested members in PERS and Plan B. TRS and TDC costs are increased in the long term.
    
    For TRS, the current military service provisions cost was reducing to $0 over the next 8 to 10 years. The new military service benefit is a significant increase for most current and future TRS members. TRS has the greatest cost impact with an increase in the UAAL of $44 million and the actuarial present value of the additional contributions in the next 10 years exceeding $48 million and over the next 26 years exceeding $59 million.
    
    For PERS, the new military service credits generally apply to a different subset of current members, generating the initial UAAL of over $3 million for those members. As new members are phased in, the current benefit costs are reduced in the lower NC amounts. During the first 10 years, the change in contributions has an actuarial present value savings of $(4) million while the sixteen years after that generates additional actuarial present value savings of $(22) million.
    
    For JRS, the likelihood that the change will impact a retiring Judge is actuarially insignificant and no cost change is projected. Judges retiring at age 65 or over are not impacted by the military service change. Only the 24 Year Retirement eligibility might be impacted by the military service change. Since JRS provides a fixed benefit formula, military service impacts retirement eligibility only and not the benefit amount.
    
    For Plan B, the change provides a decrease in benefits for all non-vested members and future members. Actuarial usage assumptions under the bill has been estimated to project short and long term cost savings.
    
    For TDC, military service is being added for employer vesting purposes. This allows some members to meet the 6, 9 or 12 year vesting thresholds by adding the extra military service. The impact for a properly situated member is an increase in the employer account vesting percentage, reducing the forfeiture to the employer in the same amount. A projection of the loss of forfeitures was completed based on forfeiture experience and the reduction in TDC coverage due to the TDC to TRS transfer of over 14 thousand TDC members. The cost impact is projected to be minor at $46 thousand over the next 10 years.



Memorandum


    The bill provides for the transition of 5 state retirement plans with individualized military service provisions to a new uniform two year military service recognition under each plan. The actual transition will require 20 to 30 years to complete as current vested members retire with credits under the prior provisions, or new provisions if greater, and non vested or new members are only entitled to the new uniform military service provisions.
    
    To avoid federally prohibited benefit cut backs and to meet West Virginia requirements under each plan, members who are vested on the effective date retain rights to elect either their current military service provisions or the new provisions. Non vested members and those first hired on or after the effective date are only eligible for military service under the new provisions.
    
    For PERS and TRS, members with 5 or more years of service on the effective date are treated as vested.
    
    For Plan B, members with 10 or more years are vested in deferred benefits and it is assumed in this Actuarial Note that the provisions of Plan B will be amended to reflect 10 year vesting (instead of 20 years as in the original draft of the bill).
    
    JRS members are treated as vested if they are eligible to retire on the effective date.
    
    TDC members are not currently eligible for any military service credits and therefore are only impacted by the new provisions regardless of vesting or hire date. It is also assumed that military service recognition will be amended to reflect up to 2 years instead of requiring 2 years for a credit and that military service will be recognized regardless of the years of service of the member on the application date for employer vesting determination.



    Person submitting Fiscal Note: Harry W. Mandel, Board Actuary, MAAA, MSPA, EA
    Email Address: harry.w.mandel@wv.gov