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F I S C A L I M P A C T R E P O R T

SPONSOR Smith

DATE TYPED 3/18/05 HB

SHORT TITLE

Educational Retirement Employer

Contribution

SB 181/aSFC/aHEC/aHAFC/aHFl#1

ANALYST Geisler

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$17.4 Recurring General Fund,

Other Funds

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

$17.4 See Narrative Recurring

Educational Retirement

Fund

$1.8 See Amendments Recurring

Educational Retirement

Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to: HB 270

SOURCES OF INFORMATION

LFC Files

Educational Retirement Board (ERB)

SUMMARY

Synopsis of HFl#1 Amendments

House Floor Amendment #1 to Senate Bill 181 as amended strikes the proposed change to a rule

of 80 from the rule of 75 (years + service) for retirement eligibility and adjusts employee and

employer contributions as follows:

1)

Adds a sixth and seventh year of .75% increases in the employer contribution. This will take

the employer contribution from 8.65% currently to 13.9% in FY12 (an increase of 5.25%

percent over seven years). Total cost of the employer contribution increase will increase

from $94.6 million for five years to $138.1 million for seven years.

2)

Reduce the employee increase from 1% to .30% over 4 years. As amended, the employee

Senate Bill 181/aSFC/aHEC/aHAFC/aHFl#1 -- Page 2

contribution will increase .075% for 4 years, which will take the employee contribution from

7.6 percent currently to 7.9 percent in FY 09. As amended, this contribution increase will

bring in $1.8 million in FY 06. When the .30% increase is fully implemented in FY09 it will

bring in revenue of $7.8 million. This is a reduction of $18.3 million in revenue from the

$26.1 million of revenue that would have been brought in by a 1% increase in the employee

contribution in FY09.

Note on Actuarial Impact: as amended by the House Floor, the combined employer/employee

contribution will increase from 16.25% currently to 21.8% by FY12, an increase of 5.55% com-

pared to the 4.75% increase as proposed by SB 181 as amended by HAFC. Assuming that actu-

arial assumptions hold true (including projected investment return of 8%), the educational re-

tirement fund will meet the 30 year GASB standard for amortization of the unfunded actuarial

liability by FY 11. By 2019 ERB would reach the benchmark of an 80% funding ratio (assets as

a percentage of liabilities).

Synopsis of HAFC Amendments

1)

The House Appropriations and Finance Committee amendments to Senate Bill 181 as

amended strike the House Education Committee amendments. The bill as amended now is

the same as version of the bill which passed the Senate, which will require a .25 percent

yearly increase in the employee contribution for four years (employee contribution rate will

increase from 7.60 percent currently to 8.6 percent in FY 09). This increase would bring in

approximately $5.8 million in revenue in FY 06 increasing to $26.1 million by FY 09.

Synopsis of HEC Amendments

The House Education Committee amendments to Senate Bill 181 as amended reduce the increase

in employee contribution rate from .25 a year for four years to .05 a year for four years. The

contribution rate will go from 7.60 percent currently to 7.80 percent in FY 09. (This compares to

the bill as amended by the Senate Finance Committee, which had proposed taking the contribu-

tion from 7.60 percent currently to 8.60 percent in FY 09).

This change will reduce the revenue from the contribution increase from $5.8 million in FY 06 to

$1.2 million. Over four years, it will reduce revenue from $26.1 million to $5.2 million. The

actuarial impact of this change would be to extend the time it will take the fund to meet the 30

year GASB standard for amortization of the unfunded liability from 2009 to 2014. (Note: all

actuarial estimates always assume 8% investment return on pension fund assets).

Synopsis of SFC Amendments

The Senate Finance Committee amendments to Senate Bill 181:

2)

Add a fifth year of employer contribution increases of .75 percent. The total increase in the

employer contribution rate is 3.75 percent over 5 years, from 8.65 percent currently to 12.4

percent in FY 10. Adding a fifth year of employer contribution increases would cost ap-

proximately $19.4 million in FY 10. Total cost of the 3.75 percent increase in the employer

contribution would be $94.6 million.

3)

Require a .25 percent yearly increase in the employee contribution for four years (employee

Senate Bill 181/aSFC/aHEC/aHAFC/aHFl#1 -- Page 3

contribution rate will increase from 7.60 percent currently to 8.6 percent in FY 09). This in-

crease would bring in approximately $5.8 million in revenue in FY 06 increasing to $26.1

million by FY 09.

Synopsis of Original Bill

Senate Bill 181 would increase the employer contribution for state employees covered under the

Educational Retirement Act .75% each year from FY 06 through FY 09. The employer contribu-

tion would increase from the current 8.65% to 11.65% at the start of FY 09.

For members employed after July 1, 2005, retirement eligibility would begin when the sum of

the member’s age plus his/her years of service equal 80, or upon reaching age 65 and completing

five years of service credit.

Significant Issues

Senate Bill 181 seeks to help improve the deteriorating actuarial position of the educational re-

tirement fund. For example, the ERB funding ratio, the actuarial value of assets as a percentage

of actuarially accrued liabilities, has declined to 75.9% at June 30, 2004, down from 91.6% at

June 30, 2000. A common benchmark for the funded ratio is 80 percent. The Governmental Ac-

counting Standards Board (GASB) has a 30-year standard for amortization of the unfunded actu-

arial liability of a pension fund. ERB’s funding period at June 30, 2004 was infinity. According

to ERB’s actuaries, under current assumptions with no changes, ERB’s actuarial shortfall will

increase from $2.4 billion at June 30, 2004 to $9.4 billion in 20 years. The funded ratio would

be only 59%.

The 3% increase in the employer contribution proposed by Senate Bill 181 ties to the recom-

mendation in the special study on ERB solvency completed during November 2004 by Mellon

Consulting Group. According to ERB’s actuaries, a 3% contribution will improve solvency of

the fund—a 20 year projection shows assets would be $3 billion higher, the funded ratio would

be 73%, and the funding period would be of 73 years.

Changing retirement eligibility to the Age + Years of Service = 80 for members employed after

July 1, 2005 increases the years of service for a full retirement from the present retirement

eligibility standards of Age + Years of Service = 75. ERB’s actuaries state that changing the

benefit structure as proposed would have a modest impact on solvency, in part due to the fact

that most of the savings from the benefit changes are in the out-years.

FISCAL IMPLICATIONS

The recurring cost of the phased-in 3% increase in employer contributions over the next 4 fiscal

years is shown below:

Fiscal Year

Employer Contribution Rate Cost

FY 06

9.4%

$17.4 million

FY 07

10.15%

$17.8 million

FY 08

10.90%

$18.2 million

FY 09

11.65%

$18.7 million

Total

$72.1 million

Senate Bill 181/aSFC/aHEC/aHAFC/aHFl#1 -- Page 4

In FY 06, the Legislative Finance Committee budget recommendation counted the increased

spending for the higher employer contribution to ERB as part of the overall compensation pack-

age for public and higher educational employees.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Relates to HB 270, which seeks to increase the current employer contribution of 8.65% of salary

by .75 percent each year from July 1, 2005 until the contribution rate equals 16.15%, an increase

of 7.50% in the total employer contribution.

OTHER SUBSTANTIVE ISSUES

ERB notes: this bill would further separate the ERB contributions and benefits from the PERA

contributions and benefits by increasing the number of years educational employees must work

before being eligible to retire. Both funds now have a 25 and out retirement eligibility option.

This bill would sunset that provision for any new ERB employees employed after July 1, 2005.

The employer contributions to educational employees have been considerably below that of state

employees for many years. The current employer contribution to state employees is 16.59% vs.

the contribution to educational employees of 8.65%.

ALTERNATIVES

Increase employee contributions and pension bonds are other alternatives for improving ERB

solvency. On January 24, Governor Richardson appointed a task force of legislators and finance

experts to recommend solutions to the educational retirement shortfall in 30 days.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

The unfunded liability of the educational retirement fund will continue to increase. The number

of years needed to pay off the liability will increase and the percentage of funding will decrease.

GG/sb:lg:yr