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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 02/04/05 HB

SHORT TITLE Increase Judicial Retirement Contributions

SB 246

ANALYST Geisler

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$150.14 Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

$150.1

$150.1 Recurring Judicial Retirement

Fund

$100.1

$100.1 Recurring Judicial Retirement

Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates: House Bill 205

SOURCES OF INFORMATION

LFC Files

Administrative Office of Courts (AOC)

Public Employees Retirement Association (PERA)

FOR THE LEGISLATIVE FINANCE COMMITTEE

SUMMARY

Synopsis of Bill

Senate Bill 246 is Legislative Finance Committee sponsored legislation that addresses actuarial

problems of the judicial retirement fund by providing for graduated increases in employer and

Senate Bill 246 -- Page 2

judge contribution levels. The bill will increase the judges contribution by 1% in both FY 06 and

FY 07 and the employer contribution by 1.5% in both FY 06 and FY 07.

Senate Bill 246 amends the PERA Act to create a new retirement benefit structure for judges

(district court, metropolitan court or court of appeals) and justices (supreme court) who first be-

come members on or after July 1, 2005. The new plan provides for a moderate decrease in nor-

mal retirement eligibility by providing a minimum age (55) and years of service (16), and pro-

vides a straight 3.75% pension factor for all years of service.

Significant Issues

PERA’s actuarial study of June 30, 2004 illustrated a continued contribution under-funding of

employer/employee contributions to the judicial retirement fund. A contribution level equivalent

to 47% of payroll would be required to cover the normal costs of the program as well as amortize

the unfunded actuarial liability within the 30 year period established by the Governmental Ac-

counting Standards Board (GASB). However, total statutory contributions are only 33% of pay-

roll, a shortage of 14% in the contribution level. Senate Bill 246 begins to address this shortfall

by providing a 5% increase in judge/employer contributions and by developing a new retirement

plan for future judges which will be less expensive. PERA estimates the changes proposed by

SB 246 will reduce the shortfall from 14% to 4.92%.

FISCAL IMPLICATIONS

The cost of the increased employer contributions is $150.1 thousand in FY 06 and will increase

in future years based on salary increase. Neither the LFC or executive recommendation included

funding for increased employer contribution in their respective FY06 recommendations, but it

will be included in the FY 07 budget request if the bill passes. The increased employee contribu-

tions will provide an additional $100 thousand during both FY 06 and FY 07 to the fund.

ADMINISTRATIVE IMPLICATIONS

Moderate administrative implications for PERA and AOC, particularly in keeping track of jus-

tices/judges elected pre 7/1/05 and post 7/1/05 for payroll contribution purposes.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 205, also sponsored on behalf of the Legislative Finance Committee, is identical to

Senate Bill 246.

OTHER SUBSTANTIVE ISSUES

Recent History of Contribution Levels

Legislation passed in 2003/2004-plan year that increased judge contributions from 5.0% to 5.5%

of salary. Pensions are directly related to judicial payroll. The source of contribution revenues

to the Judicial Fund are 5.5% of salary by judges, 9.0% of salary by employers and a portion of

docket and jury fee revenue. Historically, there is a poor correlation between docket fee revenue

and judicial payroll. PERA’s actuaries recommend that all employer contributions be related to

payroll. The disconnect between contribution revenues and benefits needs to be addressed to

Senate Bill 246 -- Page 3

preserve the long-term health of the Fund. Senate Bill 246 proposes graduated increases in con-

tribution revenue of 1% of salary by judges and their employers for each of the next 2 fiscal

years is a step in the right direction. For FY06, judges will pay 6.5% of their salary in contribu-

tions and their employer will pay 10.0% of salary in contributions. For FY07, judges will pay

7.5% of their salary in contributions and their employer will pay 11.0% of salary in contribu-

tions. These are positive steps toward stabilizing the relationship between contribution revenues

and benefits.

Comparing Current Judicial Retirement Benefits vs SB 246 proposed Benefits

CONTRIBUTIONS:

CURRENT: 5.5% of salary by judge

9% of salary paid by employer

$38 from Civil Docket Fees

PROPOSED:

FY06 6.5% of salary by judge

FY06 10.5% of salary paid by employer

FY07 7.5% of salary by judge

FY07 12% of salary paid by employer

$38 from Civil Docket Fees

ELIGIBLITY FOR RETIREMENT:

CURRENT: Age 64 with 5 or more years of judicial service

Age 60 or older with 15 or more years of judicial service

Early Retirement: Between the ages of 50 – 60 with 18 years of

service credit

PROPOSED: Age 64 with 5 or more years of judicial service

Age 55 or older with 16 or more years of judicial service

No Early Retirement

CALCULATION FOR ANNUAL PENSION:

CURRENT:

37.5% of FAS plus 3.75% of FAS for each year of service in

excess of 5 years

Maximum is 75% of FAS (salary received during the last year in

office)

Early Retirement: Applicable between ages 50-60

Pension equal to 70% of FAS plus reduction factor for each year

between age 50-60

PROPOSED:

3.75% of FAS for each year of service; maximum is 75% of FAS

(salary received during the last year in office)

Senate Bill 246 -- Page 4

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

The continued under-funding of the JRA plan may place the plan in a critical actuarial unfunded

status requiring substantial funding to make solvent.

AMENDMENTS

PERA suggests the following technical correction:

Page 3, line 2, after “July 1, 2005,” delete the remainder of the paragraph and replace with “the

amount of pension is equal to three and seventy-five one hundredths of one-twelfth of the salary

received during the last year in office multiplied by credited service. The amount of pension

shall not exceed seventy-five percent of the salary received during the last year in office.”

GG/lg