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

SPONSOR Varela

DATE TYPED 02/02/05 HB 216

SHORT TITLE Magistrate Retirement Contributions

SB

ANALYST Geisler

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$31.9 (see nar-

rative) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

$31.9

See narrative Recurring Magistrate Retire-

ment Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates: SB 201

SOURCES OF INFORMATION

LFC Files

Public Employees Retirement Association (PERA)

Administrative Office of the Courts (AOC)

SUMMARY

Synopsis of Bill

House Bill 216 is Legislative Finance Committee (LFC) sponsored legislation which addresses

actuarial concerns of the Magistrate Retirement Act (MRA) by providing an increase in the em-

ployer contribution of 1.0% during FY 06 and another 1.0% increase during FY 07. The em-

House Bill 216 -- Page 2

ployee (justices and judges) contribution will increase by 1.0% during FY 06 and another 1.0%

increase during FY 07.

Significant Issues

As of June 30, 2004, the Magistrate Fund was, for the first time since 1998, less than 100%

funded. Required contributions to maintain long term solvency exceed the current statutory con-

tribution rate by 4.05% of payroll. Given the fact that statutory contributions are less than the

normal cost of the plan, it is likely that the funded condition of this plan will deteriorate in the

absence of future experience gains.

FISCAL IMPLICATIONS

The cost of the increased employer contributions is $39.7 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.

ADMINISTRATIVE IMPLICATIONS

Moderate administrative implications for PERA and AOC to adjust employer and employee pay-

roll contributions.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 216 and Senate Bill 201 are duplicate bills.

OTHER SUBSTANTIVE ISSUES

Additional Actuarial Information on MRA

In aggregate, MRA experience was less favorable than expected, producing an experience loss of

for the year ending June 30, 2004. The primary sources of the experience loss were a rate of re-

turn on the funding value of assets that was less than the long-range assumption (3.8% vs. 8.0%),

losses related to retiree mortality (less benefits were removed than expected) and losses related to

new hires (one member came into the plan with 7 years of service). Aggregate experience re-

sulted in a loss of $0.6 million and a reduction in the funding status from 102% to 99%.

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

of salary while increasing payroll by 6%. Pensions are directly related to magistrate payroll.

The source of contribution revenues to the Magistrate Fund are 5.5% of salary by magistrates,

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 magistrate payroll. PERA’s actuaries rec-

ommend that all employer contributions be related to payroll. Although the Magistrate Fund

continues to be extremely well funded, the disconnect between contribution revenues and bene-

fits need to be addressed to preserve the long-term health of the Fund. Senate 201 proposes

graduated increases in contribution revenue of 1% of salary by magistrates and their employers

for each of the next 2 fiscal years is a step in the right direction. For FY 06, magistrates will pay

6.5% of their salary in contributions and their employer will pay 10.0% of salary in contribu-

House Bill 216 -- Page 3

tions. For FY 07, magistrates will pay 7.5% of their salary in contributions and their employer

will pay 11.0% of salary in contributions. These are positive steps toward stabilizing the rela-

tionship between contribution revenues and benefits.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

Magistrates covered by the Magistrate Retirement Act will continue to pay employee contribu-

tions of 5.5% of salary and the state will continue to make employer contributions of 9% of sal-

ary on their behalf to the Fund. Given the fact that statutory contributions are less than the nor-

mal costs of the plan, it is likely that the funded condition of this plan will deteriorate in the ab-

sence of future experience gains.

GG/lg