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

SPONSOR Sanchez, M

DATE TYPED 01/27/05 HB

SHORT TITLE CYFD Corrections Officer Retirement

SB 266

ANALYST Geisler

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

.01 See Narra-

tive

(Parenthesis ( ) Indicate Expenditure Decreases)

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

$54.0 Recurring

General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Conflicts with: SJM 18, HJM 5

SOURCES OF INFORMATION

Public Employees Retirement Association (PERA)

Children, Youth & Family Department (CYFD)

American Federation of State, County, and Municipal Employees (AFSCME)

SUMMARY

Synopsis of Bill

Senate Bill 266 amends the PERA Act to create a new coverage plan with enhanced retirement

benefits for juvenile correctional officers employed by the Children, Youth and Family Depart-

ment (“CYFD”). Under the newly created Hazardous Duty Plan 3, juvenile correctional officers

Senate Bill 266 -- Page 2

would be eligible for a 20% service credit enhancement benefit, a 3% pension factor and an 80%

pension. Under the new plan, actual service in the position of juvenile correctional officer would

be eligible for its benefit enhancements. The member’s contributions under the proposed Haz-

ardous Duty Plan 3 Member Coverage Plan 1 will be 7.6% of salary; the employer contributions

are 25.1%. This is an increase in the member contribution of 2.82% and a .62% reduction in the

employer contribution.

Significant Issues

The primary policy issue raised by Senate Bill 266 is whether juvenile correctional officers

(JCOs) should receive the increased benefits of 20% service credit enhancement retirement bene-

fit. In addition, PERA is concerned the earlier actuarial study on the issue of an enhanced retire-

ment for JCO’s may be out-of-date, leading to the question if the increased contributions pro-

posed in the bill will cover the cost of the enhanced benefit.

The PERA Board has adopted a position to not endorse any benefit enhancement legislation until

sufficient experience is gained to determine the actuarial impact of benefit enhancements passed

during recent legislative sessions. AFSCME supports this bill, pointing out it would provide the

same level of retirement benefits to juvenile correction officers as adult correction officers re-

ceive. CYFD provides that the executive branch supports the PERA proposed moratorium of

additional enhancements/changes to the system at this time.

FISCAL IMPLICATIONS

If implemented the new plan would reduce the employer contribution slightly, resulting in $54

thousand in general fund savings. The larger question remains as to whether or not the contribu-

tion increases contemplated in the bill will cover the increased cost of enhanced benefits.

Recent History of Legislation and Actuarial Studies

During the 2003 legislative session, legislation provided adult correctional officers with the same

benefits sought under Senate Bill 266. That legislation did not cover juvenile correctional offi-

cers. CYFD requested an actuarial study in January 2004 that determined a contribution increase

of 3.92 over the existing contribution rate would be sufficient to fund the benefit increase con-

templated by Senate Bill 266. However, the 2004 actuarial study contemplated moving the juve-

nile correctional officers into State Police and Adult Correctional Officer Plan 1, rather than cre-

ating a new Hazardous Duty 3 plan solely for juvenile correction officers.

In December 2004, PERA informed CYFD that its actuaries recommended an updated actuarial

study if they were introducing legislation for the JCOs due to the significant experience loss of

the State Police/Hazardous Duty division for the year ending June 30, 2004 (8.03 vs. 1.4 for

State General plan). CYFD did not update its 2004 actuarial study to reflect: a) creating a new

plan just for JCOs; and b) to determine whether the funding proposed by Senate Bill 266 is still

sufficient to finance the unfunded accrued obligations associated with the proposed benefits

given the actuarial experience of the hazardous duty fund over the past year. Without an updated

actuarial study, PERA cannot determine whether this experience loss changed the contribution

levels required to fund Senate Bill 266’s benefit increases.

Senate Bill 266 -- Page 3

ADMINISTRATIVE IMPLICATIONS

Senate Bill 266 will have some administrative impact on PERA as it will require changes to the

new pension software system that PERA is in the process of implementing.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Senate Joint Memorial 18 and House Joint Memorial 5 impose a two-year moratorium on pro-

posed benefit enhancement legislation to the public employees retirement system and the educa-

tional retirement system through December 31, 2006.

TECHNICAL ISSUES

See proposed amendments below.

OTHER SUBSTANTIVE ISSUES

PERA provided additional background information:

1.

Current Retirement Plan compared to Proposed Plan

Currently, under Hazardous Duty Plan 2, juvenile correctional officers are eligible to retire at any

age with 25 or more years of service credit. They receive a 3% pension factor for every year

they earn service credit and are capped at 100% of their final average salary. For Hazardous

Duty Plan 2, juvenile correctional officers pay 4.78% of their salary in contributions and their

employer pays 25.72% of salary in contributions. Senate Bill 266 proposes an increase of 2.82%

in member contributions and a .62% reduction in employer contributions.

Senate Bill 266 provides for an election by the juvenile correctional officers to decide whether

they will accept the increased contributions for the enhanced benefits. If accepted by a majority

of the affected membership, Senate Bill 266 will provide that juvenile correctional officers will

have each year of service credit enhanced by 20%, effectively allowing its members to retire

with 20 years of actual service, with a 3% pension factor and an 80% pension maximum.

Senate Bill 266 requires that juvenile correctional officers accrue 18 months of service credit

subsequent to July 1, 2006 to be eligible for enhanced benefits. However, Senate Bill 266 pro-

vides that all actual service credit as a “juvenile correctional officer” be enhanced by 20%. As a

result, all past service credit accrued under State Hazardous Duty Plan 2 is enhanced when trans-

ferred to the State Hazardous Duty Plan 3.

2.

PERA Support for Retirement Benefits Enhancement Moratorium

For the period ending June 30, 2003, PERA’s unfunded liability grew significantly, and the time

to pay off its unfunded actuarially accrued liability (UAAL) increased from 10 years to 17 years.

The June 30, 2004 actuarial valuation indicates that PERA funding resources are sufficient to

fund the Normal Cost and finance the UAAL over an aggregate period of 21 years. It should be

noted, however, that the funding of assets uses a smoothing technique that spreads investment

gains and losses out over a 4-year period. One quarter of this year’s investment gain has been

recognized in last fiscal year’s funding value and one quarter of it will be recognized in each of

Senate Bill 266 -- Page 4

the next 3 years. Past losses more than offset last year’s gain. In aggregate, the system had an

experience loss for the year ending June 30, 2004 of $474 million, due to rate of return on fund-

ing value of assets less than assumed (3.8% vs. 8%) and retirements greater than assumed.

PERA’s actuaries report a loss of $186 million for past investment losses will flow into the rec-

ognized gain/loss in next year’s actuarial valuation. If a loss of this magnitude occurs next year,

the effect would be that the overall PERA funding ratio will drop to 90% and PERA’s overall

UAAL will increase to approximately 30 years. This recent negative trend in actuarial position

combined with the unknown financial impact of recent legislation on the fund has led the board

to support a moratorium.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

Juvenile correctional officers employed by the Children, Youth and Family Department will con-

tinue to be covered by Hazardous Duty Plan 2. Juvenile correctional officers are eligible to retire

at any age with 25 or more years of service credit. They receive a 3% pension factor for every

year they earn service credit and are capped at 100% of their final average salary. For Hazardous

Duty Plan 2, correctional officers pay 4.78% of their salary in contributions and their employer

pays 25.72% of salary in contributions.

AMENDMENTS

PERA suggests:

1.

Page 1, line 23 through 24, states that the retirement board shall certify, “a majority of the

members voting of those members to be covered” under state hazardous duty member cover-

age plan 3 has voted to approve adoption of this plan at an election.

Line 23 through 24 should be corrected to state, “a majority of affected juvenile correctional

officer members have voted to approve adoption of the plan” under state hazardous duty

member coverage plan 3 has voted to approve adoption of this plan at an election.

2.

Page 4, line 20 through 22, states that a “member shall have one and one-half years of service

credit earned under state hazardous duty member coverage plan 3 subsequent to July 1,

2006.”

Page 4, line 20 should be corrected to state “member shall have one and one-half years of ac-

tual service credit earned under state hazardous duty member coverage plan 3 subsequent to

July 1, 2006.”

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