2014 REGULAR SESSION
ACTUARIAL NOTE HB 67
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House Bill 67 HLS 14RS-441
Engrossed with House Retirement
Committee Amendment #3941
Author: Representative Jack
Montoucet
Date: May 4, 2014
LLA Note H B 67.02
Organizations Affected:
Firefighters’ Retirement System
EG INCREASE APV
This Note has been prepared by the Actuarial Services Department of the Office of
the Legislative Auditor. The attachment of this Note to HB 67 provides
compliance with the requirements of R.S. 24:52 1.
Bill Header: RETIREMENT/FIREFIGHTERS: Provides relative to the accrual rate and Deferred Retirement Option Plan
participation in the Firefighters' Retirement System
Cost Summary:
The estimated actuarial and fiscal impact of the proposed legislative is summarized below. Actuarial costs pertain to changes in the
actuarial present value of future benefit payments. A cost is denoted by “Increase” or a positive number. Savings are denoted by
“Decrease” or a negative number.
Actuarial Cost/(Savings) to Retirement Systems and OGB Increase
Total Five Year Fiscal Cost
Expenditures Increase
Revenues Increase
Estimated Actuarial Impact:
The chart below shows the estimated change in the actuarial present value of future benefit payments, if any, attributable to the
proposed legislation. A cost is denoted by “Increase” or a positive number. Savings are denoted by “Decrease” or a negative number.
Present value costs associated with administration or other fiscal concerns are not included in these values.
Change in the
Actuarial Cost to: Actuarial Present Value
All Louisiana Public Retirement Systems Increase
Other Post Retirement Benefits Decrease
Total Increase
Estimated Fiscal Impact:
The chart below shows the estimated fiscal impact of the proposed legislation. This represents the effect on cash flows for
government entities including the retirement systems and the Office of Group Benefits. Fiscal costs include estimated administrative
costs and costs associated with other fiscal concerns. A fiscal cost is denoted by “Increase” or a positive number. F iscal savings are
denoted by “Decrease” or a negative number.
EXPENDITURES 2013-14 2014-15 2015-16 2016-17 2017-2018 5 Year Total
State General Fund $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Agy Self Generated Increase Increase Increase Increase Increase Increase
Stat Deds/Other 0 0 0 0 0 0
Federal Funds 0 0 0 0 0 0
Local Funds 0 Increase Increase Increase Increase Increase
Annual Total Increase Increase Increase Increase Increase Increase
REVENUES 2013-14 2014-15 2015-16 2016-17 2017-2018 5 Year Total
State General Fund $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Agy Self Generated 0 Increase Increase Increase Increase Increase
Stat Deds/Other 0 0 0 0 0 0
Federal Funds 0 0 0 0 0 0
Local Funds 0 0 0 0 0 0
Annual Total $ 0 Increase Increase Increase Increase Increase
2014 REGULAR SESSION
ACTUARIAL NOTE HB 67
Page 2 of 5
Bill Information:
Current Law
Current law provides for a 3 1/3% accrual rate for all members of Firefighters Retirement System (FRS).
Current law provides that members of the Firefighters’ Retirement System (FRS) may remain in Deferred Retirement Option Plan
(DROP) for a period of three years.
Proposed Law
Accrual Rate
The accrual rate for members for FRS first employed on or after June 1, 2014 and who retire with less than 30 years of
service, will be reduced from 3 1/3% per year of service to 3.0% per year of service.
However, the benefit for a member employed on or after June 1, 2014, who is approved for disability benefits for an injury
sustained in the line of duty or who is killed in the line of duty, and for whom the calculation of disability or survivor benefits
is based on a benefit accrual rate, shall be calculated under current law.
DROP
The duration of the DROP period will be extended to five years for any member who has at least 30 years of service
Implications of the Proposed Changes
Benefit provisions for some future members of FRS will be reduced. Benefit provisions pertaining to DROP for all existing and
future members will be enhanced.
Cost Analysis:
Analysis of Actuarial Costs
Retirement Systems
Accrual Rate
This provision of HB 67 is a benefit provision having actuarial savings.
HB 67 has no effect on any current member of FRS. The actuarial present value of future benefit payments for existing
members will not change. HB 67 has no effect on accrued liabilities because it applies to members first employed on or
after July 1, 2014.
HB 67 provides for lower benefit accrual rates to members first employed on or after July 1, 2014 , with less than 30
years of total creditable service. As a result, the present value of future benefit payments for future members will
decrease. Future normal costs and future employer contribution requirements will also decrease.
The estimated short term effect of HB 67 is that the employer contribution rate in five years will be 0.51% of pay less
than it would be if HB 67 is not enacted.
The long term effect of HB 67 is that the employer contribution rate in 25 to 30 years will be 1.75% of pay less than it
will be if HB 67 is not enacted.
This analysis is partially based on information provided to the FRS by G.S. Curran & Company, Ltd.
DROP Participation
This provision of HB 67 is a benefit provision having an actuarial cost.
Although, HB 67 produces offsetting increases and decreases in actuarial costs, the net effect is an increase in actuarial
costs.
The following information is presented to put some context to our analysis of actuarial costs.
1. FRS has 200 active members who have 25 to 30 years of service. The average salary of these members is
$71,000 a year.
2. FRS has 53 active members with 30 or more years of service. The average salary of these members is $81,000.
3. FRS has 203 members who are in DROP and are under age 60. The average service and average pay associated
with these members are not available.
2014 REGULAR SESSION
ACTUARIAL NOTE HB 67
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4. FRS has 8 members in DROP who are between age 60 and age 65. Average service and average pay are not
available.
5. The average annual salary of new firefighters is $29,460.
The following case is presented to illustrate the basis for our cost conclusions.
A 58 year old member with 30 years of service before entering DROP has been in DROP for 3 years. He is earning
$60,000 a year and has been earning that amount for the past 6 years. If he continues to be a firefighter, he will
continue to earn $60,000 a year for the foreseeable future.
Situation A
Let’s first suppose that the member intends to continue to work two more years regardless of whether or not HB 67
is enacted. HB 67 will then have the following effects on the member, FRS, and the employer.
The following analysis shows that if HB 67 enacted, the employer avoids paying $35,100 in contributions to the
system, FRS liability increases by $115,100, and the plan member gains an additional $80,000 in benefits.
Effect On: HB 67 Is Not Enacted HB 67 Is Enacted
The Member:
Deposits into DROP Account $ 0
$60,000 x 2 =
$ 120,000
Member Contributions to FRS
$(60,000) x 2 x 10% =
$ (12,000)
$ 0
Value of Additional Benefit Accruals
2 x 3 1/3% x $60,000 x 13 =
$52,000
$ 0
Increase/(Decrease) in Wealth
$ 40,000 $ 120,000
FRS:
Payments to member’s DROP account. $0
2 x $(60,000) =
$(120,000)
Contributions received from the member
$60,000 x 2 x 10% =
$ 12,000
$ 0
Contributions received from the employer
$60,000 x 2 x 29.25 % =
$ 35,100
$ 0
Value of additional benefits granted to the
employee
2 x 3 1/3% x $(60,000) x 13
= $ (52,000)
$ 0
Increase/(Decrease) in Assets
$ (4,900) $ (120,000)
The Employer:
Contributions paid by the employer to FRS
$ (35,100) $ 0
Situation B
On the other hand, let’s suppose that the member will quit immediately if HB 67 is not enacted, but will continue to
work if it is enacted. HB 67 will then have the following effects on the member, FRS, and the employer.
The following analysis shows that if HB 67 enacted, the employer will incur $42,450 of additional payroll costs,
FRS liability will increase $20,850, and the member has no gain or loss.
Effect On: HB 67 Is Not Enacted HB 67 Is Enacted
The Member:
Deposits into DROP Account or pension payments
$ 120,000
$ 120,000
Member Contributions to FRS $ 0
$ 0
Value of Additional Benefit Accruals $ 0
$ 0
Increase/(Decrease) in Wealth
$ 120,000 $ 120,000
2014 REGULAR SESSION
ACTUARIAL NOTE HB 67
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Effect On: HB 67 Is Not Enacted HB 67 Is Enacted
FRS:
Payments to member DROP account. $(120,000)
$(120,000)
Contributions received from the member or
his replacement assuming replacement
earns $30,000 a year
$30,000 x 2 x 10% =
$ 6,000
$ 0
Contributions received from the employer
on member’s salary or on his
replacement‘s salary
$30,000 x 2 x 29.25% =
$ 17,550
$ 0
Value of additional benefits earned
2 x 3 % x $(30,000) x 1.5 =
$ (2,700)
$ 0
Increase/(Decrease) in Assets
$ (99,150) $ (120,000)
The Employer:
Salary paid to the member and/or his
replacement
2 x $(30,000) =
$(60,000)
2 x $(60,000) =
$(120,000)
Contributions paid by the employer to FRS
$ (17,550) $ 0
Increase/(Decrease in Assets)
$ (77,550)
$ (120,000)
Therefore, in both situations, FRS incurs an actuarial cost as a result of HB 67. Employer contribution requirements will
have to be increased in the future in order to accommodate greater expenditures from the retirement system. The precise amount cannot be determined. Currently FRS has 211 members in DROP. Many of these are likely to be in Situation A.
They will work two more years regardless of HB 67. Enactment will provide them with a windfall and FRS will pay out
significantly more money in pension benefits.
Many of the 211 members in DROP will fall into Situation B. They will not receive a windfall, but FRS still incurs a
loss.
Some actuarial savings may arise relative to members of FRS who elect to continue regular employment and defer entry
into DROP to obtain the benefit of the extended DROP period. HB 67 may induce members with less than 30 years of
service to remain employed in order to reap the benefit of a longer DROP period. If such inducement occurs some
savings will be realized to offset the additional benefits that will be provided to such members. There is insufficient
evidence to conclude that such savings will be large enough to offset the additional costs associated with Situation A and
Situation B. As a result, HB 67 has an actuarial cost.
The effects on various components of actuarial cost relative to the DROP provisions of HB 67 are summarized below:
1. The actuarial present value of future benefits will increase.
2. The unfunded accrued liability of the plan will increase.
3. Normal costs will increase.
Conclusions
In the near term, actuarial costs associated with the DROP provisions of HB 67 will exceed the savings that will
materialize from the Benefit Accrual Rate provisions. There are near term actuarial costs.
Ultimately, savings associated with the Benefit Accrual Rate provisions will increase. However, whether the ultimate
savings from the Benefit Accrual Rate changes will exceed or fall short of the additional actuarial costs associated with
the changes to DROP cannot be determined.
Other Post Retirement Benefits
Actuarial costs for post-retirement benefits other than pensions will decrease as a result of HB 67 to the extent that employers
provide such benefits. Some members will be induced to work a couple more years in order to receive the benefits offered by
HB 67. As a result, premiums associated with post-employment benefits will not be paid and actuarial costs will decrease.
Analysis of Fiscal Costs
HB 67 will have the following effect on fiscal costs.
Expenditures:
1. Expenditures from FRS (Agy Self-Generated) will increase regardless of whether or not HB 67 induces firefighters with
30 or more years of service to work longer. In either event, benefit payouts to members in DROP affected by HB 67 will
increase.
2014 REGULAR SESSION
ACTUARIAL NOTE HB 67
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2. Expenditures from FRS (Agy Self-Generated) will decrease to the extent that HB 67 encourages firefighters with less
than 30 years to work longer before entering DROP.
3. Net expenditures from FRS (Agy Self-Generated) will increase.
4. Expenditures from Local Funds will increase to the extent that employer contribution requirements increase to
accommodate larger benefit payments.
5. Expenditures from Local Funds will decrease to the extent that normal costs for new members first employed on or after
July 1, 2014 are lower .
6. Net expenditures from Local Funds will increase during the five year measurement period.
Revenues:
• FRS revenues (Agy Self-Generated) will increase to the extent that employer contribution requirements increase.
The net increase in expenditures from FRS over first three years of the fiscal measurement period is expected to exceed $100,000.
Actuarial Data, Methods, and Assumptions
This actuarial note was prepared using actuarial data, methods, and assumptions as disclosed in the most recent actuarial valuation
report approved by PRSAC. These assumptions and methods are in compliance with actuarial standards of practice. This data,
methods and assumptions are being used to provide consistency with the actuary for the retirement system who may also be
providing testimony to the Senate and House retirement committees.
Actuarial Caveat
There is nothing in this bill that has or will compromise the signing actuary’s ability to present an unbiased statement of actuarial
opinion.
Actuarial Credentials:
Paul T. Richmond is the Manager of Actuarial Services for the Louisiana Legislative Auditor. He is an Enrolled Actuary, a
member of the American Academy of Actuaries, a member of the Society of Actuaries and has met the Qualification Standards of
the American Academy of Actuaries necessary to render the actuarial opinion contained herein.
Dual Referral:
Senate House
x 13.5.1: Annual Fiscal Cost ≥ $100,000 6.8(F)(1): Annual State Fiscal Cost ≥ $100,000
13.5.2: Annual Tax or Fee Change ≥ $500,000 6.8(F)(2): Annual State Revenue Reduction ≥ $500,000
6.8(G): Annual Tax or Fee Change ≥ $500,000