Federal Pensions: Judicial Survivors' Annuities System Costs
Published: 2002-06-26T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Federal Courts Administration Act of 1992 requires GAO to review certain aspects of the Judicial Survivors' Annuities System (JSAS), one of several survivor benefit plans applicable to federal employees. JSAS provides annuities to surviving spouses and dependent children of deceased Supreme Court Justices, judges of the United States, and other participating judicial officials. For the 3 years covered by GAO's review, the judges' contributions represented more than 50 percent of the JSAS normal costs for fiscal year 1999, but less than 50 percent for fiscal years 2000 and 2001. To cover 50 percent of JSAS estimated future normal costs, the judges' contributions would need to increase by 0.1 percentage point above the 2.2 percent of salaries paid by retired judges. However, increasing required contributions could reduce the judges' rate of participation even though increasing participation was one of the main reasons for enhancing JSAS benefits and reducing judges' contributions in 1992.

section_title: Letter
paragraphs: This report was prepared in response to the requirements of the Federal  Courts Administration Act of 1992 (Public Law 102-572) specifying that we  review certain aspects of the Judicial Survivors’ Annuities System (JSAS),  which is one of several survivor benefit plans applicable to particular  groups of federal employees.  JSAS provides annuities to surviving spouses  and dependent children of deceased Supreme Court Justices, judges of the  United States, and other judicial officials who participate in JSAS.
The 1992 act enhanced the benefits available from JSAS and reduced the  amounts that participating judges and other judicial officials were required  to contribute toward the plan’s costs.  The act requires us to review JSAS  costs every 3 years and to determine whether the judges’ contributions  represent 50 percent of the plan’s costs.  If the contributions represent less  than 50 percent of these costs, we are to determine what adjustments to the  contribution rates would be needed to achieve the 50 percent figure.  For  the purpose of the review, we have examined the “normal cost” of the plan.   The plan’s actuary using the plan’s funding method, in this case, the  aggregate cost method, determines the plan’s normal cost.  Under the  aggregate cost method, the normal cost is the level percentage of future  salaries, which will be sufficient, along with investment earnings and the plan’s assets, to pay the plan’s benefits.  This is our third report since the  passage of the 1992 act.
subsections: section_title: Background
paragraphs: Most federal civilian employees are covered by the Civil Service Retirement  System (CSRS) or the Federal Employees’ Retirement System (FERS).   Both of these retirement plans include survivor benefit provisions.  Three  separate retirement plans apply to various groups of judges in the federal  judiciary, with JSAS being available to participants in all three retirement  plans to provide annuities to their surviving spouses and children.   Appendix I provides additional information regarding retirement plans that  are available to federal judges.
section_title: History of JSAS
paragraphs: JSAS was created in 1956 to provide financial security for the families of  deceased federal judges.  It provides benefits to eligible spouses and  dependent children of judges who elect coverage within either 6 months of  taking office, 6 months after getting married, or during an open season  authorized by statute.  Active and senior judges currently contribute 2.2  percent of their salaries, and retired judges generally contribute 3.5 percent  of their retirement salaries to JSAS.  Upon a judge’s death, the surviving  spouse is to receive an annual annuity that is equal to 1.5 percent of the  judge’s average annual salary during the 3 highest consecutive paid years  (commonly known as the “high 3”) times the judge’s years of creditable  service.  The annuity may not exceed 50 percent of the high 3 and is  guaranteed to be no less than 25 percent.  Separately, an unmarried  dependent child under age 18, or 22 if a full-time student, receives a  survivor annuity that is equal to a maximum of 10 percent of the judge’s 3  highest paid years or 20 percent of the judge’s 3 highest paid years divided  by the number of children, whichever is smaller.  JSAS annuitants receive  an annual adjustment in their annuities at the same time, and by the same  percentage, as any cost-of-living adjustment (COLA) received by CSRS  annuitants.  Spouses and children are also eligible for Social Security  survivor benefits.
Since its inception in 1956, JSAS has changed several times.  Because of  concern that too few judges were participating in the plan (74 percent of  federal judges participated in 1985, which was down from 90 percent in  1976), Congress made broad reforms effective in 1986 with the Judicial  Improvements Act of 1985 (Public Law 99-336).  The 1985 Judicial  Improvement Act (1) increased the annuity formula for surviving spouses  from 1.25 percent to the current 1.5 percent of the high 3 for each year of  creditable service and (2) changed the provisions for surviving children’s  benefits to relate benefit amounts to judges’ high 3 rather than the specific  dollar amounts provided by the Judicial Survivors’ Annuities Reform Act of  1976 (Public Law 94-554).  In recognition of the significant benefit  improvements that were made, the 1985 Judicial Improvements Act  increased the amounts that judges were required to contribute from 4.5  percent to 5 percent of their salaries, including retirement salaries.
The 1985 Judicial Improvements Act also changed the requirements for  government contributions to the plan by specifying that the government  would contribute whatever amounts were necessary (up to a maximum of 9  percent of participating judges’ salaries or retirement salaries) to keep the  plan fully funded.  Under the 1976 Judicial Survivors’ Annuities Reform Act,  the government matched the judges’ contributions of 4.5 percent of salaries  and retirement salaries.  Despite the benefit improvements in the 1985  Judicial Improvements Act, the rate of participation in JSAS continued to  decline.  In 1991, the rate of participation was about 40 percent overall and  25 percent for newly appointed judges.
In response to concerns that required contributions of 5 percent may have  created a disincentive to participate, Congress enacted the 1992 Federal  Courts Administration Act.  Under this act, participants’ contribution  requirements were reduced to 2.2 percent of salaries for active and senior  judges and 3.5 percent of retirement salaries for retired judges.  Another  significant change was an increase in benefits for survivors of retired  judges.  This increase was accomplished by including years spent in  retirement in the calculation of creditable service and the high 3 salary  averages.
The 1992 Federal Courts Administration Act also allowed the judges to stop  contributing to the plan if they ceased to be married and granted benefits to  survivors of any judge who died in the interim between leaving office and  the commencement of a deferred annuity.  As of September 30, 2001, there  were 1,256 active and senior judges, 203 retired judges, and 260 survivor  annuitants covered under JSAS compared to 1,284 active and senior judges,  136 retired judges, and 241 survivor annuitants as of September 30, 1998.
Defining Cost for JSAS JSAS is financed by judges’ contributions and direct appropriations in an  amount estimated to be sufficient to fund the future benefits to current  participants.  The government’s contribution is approved through an  annual appropriation and is not based on a rate or percentage of judges’  salaries.  An enrolled actuary engaged by the Administrative Office of the  United States Courts (AOUSC) calculates the annual amount of funding  needed based on the difference between the present value of the expected  future benefit payments to participants and the present value of net assets  in the plan.  Appendix II provides more details on the formulas used to  determine the participants’ and the government’s contributions and lump  sum payments.
The cost of a retirement or survivor benefit plan is typically not measured  by annual expenditures for benefits.  Such expenditures are not an  indicator of the overall long-term cost of a plan.  The more complete and  acceptable calculation of a plan’s cost is the projected future outlays to  retirees or survivors, based on the current pool of participants, with such  costs allocated annually.  This annual cost allocation is referred to as the  normal cost.  Normal cost calculations, prepared by an enrolled actuary,  are estimates and require that many actuarial assumptions be made about  the future, including mortality rates, turnover rates, return on investments,  salary increases, and COLA increases over the life spans of current and  future participants.  The plan’s actuary using the plan’s funding method, in  this case, the aggregate cost method, determines the plan’s normal cost.   Under the aggregate cost method, the normal cost is the level percentage of  future salaries, which will be sufficient, along with investment earnings and  the plan’s assets, to pay the plan’s benefits.  There are many acceptable  actuarial methods for calculating normal cost.  Regardless of which cost  method is chosen, the expected total long-term cost of the plan should be  the same; however, year-to-year costs may differ, depending on the cost  method used.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine whether participating judges’  contributions for the 3 years ending in fiscal year 2001 accounted for 50  percent of the JSAS costs and, if not, what adjustments in the contribution  rates would be needed to achieve the 50 percent figure.
To satisfy our objectives, we examined the normal costs reported in the  JSAS annual report submitted by AOUSC to the Comptroller General for  plan years 1999 through 2001.  We also examined participants’  contributions and other relevant information in the annual report.  An  independent accounting firm hired by AOUSC audited the JSAS financial  and actuarial information, included in the JSAS annual report, with input  from an enrolled actuary regarding relevant data such as actuarial present  value of accumulated plan benefits.  An enrolled actuary certified those  amounts that are included in the JSAS annual report.  We also discussed the  contents of the JSAS reports with officials from AOUSC for the 3 fiscal  years (1999 through 2001).  We did not independently audit the JSAS annual  report or the actuarially calculated cost figures.
We performed our review in Washington, D.C., from August 2001 through  May 2002, in accordance with generally accepted government auditing  standards.   We requested comments on a draft of this report from the  Director of AOUSC or his designee.  On June 10, 2002, the Deputy Associate  Director of AOUSC provided technical comments, which we incorporated  into the report where appropriate.
section_title: Portion of JSAS Costs Covered by Judges’ Contributions Varied
paragraphs: For JSAS plan years 1999 through 2001 under the Federal Courts  Administration Act of 1992, the participating judges paid more than 50  percent of the JSAS normal costs in the first year and less than 50 percent  in the remaining 2 years.  In fiscal year 1999, the participating judges  contributed approximately 61 percent of JSAS normal costs, and in fiscal  years 2000 and 2001, the participating judges contributed approximately 48  percent of the JSAS normal costs.
On the basis of data from plan years 1999, 2000, and 2001, the participating  judges contributed, on an average, approximately 52 percent of JSAS  normal costs; the government’s share amounted to, on an average,  approximately 48 percent.  Table 1 shows the judges’ and government’s  contribution rates and shares of JSAS normal costs (using the aggregate  cost method, which is discussed in appendix II) for the period covered in  our study.
The judges’ and the government’s contribution rates for each of the 3 years,  shown in table 1, were based on the actuarial valuation that occurred at the  end of the prior year.  For example, the judges’ contribution of 2.36 percent  and the government’s contribution of 2.60 percent in fiscal year 2001 were  based on the September 30, 2000, valuation contained in the fiscal year  2001 JSAS report.
The judges’ share of JSAS normal costs in the above table decreased from  approximately 61 percent in fiscal year 1999 to approximately 48 percent in  fiscal years 2000 and 2001, while the government’s share of JSAS normal  costs increased from approximately 39 percent to approximately 52  percent.  During those same years, the judges’ contribution rates remained  constant, while the government’s contribution rate increased from 1.5  percent of salaries in fiscal year 1999, based on the September 30, 1998,  valuation, to 2.6 percent of salaries in 2000 and 2001.  The increase in the  government’s contribution was primarily a result of the increase in total  normal costs determined by the actuary from 3.86 percent of salaries in  fiscal year 1999, based on the September 30, 1998, valuation, to 4.97 percent  of salaries in fiscal year 2000.  The increase in normal costs resulted from a  decline in the market value of assets held in JSAS, as well as an increase in  plan benefits being paid out over the period.
Specifically, the total plan assets decreased from $366.7 million in fiscal  year 1998 to $363.6 million in fiscal year 1999.  At the same time, the  accumulated plan benefit obligations increased from $311.9 million in fiscal  year 1998 to $329.3 million in fiscal year 1999.  The increase in the JSAS  normal costs reflects the combined effect of the decrease in the value of  plan assets and increase in the estimates of plan benefit obligations.   Although the judges’ contribution rate remained fairly constant, the judges’  share of normal costs decreased to approximately 48 percent in fiscal years  2000 and 2001 because the total normal costs increased.   In fiscal year  2001, the normal costs covered by the judges’ and government’s  contributions remained constant because the percentage change in asset  value was approximately 6.5 percent, which was in line with the 7.0 percent  rate of return on investments that was assumed by the plan actuary.
section_title: Adjustment That Would Be Needed in Judges’ Contribution Rates
paragraphs: On the basis of the information contained in the JSAS actuarial report as of  September 30, 2001, we determined that the participating judges’ future  contributions would have to increase a total of 0.1 percentage point above  the current 2.2 percent of salaries for active and senior judges and 3.5  percent of retirement salaries for retired judges in order to cover 50  percent of JSAS costs.  If the increase were distributed equally among the  judges, those contributing 2.2 percent would have to increase to 2.3  percent, and those contributing 3.5 percent would have to increase to 3.6  percent.
A potential effect of increasing the contribution rates could be a decline in  the participation rate for JSAS, which would run counter to the goal of  increasing participation—a major reason for the changes made to JSAS in  1992.  However, this potential impact appears to be less likely as compared  with our findings from 3 years ago, when we reported that an increase of  0.3 percentage points would have been needed to achieve the 50 percent  contribution goal.  Since fiscal year 1998, the participating judges increased  from 1,420 to 1,459 as of September 30, 2001.  However, increasing the  contribution rates now could affect the judges’ decision to participate in  JSAS.
Even if contribution rates are adjusted to the levels currently estimated to  cover 50 percent of future normal costs, the future normal costs are  estimates that could change in any given plan year.  During the course of  any year, certain events, such as the number of survivors or judges who  have died, the number of new judges electing to participate, or the number  of judges who decide to retire, as well as the value of and the rates of return  on assets in the plan could create normal statistical variances that would  affect the annual normal costs of the plan.  Since the plan only has 1,459  participants—both active and retired judges—and 260 survivor annuitants,  such variances can have a significant effect on the expected normal costs  and lead to short-term variability.
Therefore, the long-term view is important when evaluating the expected  judges’ contributions of 50 percent of the normal costs.  As shown in table  2, the average of the annual share of judges’ contributions since enactment  of the 1992 Federal Courts Administration Act has been approximately 47 percent.
section_title: Agency Comments
paragraphs: We requested comments on a draft of this report from the Director of  AOUSC or his designee.  On June 10, 2002, the Deputy Associate Director of  AOUSC provided technical comments, which we incorporated into the  report as appropriate.
We are sending copies of this report to AOUSC.  Copies of this report will  be made available to others upon request.  This report will also be available  at no charge on the GAO Web site @www.gao.gov.  Should you or your  staffs have any questions concerning our review, please contact me at (202)  512-9406 or Hodge Herry, Assistant Director, at (202) 512-9469.  You can  also reach us by e-mail at franzelj@gao.gov or herryh@gao.gov.  Key  contributors to this report were Joseph Applebaum, Jacquelyn Hamilton,  Meg Mills, Charles Ego, and Deborah Silk.
section_title: Retirement Plans Available to Federal Judges
paragraphs: AOUSC administers three retirement plans for judges in the federal  judiciary.
The Judicial Retirement System automatically covers United States  Supreme Court Justices, federal circuit and district court judges, and  territorial district court judges and is available, at their option, to the  Administrative Assistant to the Chief Justice, the Director of AOUSC,  and the Director of the Federal Judicial Center.
The Judicial Officers’ Retirement Fund is available to bankruptcy and  full-time magistrate judges.
The United States Court of Federal Claims Judges’ Retirement System is  available to the United States Court of Federal Claims judges.
Also, except for judges who are automatically covered under the Judicial  Retirement System, judges and judicial officials may opt to participate in  FERS or elect to participate in the Judicial Retirement System for  Bankruptcy Judges, Magistrate Judges, or United States Court of Federal  Claims Judges.
Judges who retire under any of the three judicial retirement plans generally  continue to receive the full salary amounts that were paid immediately  before retirement, assuming the judges met the age and service  requirements.  Retired territorial district court judges generally receive  the same COLA that CSRS retirees receive, except that their annuities  cannot exceed 95 percent of an active district court judge’s salary.  United  States Court of Federal Claims judge retirees continue to receive the same  salary payable to active United States Court of Federal Claims judges.
Those in the Judicial Retirement System and the United States Court of  Federal Claims Judges’ Retirement System are eligible to retire when the  number of years of service and the judge’s age total at least 80, with a  minimum retirement age of 65, and service ranging from 10 to 15 years.   Those in the Judicial Officers’ Retirement Fund are eligible to retire at age  65 with at least 14 years of service or may retire at age 65 with 8 years of  service, on a less than full salary retirement.   Participants in all three  judicial retirement plans are required to contribute to and receive Social  Security benefits.
section_title: Formulas Used to Determine Judges’ and the Government’s Contributions and Lump Sum Payments
paragraphs: Aggregate Funding Method.  This method, as used by the JSAS plan,  defines the normal cost as that level percentage of future salaries, which  will be sufficient, along with investment earnings and the plan’s assets, to  pay the plan’s benefits.  The formula is as follows:    The present value of future normal costs (PVFNC) equals present value  of future benefits (PVFB) less net asset value.
The present value of future normal costs is the amount that remains to be  financed by the judges and the government.
Normal cost percentage (NC percent) equals PVFNC divided by present  value of future salaries (PVFS).
Government Contribution.  The following formula is used to determine  the government’s contribution amount:    The government contribution represents the portion of NC not covered  by participants’ contributions.
Lump Sum Pay Out.  This may occur upon the dissolution of marriage  either through divorce or death of spouse.  Payroll contributions cease, but  previous contributions remain in JSAS.  Also, if there is no eligible  surviving spouse or child upon the death of the judicial official, the lump  sum pay out to the judicial official’s designated beneficiaries is computed  as follows:    Lump sum pay out equals total amount paid into the plan by the judge  plus 3 percent annual interest accrued less 2.2 percent of salaries for  each participating year (forfeited amount).
In effect, the interest plus any amount contributed in excess of 2.2 percent  of judges’ salaries will be refunded.
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