Federal Pensions: Judicial Survivors' Annuities System Costs
Published: 2008-09-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Judicial Survivors' Annuities System (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 6 months of taking office, 6 months after getting married, 6 months after being elevated to a higher court, or during an open season authorized by statute. Active and senior judges currently contribute 2.2 percent of their salaries to JSAS, and retired judges contribute 3.5 percent of their retirement salaries to JSAS. Pursuant to the Federal Courts Administration Act of 1992 (Pub. L. No. 102-572), GAO is required to review JSAS costs every 3 years and determine whether the judges' contributions fund at least 50 percent of the plan's costs during the 3-year period. If the contributions fund less than 50 percent of these costs, GAO is to determine what adjustments to the contribution rates would be needed to achieve the 50 percent ratio.
section_title: What GAO Found
paragraphs: For the 2005 to 2007 time frame covered by this review, the participating judges funded approximately 54 percent of JSAS costs, and the federal government funded 46 percent. The increase in the government's contribution rate over the 3-year period was a result of increases in costs. The increase in costs reflected the combined effects of changes in actuarial assumptions; lower-than-expected rates of return on plan assets; demographic changes such as retirement, death, disability, new members, and pay increases; as well as an increase in plan benefit obligations. GAO determined that an adjustment to the judges' contribution rate was not needed because their average contribution share for the 3-year period exceeded the 50 percent minimum contribution goal specified by law. GAO examined the annual share of normal costs covered by judges' contributions over a 9-year period and found that, on average, the participating judges funded approximately 60 percent of JSAS's costs.

section_title: Letter
paragraphs: This report was prepared in response to the Federal Courts Administration  Act of 1992, which requires that we review certain aspects of the Judicial  Survivors’ Annuities System (JSAS). JSAS is a voluntary plan, and it is the  only survivor benefit plan available to Article III judges and certain non- Article III judges. JSAS provides annuities to surviving spouses and  dependent children of (1) deceased Supreme Court justices, (2) deceased  judges of the United States, and (3) other deceased judicial officials who  participated in JSAS.
The 1992 Act enhanced the benefits available from JSAS and reduced the  amounts that participating judges 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 fund at least 50 percent of the  plan’s costs. If the contributions fund 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 ratio.
The judicial system has determined that JSAS costs are the same as  normal cost; for this review, we have examined the normal cost rates 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 rate and  the normal cost for each plan year. The normal cost rate is the level  percentage of future salaries that will be sufficient, along with investment  earnings and the plan’s assets, to pay the plan’s benefits. The normal cost  for a plan year is the normal cost rate multiplied by the participants’  salaries for that year. This is our fifth report since the passage of the 1992  Act.
subsections: section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine whether participating judges’  contributions for the 3 plan years ending on September 30, 2007, funded at  least 50 percent of the JSAS costs and, if not, what adjustments in the  contribution rates would be needed to achieve the 50 percent ratio. To  satisfy our objectives, we used the normal cost rates determined by  actuarial valuations of the system for each of the 3 fiscal years. We also  examined participants’ contributions, the federal government’s  contribution, and other relevant information in each plan years’ JSAS  actuarial valuation report. An independent accounting firm hired by the  Administrative Office of the United States Courts (AOUSC) audited the  JSAS financial and actuarial information included in the JSAS actuarial  valuation reports, with input from the plan’s actuary regarding relevant  data, such as the actuarial present value of accumulated plan benefits. The  plan’s actuary certified those amounts that are included in the JSAS  actuarial valuation reports. We discussed the contents of the JSAS  actuarial valuation reports with officials from AOUSC for the 3 plan years  (2005 through 2007).
In addition, we discussed with the plan’s actuary the actuarial assumptions  made to project future benefits of the plan. We noted that the JSAS  actuarial valuation for plan years 2005 through 2007 used a 0.0 percent  salary increase per year, above inflation, in contrast to the September 30,  2007, Civil Service Retirement and Disability System valuation which used  a 0.75 percent salary increase per year, above inflation. We determined  that the use of 0.0 percent salary increase for the JSAS is reasonable, and  consistent with a recent trend analysis we performed on judicial pay  plans. We also reviewed the qualifications of the plan’s actuary who  prepared the JSAS actuarial valuation reports for plan years 2005 to 2007  and nothing came to our attention that would lead us to question the  qualifications of the actuary. We did not independently audit the JSAS  actuarial valuation reports or the actuarially calculated cost figures.
We conducted this performance audit in accordance with generally  accepted government auditing standards. Those standards require that we  plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on our audit  objectives. We performed our review in Washington, D.C., from June 2008  through August 2008. We made a draft of this report available to the  Director of AOUSC for review and comment.
section_title: Background
paragraphs: Depending on the circumstances, judicial participants may be eligible for  some combination of five retirement plans, including the Civil Service  Retirement System (CSRS) or the Federal Employees’ Retirement System  (FERS). Three other separate retirement plans, described in appendix I,  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.
subsections: section_title: History of JSAS
paragraphs: JSAS was created in 1956 to help provide financial security for the families  of deceased federal judges. It provides benefits to surviving eligible  spouses and dependent children of judges who participate in the plan.  Judges may elect coverage within 6 months of taking office, 6 months after  getting married, if they were not married when they took office, 6 months  after being elevated to a higher court, or during an open season authorized  by statute. Active and senior judges currently contribute 2.2 percent of  their salaries to JSAS, and retired judges 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 equals 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 10 percent of the judge’s high-3 or 20 percent of the judges’ high-3  divided by the number of eligible 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 been amended several times. Because  of concern that too few judges were participating in the plan, Congress  made broad reforms effective in 1986 with the Judicial Improvements Act  of 1985. The 1985 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  child benefits to relate benefit amounts to judges’ high-3 rather than the  specific dollar amounts provided in 1976 by the Judicial Survivors’  Annuities Reform Act. In recognition of the significant benefit  improvements that were made, the 1985 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 act also changed the requirements for government contributions  to the plan. Under the 1976 Judicial Survivors’ Annuities Reform Act, the  government matched the judges’ contributions of 4.5 percent of salaries  and retirement salaries. The 1985 act modified this by specifying that the  government would contribute the amounts necessary to fund any  remaining cost over the future lifetime of current participants. That  amount is limited to 9 percent of total covered salary each year.
In response to concerns that required contributions of 5 percent may have  created a disincentive to participate, Congress enacted the Federal Courts  Administration Act of 1992. 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. The 1992  act also significantly increased 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.  Additionally, the 1992 act allowed 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, 2007, there were 1,303 active and senior judges, 223  retired judges, and 333 survivor annuitants covered under JSAS, according  to the JSAS actuarial valuation report for plan year 2007.
section_title: Calculation of Federal Share
paragraphs: JSAS is financed by judges’ contributions and direct appropriations in an  amount estimated to be sufficient to fund the future benefits paid to  survivors of current and deceased participants. The plan’s actuary, using  the plan’s funding method—in this case, the aggregate cost method— determines the plan’s normal cost rate and the normal costs for each plan  year. The normal cost rate is the level percentage of future salaries that  will be sufficient, along with investment earnings and the plan’s assets, to  pay the plan’s benefits for current participants and beneficiaries. Normal  cost calculations are estimates and require that many actuarial  assumptions be made about the future, including, but not limited to  mortality rates, turnover rates, and returns on investment, salary  increases, and COLA increases over the life spans of current participants  and beneficiaries. 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. The  expected annual federal, actuarially recommended contribution is the  product of the federal government’s contribution rate and the participating  judges’ salaries. However, the actual federal government contribution is  approved through annual appropriations which have varied, both above  and below the actuarially recommended amount.
To determine the actuarially recommended annual contribution of the  federal government, AOUSC, which is responsible for the administration  of the JSAS, engages an enrolled actuary to perform the calculation 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  methodology used to determine the federal government’s contribution rate  and lump sum payments.
section_title: Portion of JSAS Cost Covered by Judges’ Contributions Varied
paragraphs: For JSAS plan years 2005 through 2007, the participating judges  contributed, on average, about 54 percent of the plan’s costs. In plan years  2005 and 2006, participating judges paid slightly more than 61 percent and  50 percent of JSAS normal costs, respectively, and in plan year 2007, they  paid slightly less than 50 percent of JSAS normal costs.
Table 1 shows the judges’ and the federal 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 review.
The judges’ and the federal government’s contribution rates for each of the  3 years shown in Table 1 were based on the actuarial valuations that  occurred at the end of the prior year. For example, the judges’  contribution rate of 2.32 percent and the federal government’s  contribution rate of 1.48 in plan year 2005 were based on the September  30, 2004, valuation contained in the plan year 2005 JSAS report.
The total normal costs expressed as a percentage of the present value of  participant’s future salaries shown in table 1 increased from 3.8 percent in  plan year 2005 to 5.13 percent in plan year 2007. The judges’ share of the  JSAS normal costs decreased from approximately 61 percent in plan year  2005, to approximately 50 percent in plan years 2006 and 2007. The federal  government’s share of JSAS normal costs increased, from approximately  39 percent in plan year 2005, to approximately 50 percent in plan years  2006 and 2007. During those same years, the government’s contribution  rates increased from 1.48 percent of salaries in plan year 2005 to 2.5  percent of salaries in plan year 2006, and then to 2.59 percent in plan year  2007. The increase in the federal government’s contribution rates was a  result of the increase in normal costs resulting from several combined  factors, such as changes in actuarial assumptions; lower-than-expected  investment experience on plan assets; demographic changes—retirement,  death, disability, new members, pay increases; as well as an increase in  plan benefit obligations. However, the majority of the increase in the  federal government’s contribution rate is because of changes in actuarial  assumptions and a lesser degree the government’s contributing less than  the actuarially recommended amounts, in plan years 2005, 2006, and 2007.
section_title: No Adjustment Required to Contribution Rates
paragraphs: Based on our review of the judges’ contribution rates for the JSAS, we  determined that there was no need for any adjustments in the judges’  contribution rate. JSAS actuarial reports for the 3 years under review  show that participating judges’ contributed at least 50 percent of JSAS  normal costs as required by the Federal Courts Administration Act for plan  years 2005 and 2006, and slightly below half for plan year 2007. As shown  in Table 1 above, the judges’ average contribution for JSAS normal costs  for this review period was approximately 54 percent, which exceeded the  50 percent contribution goal for judges.
Table 2 provides a summary of the percentage share of contribution for  judges and the federal government over the past 9 years.
As shown above, the judges’ contribution share, in any given year, may  vary from the 50 percent contribution goal, either exceeding or not  meeting this goal. The judges’ average contribution share for the 9-year  period was approximately 60 percent. Therefore, there is no reason to  modify the judges’ contribution rates at this time.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from the Director of  AOUSC or his designee. In a letter dated September 10, 2008, the Director  provided written comments on the report, which we have reprinted in  appendix III. AOUSC also provided technical comments, which we have  incorporated as appropriate.
In its comments, AOUSC stated that our report showed that for a third  consecutive triennial cycle, judges have paid a greater share of the cost of  this system. AOUSC stated that our report showed that over the past 9  years, judges’ contributions have funded approximately 60 percent of the  costs of JSAS. In AOUSC’s view, we did not present in our report the  downward adjustment that would be needed to the participating judges’  contribution rates to attain the 50 percent level, and this omission is not  consistent with Congress’s intent in enacting the Federal Courts  Administration Act of 1992.
We disagree with AOUSC’s view as to the purpose of section 201(i), of the  Act. Since enactment, we have interpreted this section as providing a  minimum percentage of the costs of the program to be borne by its  participants because the statute requires us to recommend adjustments  when the judges’ contributions have not achieved 50 percent of the costs  of the fund. We do not view the section as calling for parity between the  participants and the federal government with respect to funding the  program. For the 3-years covered by this review, we determined and  reported that judges’ contributions represented approximately 54 percent  of the normal costs of JSAS, and therefore, an adjustment to the judges’  contribution rates was not needed under the existing legislation because  the judges’ contribution achieved 50 percent of JSAS costs. We have  consistently applied this interpretation of the Act’s requirements in all of  our previously mandated reviews.
However, if one were to interpret the Act as calling for an equal sharing of  the program’s cost between participants and the government, then, on the  basis of the information contained in the JSAS actuarial reports over the  last 9 years, participating judges’ future contributions would have to  decrease a total of 0.32 percentage points below the current 2.2 percent of  salaries for active judges and senior judges and 3.5 percent for retired  judges in order to fund 50 percent of JSAS costs over the last 9 years. If the  decrease were distributed equally among the judges, those currently  contributing 2.2 percent of salaries would have to contribute 1.88 percent,  and those currently contributing 3.5 percent of retirement salaries would  have to contribute 3.18 percent.
We have not declined to include downward adjustment information, as  AOUSC states, but we are not recommending such an adjustment because  of our interpretation of the statute’s requirements.
We are sending copies of this report to interested congressional  committees and the Director of AOUSC. Copies of this report will be made  available to others upon request. This report is also available at no charge  on the GAO Web site at http://www.gao.gov. Please contact Steven J.  Sebastian at (202) 512-3406 sebastians@gao.gov, or Joseph A. Applebaum  at (202) 512-6336 applebaumj@gao.gov, if you or your staff have any  questions concerning this report. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report were Julie Phillips, Assistant  Director; Jehan Abdel-Gawad; and Kwabena Ansong.
section_title: Appendix I: Retirement Plans Available to Federal Judges
paragraphs: The Administrative Office of the United States Courts (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, judges who are not automatically covered under the Judicial  Retirement System may opt to participate in the Federal Employees’  Retirement System (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 the 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 cost-of- living adjustment that Civil Service Retirement System 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: Appendix II: Explanation of the Method Used to Determine the Federal Government’s Contribution Rate and Lump Sum Payout
paragraphs: Aggregate funding method. This method, as used by the Judicial  Survivors’ Annuities System (JSAS) plan, defines the normal cost rate as  the level percentage of future salaries that will be sufficient, along with  investment earnings and the plan’s assets, to pay the plan’s benefits for  current participants and beneficiaries. The following discussion is  intended to illustrate the use of the aggregate funding method.
For plan year 2007, the JSAS’s actuary estimated the present value of  future benefits for participating judges and beneficiaries was $649,628,473  and the JSAS had assets amounting to $491,788,627. The difference  between these amounts, $157,839,846, must be financed through future  contributions to be paid by the participating judges and the federal  government. Using the same assumptions as used to estimate the present  value of future benefits, the actuary estimated the present value of  participating judges’ future salaries to be $3,078,464,410 so that the  amount to be financed represented 5.13% ($157,839,846 divided by  $3,078,464,410) of the future participating judges’ salaries. This percentage  is the JSAS’s normal cost rate. If all the actuarial assumptions proved  exactly correct, then a total contribution of 5.13% of the participating  judges’ salaries annually would make up the difference between the JSAS’s  future payments and its assets (the $157,839,846 mentioned above). The  JSAS’s actuary also estimated the present value of participating judges’  future contributions to be $78,123,909. Thus the federal government’s  share for plan year 2007 is the difference between $157,839,846 and  $78,123,909, or $79,715,937.
Federal government’s actuarially recommended contribution rate.  The federal government’s actuarially recommended contribution rate is  equal to the federal government’s share of future financing ($79,715,937)  divided by the present value of the participating judges’ future salaries  ($3,078,464,410). For the plan year 2007 the rate was 2.59% ($79,715,937  divided by $3,078,464,410). Thus, the actuarially recommended federal  contribution is the product of the federal government’s actuarially  recommended contribution rate and the participating judges’ salaries. The  federal government’s contribution is approved through an annual  appropriation. It has varied, both above and below the actuarially  recommended amount.
Lump sum payout. Under JSAS, a lump sum payout 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 a  participating judge, the lump sum payout to the judge’s designated  beneficiaries is computed as follows:    Lump sum payout equals the 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.