LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE 75th Regular Session May 27, 1997 TO: Honorable Bob Bullock Honorable James E. "Pete" Laney Lieutenant Governor Speaker of the House Senate Austin, Texas FROM: John Keel, Director In response to your request for a Fiscal Note on HB2644 ( relating to systems and programs administered by the Teacher Retirement System of Texas) this office has detemined the following: Biennial Net Impact to General Revenue Funds by HB2644-Conference Committee Report No fiscal implication to the State is anticipated. The bill would make numerous changes to the Teacher Retirement System (TRS) governing statutes, change the normal retirement age plus service eligibility to a rule of 80, and provide a 75% CPI catch-up ad hoc annuity increase for current retirees. Insurance related provisions include some of the major recommendations of the Value Health Management study, affecting both the active and retiree health insurance plans. The bill would require no increase in state retirement contributions since the current state plus member contribution is sufficient to pay for the increased normal costs and amortize the resulting unfunded actuarial liability within 30 years. However the funding period would increase by 18.9 years, from 5.8 years to 24.7 years. The 75% CPI catch-up is the third installment out of a 4 biennia schedule intended to increase retirement annuity payments so that they are greater than or equal to the retiree s original annuity, when adjusted by the CPI. Retirees who retired prior to 1971 have already "caught up", and will receive an additional 5% increase from this provision. The increase in unfunded actuarial liabilities from this provision is approximately $1.3 billion. Currently, an active TRS member can retire at age 50 with 30 years of service, age 60 with 20 years of service, or age 65 with 5 years of service. Section 15 of the bill would allow unreduced retirement benefits for any combination of age and service adding up to 80. The increase in unfunded actuarial liabilities from this provision is approximately $460 million. This provision also increases the actuarial normal cost of the plan by 0.07%; at current payroll rates this is an additional $11 million per year. The bill would create a Deferred Retirement Option Plan (DROP), which would allow teachers with 25 or more years of service to "retire" under current eligibility standards, and continue working for up to 5 years. They would have a monthly annuity payment equal to 79% of the usual retirement annuity payment go into a special DROP account. The proceeds of this would be paid out at retirement as a lump sum or as periodic installments. This plan would greatly increase retirement rates at ages earlier than usual, but paying only 79% of the usual annuity makes this portion of the bill cost neutral. TRS would be authorized to self-fund the retiree health insurance program. Long-term care could be included as a component of the current plan, or as a separate insurance plan. To the extent the cost was not borne by the retirees, this could have a large cost to the fund. The state would be specifically authorized to raise its contribution above the current 0.5 percent of payroll without increasing the active member contribution. Section 30 of the bill would require TRS to allow retirees to have membership dues for a nonprofit association of retired school employees withheld from their monthly annuity payments. TRS would then be responsible for sending these dues to the nonprofit association every month. Current statute requires that school districts provide health insurance coverage comparable to the coverage provided under the Uniform Group Insurance Program (UGIP), but does not define "comparable coverage." The bill would direct TRS to make rules and determine whether the insurance programs provided are comparable, and lists several factors that TRS should consider in this determination. Implementing these provisions would require TRS to incur additional administrative expenses to be paid from the retired school employees group insurance trust fund, but these would not be significant. Currently, the majority of school districts certify to TRS that their plans are comparable to UGIP. The number of school districts that would fail to meet the definition of comparability that TRS would establish is not known. Local units of government may incur additional costs if their insurance coverage is deemed not comparable and they change their plan to meet the standards established by TRS rules. Adding teacher salary supplements up to $5,000 for driver's education to the salary base would require increased contributions. This salary would be above the state minimum salaries for teachers, so the increased costs would be borne by local school districts. The total cost across the state would be approximately $360,000 per year. This would be allocated by district in proportion to the number of driver's education courses taught in the district. Source: Agencies: LBB Staff: JK ,JD ,WM