LEGISLATIVE BUDGET BOARD
Austin, Texas
FISCAL NOTE
75th Regular Session
March 31, 1997
TO: Honorable Barry Telford, Chair IN RE: House Bill No. 2644
Committee on Pensions and Investments By: Telford
House
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-As Introduced
Implementing the provisions of the bill would result in a net
negative impact of $(811,900,000) to General Revenue Related
Funds through the biennium ending August 31, 1999.
Fiscal Analysis
House Bill 2644 would make numerous changes to the Teacher Retirement
System (TRS) governing statutes and provide a 75% CPI catch-up
ad hoc annuity increase for current retirees. Other retirement
provisions would create a Deferred Retirement Option Program
(DROP) and direct the TRS Board of Trustees to increase the
retirement multiplier up to 2.25 percent when doing so would
not cause the system to become actuarially unsound. 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 an
increase in state retirement contributions of $836.4 million
for the 1998-99 biennium to pay the increased normal costs and
amortize the resulting unfunded actuarial liability within 30
years.
The 75% CPI catchup 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.
The DROP plan would allow teachers to retire
under current eligibility standards, and continue working for
up to 5 years. All their retirement annuity payments would go
into a special DROP plan which they could choose to receive
as a lump sum or as periodic installments. This plan would greatly
increase retirement rates at ages earlier than usual, increasing
the actuarial liabilities and normal cost. At current payroll
rates, the increase in normal cost is approximately $220.1 million
per year. An additional $4.4 billion in unfunded actuarial liability
would be incurred by the fund. There would be some savings to
the state associated with not making retirement contributions
for DROP participants, but this amount has not been identified
by TRS.
The bill states that the legislature has determined
that the benefits multiplier should be permanently increased,
not to exceed a total of 2.25 percent, by the board of trustees
when doing so would not violate the 30 year funding rule. This
could lead to increased state contributions under the following
scenario. A period of high investment returns could produce
a surplus which would allow the trustees to raise the multiplier
to a level so that the resulting actuarial normal cost was higher
than the state s contribution, without violating the funding
rule. When the surplus was gone, the state s contribution would
have to increase. Since other provisions of HB2644 add enough
costs to exceed the 30 year funding rule, the TRS analysis shows
no increased cost due to this provision.
The active insurance
program would lower the minimum health insurance premiums paid
by the employer/district to 75 percent of the ERS health premium.
The bill would also allow participating districts to have a
separate health insurance plan. These provisions should enhance
participation in the plan. The active and retiree health insurance
plans would be authorized to contract directly with health maintenance
organizations and provider organizations as well as administrators.
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.
Methodolgy
The TRS actuary estimates the bill would require an increase
in state retirement contributions of 2.57% of payroll. The 1998
state contribution at 6% of payroll is $950.2 million, of which
$922.3 million is General Revenue, and $27.9 million is General
Revenue Dedicated Funds. The payroll growth assumtion is 5.5%.
The probable fiscal implications of implementing the provisions
of the bill during each of the first five years following passage
is estimated as follows:
Five Year Impact:
Fiscal Year Probable Probable
Savings/(Cost) Savings/(Cost)
from General from All GR
Revenue Fund Dedicated Funds
0001 NEW-DED
1998 ($395,100,000) ($11,900,000)
1998 (416,800,000) (12,600,000)
2000 (439,700,000) (13,300,000)
2001 (463,900,000) (14,000,000)
2002 (489,400,000) (14,800,000)
Net Impact on General Revenue Related Funds:
The probable fiscal implication to General Revenue related funds
during each of the first five years is estimated as follows:
Fiscal Year Probable Net Postive/(Negative)
General Revenue Related Funds
Funds
1998 ($395,100,000)
1999 (416,800,000)
2000 (439,700,000)
2001 (463,900,000)
2002 (489,400,000)
Similar annual fiscal implications would continue as long as
the provisions of the bill are in effect.
No fiscal implication to units of local government is anticipated.
Source: Agencies: 323 Teacher Retirement System and Optional Retirement Program
LBB Staff: JK ,PE ,WM