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