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