LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE 75th Regular Session April 1, 1997 TO: Honorable Rene Oliveira, Chair IN RE: House Bill No. 3512 Committee on Economic Development By: Greenberg House Austin, Texas FROM: John Keel, Director In response to your request for a Fiscal Note on HB3512 ( Relating to assistance or benefits provided to state employees who lose their jobs as a result of a reduction in force or the privatization of state services or who retire.) this office has detemined the following: Biennial Net Impact to General Revenue Funds by HB3512-As Introduced FN Revision 1 Implementing the provisions of the bill would result in a net positive impact of $10,486,200 to General Revenue Related Funds through the biennium ending August 31, 1999. The bill would make no appropriation but could provide the legal basis for an appropriation of funds to implement the provisions of the bill. Fiscal Analysis HB 3512 provides that a state employee whose position is eliminated due to a reduction in force or privatization would receive preferential treatment in employment with other state agencies. The bill also directs the Texas Workforce Commission (TWC) to provide a variety of outplacement services to former employees of state agency that implemented a reduction in force or eliminated 25 or more positions due to privatization of certain services. HB 3512 would also establish an early retirement incentive during the 1998-99 biennium for members of the Employees Retirement System (ERS). The incentive would reduce the age requirement for retirement by three years for members of ERS, and eliminate actuarial reductions for early retirement for members of the Law Enforcement and Custodial Officers Supplemental Retirement Fund. In order to receive the incentive, members must retire when first eligible during the incentive period. Once an employee retires, ERS would submit to the Comptroller's office information about the employee's monthly salary and the Comptroller's office would reduce appropriations to the agency by this amount times the number of months remaining in the biennium. This incentive is similar to the early retirement incentive recommended by the Texas Performance Review. In addition, Section 2 of the bill would prohibit a state agency from hiring or contracting with any individual who was employed by the state within the previous twelve months. However, it is not clear whether this provision applies to all former employees or only to employees who have retired under the incentive. Finally, the bill requires that any contract between a state agency and a private entity for services that were previously performed by state employees must require the private entity to provide a level of compensation and benefits that is at least comparable to those provided by the state. Methodolgy The Texas Workforce Commission projects that there will be no fiscal impact from the provisions of this bill that apply directly to that agency. Most services called for by the bill are currently provided to all job-seekers, whether or not they are former state employees. The early retirement incentive will have both a fiscal impact and an actuarial impact. The actuarial impact is a result of allowing employees to retire earlier than they would otherwise have, thus reducing the plan's assets as a result of a reduction in employee and state contributions. The reduction in plan assets, both for the Employees Retirement System and for the Law Enforcement and Custodial Officers Supplemental Retirement Fund would be minimal in relation to the size of the actuarial surpluses in those funds. The fiscal impact is a result of the early retirement of state employees and the subsequent reduction in appropriations mandated by the bill. The savings estimate assumes five percent of eligible employees, or 323, would take advantage of this incentive over the biennium. A reduction is made for lump sum termination payments. In addition to a projected average annual salary of $29,761, savings would be derived from not paying Social Security or ERS retirement contributions on this salary. To the extent employees are replaced, additional costs would be incurred for paying retiree health insurance as well as employee health insurance. But these additional costs would be balanced by additional savings of employee health insurance and Benefit Replacement Pay for those employees which are not replaced. The additional retiree health insurance, together with the reduced employee health insurance and Benefit Replacement Pay, is assumed to produce no net costs. A final reduction is made for lump sum termination payments. This savings estimate is dependent upon inclusion of language in the General Appropriations Bill assigning appropriation reduction authority to the Comptroller's Office. Early retirement incentives are usually offered on the assumption that a younger replacement will earn less than the person they replace was making, resulting in a savings of some percent of the original salary ( i.e. the replacement ratio). This incentive, by enforcing a savings of 100 percent of salary, may in some cases limit the agencies ability to replace the employee. This is tempered by excluding agencies with appropriations of less than $1,000,000, but still may have some effect on agencies with many early retirements. If more than 5 percent of eligible employees retired, total savings would increase. Also, the effect on agencies would be greater. The FTE reductions for 1998 and 1999 are derived from payroll reductions provided by the Comptroller's Office and assume half of the retirees would be replaced during the biennium. A straight line projection of savings would result in annual savings of $10,936,200 after 1999. This would be offset by the desire of agencies affected by retirements to replace employees. Since the appropriation reduction provision expires at the end of the 1998-99 biennium, future salary savings would be calculated using the difference between the original salary and the replacement salary. However, there would be additional costs for paying the retiree's health insurance as well as the employee's health insurance. The actuary for the ERS Retirement Fund assumed it was unlikely the salary savings would be greater than the cost of additional health insurance for the years 2000, 2001, and 2002. Over the course of the three years, the costs and the savings would both be slightly less than 10 percent of salary and would effectively cancel each other out. The estimate for the fiscal impact of the early retirement incentive is based on the fiscal analysis done for recommendation EI6 of the Texas Performance Review. 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 Probable Probable Change in Number Savings/(Cost) Savings/(Cost) Savings/(Cost) Savings/(Cost) of State from General from All from Federal Funds from State Employees from Revenue Fund GR-Dedicated Highway Fund FY 1997 Accounts 0001 8021 0555 0006 1998 $4,335,600 $378,000 $1,402,200 $1,028,400 (122.0) 1998 6,150,600 533,400 1,958,400 1,452,000 (152.0) 2000 0 0 0 0 2001 0 0 0 0 2002 0 0 0 0 Fiscal Year Probable Savings/(Cost) from Other Funds 8042 1998 1999 42,600 2000 0 2001 0 2002 0 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 $4,335,600 1999 6,150,600 2000 0 2001 0 2002 0 No fiscal implication to units of local government is anticipated. Source: Agencies: 327 Employees Retirement System LBB Staff: JK ,TH ,SC ,RA