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