LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE, 76th Regular Session April 15, 1999 TO: Honorable Florence Shapiro, Chair, Senate Committee on State Affairs FROM: John Keel, Director, Legislative Budget Board IN RE: SB1179 by Wentworth (Relating to an optional defined contribution retirement plan for persons eligible to participate in the Employees Retirement System of Texas.), As Introduced ************************************************************************** * Estimated Two-year Net Impact to General Revenue Related Funds for * * SB1179, As Introduced: negative impact of $(1,250,000) through * * the biennium ending August 31, 2001. * * * * The bill would make no appropriation but could provide the legal * * basis for an appropriation of funds to implement the provisions of * * the bill. * ************************************************************************** General Revenue-Related Funds, Five-Year Impact: **************************************************** * Fiscal Year Probable Net Positive/(Negative) * * Impact to General Revenue Related * * Funds * * 2000 $(750,000) * * 2001 (500,000) * * 2002 (500,000) * * 2003 (500,000) * * 2004 (500,000) * **************************************************** All Funds, Five-Year Impact: *************************************************************************** *Fiscal Probable Savings/(Cost) from Change in Number of State * * Year General Revenue Fund Employees from FY 1999 * * 0001 * * 2000 $(750,000) 8.0 * * 2001 (500,000) 8.0 * * 2002 (500,000) 8.0 * * 2003 (500,000) 8.0 * * 2004 (500,000) 8.0 * *************************************************************************** Fiscal Analysis The bill provides for an optional defined contribution plan, effective September 1, 2000. Members of the Employees Retirement System (ERS) would be allowed to participate in either the ERS pension plan or the optional defined contribution plan with an irrevocable decision to be made within 90 days of employment, or following the date this option becomes available. All future state and member contributions that would otherwise be deposited with the ERS pension plan would be deposited into the defined contribution plan, with investment choices being managed by outside vendors. The ERS actuary estimates that implementation of this legislation would increase the normal cost of the plan from the current 11.861% to 12.64% as a result of the expected elections of many, generally younger, members into the defined contribution plan. The combined state and member contribution rate would remain at 12.0%. Since the normal cost would exceed the combined contribution rate, the actuarial assets of the plan would be reduced. Because the ERS system has a net actuarial surplus of $1.6 billion, the fund could absorb these annual losses for a period of time, assuming that the plan's experience matches the current assumptions, and that no actuarial gains or losses occur. Eventually, the actuarial surplus would be eliminated and an unfunded liability would emerge that could not be amortized within the 31 years required by statute. At that point, an increase in state contributions to cover the higher normal cost would be necessary, at an estimated annual cost of at least $17 million a year. There would be a parallel increase in the state's contributions to the defined contribution plan of at least $13 million, because the bill specifies that the state's contribution rate for defined contribution plan participants will be the same as the contribution rate for the pension plan participants. While outside vendors would provide the investment management services and could be paid from the account balances of the participants, there would still be administrative duties for ERS to perform. These duties would include developing communication and administration documentation, selecting investment organizations, and interacting with state agencies and their employees in processing plan participation decisions and changes. Methodology ERS' actuary estimates that approximately 70,000 current ERS members would elect to participate in the defined contribution plan, with a proportion of newly hired employees joining in future years. ERS estimates that the first-year costs of implementing the optional defined contribution plan would be $750,000, with ongoing annual costs of approximately $500,000. Local Government Impact No fiscal implication to units of local government is anticipated. Source Agencies: 304 Comptroller of Public Accounts, 327 Employees Retirement System LBB Staff: JK, SD, SC