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
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* 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. *
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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:
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*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 *
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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