LEGISLATIVE BUDGET BOARD
                              Austin, Texas
                                     
                    FISCAL NOTE, 77th Regular Session
  
                              March 24, 2001
  
  
          TO:  Honorable Dale B. Tillery, Chair, House Committee on
               Pensions & Investments
  
        FROM:  John Keel, Director, Legislative Budget Board
  
       IN RE:  HB2031  by Isett (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    *
*  HB2031, As Introduced:  negative impact of $(800,000) through the     *
*  biennium ending August 31, 2003.                                      *
*                                                                        *
*  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                *
          *       2002                           $(500,000)  *
          *       2003                            (300,000)  *
          *       2004                            (450,000)  *
          *       2005                            (600,000)  *
          *       2006                            (750,000)  *
          ****************************************************
  
All Funds, Five-Year Impact:
  
***************************************************************************
*Fiscal    Probable Savings/(Cost) from     Change in Number of State     *
* Year         General Revenue Fund           Employees from FY 2001      *
*                      0001                                               *
*  2002                        $(500,000)                             8.0 *
*  2003                         (300,000)                             8.0 *
*  2004                         (450,000)                             9.0 *
*  2005                         (600,000)                            10.0 *
*  2006                         (750,000)                            11.0 *
***************************************************************************
  
Fiscal Analysis
  
The bill would create an optional defined contribution retirement plan as
an alternative to the defined benefit pension plan administered by the
Employees Retirement System (ERS) for state employees.  A newly hired
employee would have 90 days after the date of hire to make an irrevocable
election to join the defined contribution plan.  The bill does not
appear to allow current state employees to switch from the pension plan
to the proposed defined contribution plan.  The state's 6.0% retirement
contribution, along with the member's 6.0% contribution would be
deposited to whichever plan the employee chose.  Members that terminate
employment with fewer than 5 years of service would forfeit a portion of
their defined contribution account derived from state contributions.

ERS estimates that the first year start-up costs will total $500,000 and
require 8 additional full-time-equivalent employees.  The ongoing annual
cost for operation is estimated at $300,000 in fiscal year, increasing
to $750,000 in fiscal year 2006 as the number of participants increases.
ERS would be responsible for selecting and maintaining the list of
approved vendors, distributing plan materials, collecting the employee
and state contributions and remitting those contributions to the
investment vendors chosen by the participants.
  
  
Methodology
  
The bill does not provide any mechanism for ERS to fund the
administrative costs of operating the defined contribution plan.
Therefore, it is assumed that General Revenue will be necessary to pay
for the administrative costs.  The estimated costs of administration are
based on the current costs incurred by ERS for administering the state's
deferred compensation program and adjusted for estimated participation
levels.

ERS also projects that the defined contribution plan will be an
attractive option to younger employees, who have a lower normal cost
than older employees.  As a portion of these younger employees choose
the defined contribution plan over the pension plan, the overall normal
cost of the pension plan will increase.  The combined state and employee
contribution will not be sufficient to cover the normal cost; as a
result, the fund's actuarial surplus will decrease.  At some point in
the future, an increase in state and/or member contributions could be
required.
  
  
Local Government Impact
  
No fiscal implication to units of local government is anticipated.
  
  
Source Agencies:   327   Employees Retirement System
LBB Staff:         JK, RB, SC