TO: | Honorable Allan Ritter, Chair, House Committee on Pensions & Investments |
FROM: | John Keel, Director, Legislative Budget Board |
IN RE: | HB951 by Isett (Relating to an optional defined contribution retirement plan for persons eligible to participate in the Employees Retirement System of Texas.), As Introduced |
Fiscal Year | Probable Net Positive/(Negative) Impact to General Revenue Related Funds |
---|---|
2004 | ($500,000) |
2005 | ($300,000) |
2006 | ($450,000) |
2007 | ($600,000) |
2008 | ($750,000) |
Fiscal Year | Probable Savings/(Cost) fromGENERAL REVENUE FUND 1 |
Change in Number of State Employees from FY 2003 |
---|---|---|
2004 | ($500,000) | 8.0 |
2005 | ($300,000) | 8.0 |
2006 | ($450,000) | 9.0 |
2007 | ($600,000) | 10.0 |
2008 | ($750,000) | 11.0 |
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 percent retirement contribution, along with the member's 6.0 percent contribution would be deposited to whichever plan the employee chose. Members that terminate employment with fewer than five 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 eight 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 2008 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.
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.
It is important to note that the actuarial impact of the benefit increase required under the bill could change as a result of the retirement system's February 2003, updated actuarial valuation.
Source Agencies: | 304 Comptroller of Public Accounts, 312 Securities Board, 327 Employees Retirement System
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LBB Staff: | JK, RR, MS, ZS
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