A Glossary of Actuarial Terms is provided at the end of this impact statement.

The proposal would increase the Teacher Retirement System (TRS) normal cost by 0.01% of payroll, from 12.67% of payroll to 12.68% of payroll. The unfunded actuarial liability (UAAL) would increase by $8 million, from $3,287 million to $3,295 million. Since the funding period of TRS exceeds 30.9 years, passage of this bill without additional funding would violate statutory requirements. Because the TRS normal cost is greater than the current contribution rate and the UAAL is greater than zero both before and after the change, the funding period would remain infinite.

State contribution rates of 7.15% of pay under the current structure, and 7.17% under the proposed structure will amortize the unfunded actuarial accrued liability over 30 years. Please note that the actual current state contribution rate is 6%. The current state/member contribution rate will never result in the complete amortization of the unfunded actuarial accrued liability for either the current or the proposed structures.

This bill, to be effective September 1, 2003, would provide the following changes:

• The proposal provides a supplemental retirement annuity for paid, full-time peace officers/members who have at least 25 years of service as a peace officer in TRS. The supplement is optional, at the election of the employer of the peace officer/member and is paid by such employer on a pay as you go basis.

• The supplement equals .5% of average monthly compensation per year of service as a peace officer in TRS. Average compensation is calculated on 36 months of service, whether or not consecutive, for which the member received the highest monthly compensation as a peace officer.

• Includes improved early retirement factors for employees under the age of 55 and the determination of service using the greater of service determined under the TRS rules or service determined on a completed month basis.

The TRS actuary's analysis is based upon the assumption that the employer who elects the supplemental retirement annuity will pay the additional benefit owed the employee, and that the retirement system shall provide the remainder of the monthly amount due based on the regular multiplier of 2.3%. There would be a significantly greater actuarial impact to the pension trust fund if the employer paid only 0.5% of the total annuity amount, as compared to the employer paying the full difference owed to the annuitant because of the 0.5% multiplier. As written, this bill is ambiguous about how the annuity amount is to be handled.

The increase in costs to TRS is due to allowing earlier retirements for certain peace officers than the current statute allows for. Approximately 2,000 TRS members who are peace officers would be affected.  

There are currently $14.3 billion in deferred asset losses from FY 2001 and FY 2002, which have not yet been recognized in the actuarial value of assets. The market value of assets was $71.7 billion, while actuarial value of assets was $86 billion on August 31, 2002. As these losses are recognized in future valuations, the effect will be to increase the required contributions.

The PRB actuary stated that electing employers may be undertaking significant long-term financial obligations under the proposal. The cost of making the election to provide the supplement would be deferred to the time payments are made on and after the retirement of eligible members. Generally, it is preferable to recognize employee costs at the time service is performed, not at the time payments are actually made. Pay as you go funding runs counter to many State laws governing other public systems in Texas which require advance funding.

In valuing the actuarial impact of this bill, the TRS actuary assumed that there are approximately 2,000 members of TRS who are commissioned peace officers who would be impacted by this bill. The TRS actuary also assumed that these members would retire at a rate 25% greater than other members of TRS in the same age/service combinations.

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2002 actuarial valuation of TRS. According to the PRB actuary, the actuarial assumptions and methods appear to be reasonable. All actuarial projections have a degree of uncertainty because they are based on the probability of occurrence of future contingent events. Accordingly, actual results will be different from the results contained in the analysis to the extent actual future experience varies from the experience implied by the assumptions.

• Actuarial Analysis by Lewis Ward, Consultant and W. Michael Carter, Actuary, Gabriel, Roeder, Smith & Company, March 5, 2003
• Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 6, 2003

Normal Cost-- the current cost as a percentage of payroll that is necessary to pre-fund pension benefits adequately during the course of an employee's career.

Unfunded Liability-- the amount of total liabilities that are not covered by the total assets of a retirement system. Both liabilities and assets are measured on an actuarial basis using certain assumptions including average annual salary increases, the investment return of the retirement fund, and the demographics of retirement system members.

Amortization Period-- the number of years required to pay-off the unfunded liability. Public retirement systems have found that amortization periods ranging from 20 to 40 years are acceptable. State law prohibits changes in TRS, ERS, or JRS-2 benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.