LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
78TH LEGISLATIVE REGULAR SESSION
 
March 9, 2003

TO:
Honorable Allan Ritter, Chair, House Committee on Pensions & Investments
 
FROM:
John Keel, Director, Legislative Budget Board
 
IN RE:
HB464 by Hopson (Relating to the hazardous duty performed by certain custodial officers of the Texas Department of Criminal Justice.), As Introduced


LAW ENFORCEMENT CUSTODIAL OFFICERS' SUPPLEMENTAL RETIREMENT FUND

Current

Proposed

Difference

State Contribution

Employee Contribution

Total Contribution

0 %

0 %

0 %

0 %

0 %

0 %

0

0

0

Normal Cost (% of payroll)

1.753 %

1.754 %

+ 0.001%

Net Asset Balance (millions)

$129.8

$129.3

-$0.5

Funded Ratio

124.7%

124.5%

-0.2%

Amortization Period (years) as of 8/31/02 actuarial valuation

6.6

6.5

-0.1

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

ACTUARIAL EFFECTS:

The proposal will increase the Law Enforcement Custodial Officers' Supplemental Retirement Fund (LECOSRF) normal cost .001% of payroll, from 1.753% of payroll to 1.754% of payroll. The LECOSRF actuarial accrued liability will increase approximately $0.5 million. Under current law, the net asset/liability balance is expected to drop from a net asset balance of $129.8 million on September 1, 2002 to a net asset balance of $64.2 million on September 1, 2005. This projection assumes an 8% return on assets at market and the absence of net gains from sources other investments. Under the proposal the net asset balance is projected at $63.6 million on September 1, 2005.

SYNOPSIS OF PROVISIONS:

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

FINDINGS AND CONCLUSIONS:

HB 464 potentially affects approximately 160 members of LECOSRF. These members would be entitled to increase their credited custodial officer service by an average of approximately 3.5 years under this bill. This additional service could potentially allow members to be eligible for earlier service retirement under ERS and LECOSRF. This would increase the credited service used to determine the standard service retirement annuity under the LECOSRF.

In the absence of net gains, the current 6% ERS State contribution rate will not be adequate starting September 1, 2003 under the current structure. As long as a benefit change does not increase ERS obligations, additional State contributions to ERS in excess of 6% are not required under the law.

Under the current structure, LECOSRF will remain actuarially sound provided state contributions are made at the rate of 1.753% of payroll starting when the net asset is depleted. Under the proposal, LECOSRF will remain actuarially sound provided state contributions are made at the rate of 1.754% of payroll starting when the net asset is depleted. The market value of assets for LECOSRF was $88 million less than the actuarial value of assets as of August 31,2002.

The ERS actuary notes that as of the August 31, 2002 actuarial valuation, the Employees Retirement System of Texas actuarial value of assets exceeded the actuarial accrued liability and the contribution rate was less than the normal cost. The actuarial value of asset method smooths unexpected asset gains and losses at a rate of 20% per year. As a result, the ($2,462 million of) asset losses that have not been recognized in the August 31, 2002 valuation will be smoothed in over the next five years. As these losses are recognized, in the absence of outstanding market gains, the plan will cease to be self-sufficient, even if no benefit improvements are granted.

METHODOLOGY AND STANDARDS:

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2002 actuarial valuations of ERS and LECOSRF. According to the PRB actuary, the actuarial assumptions and methods, as well as the plan level conclusions, 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.

SOURCES:

Actuarial Analysis by Steven R. Rusher, Actuary, Towers Perrin, March 6, 2003

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 7, 2003

GLOSSARY OF ACTUARIAL TERMS:

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.



Source Agencies:
338 Pension Review Board
LBB Staff:
JK, WM