HB601 (Thompson) contains a proposed amendment to the State law under which the Houston Municipal Employees Pension System (HMEPS) operates.

2001 Valuation Information

The bill does not propose to directly change the amount or number of benefits or participation in benefits of a public retirement system. The HMEPS actuary stated that an actuarial analysis is not required under the law.

• The proposal would revise existing rules regarding the composition and designation of the HMEPS pension board
• Authorizes agreements between the pension board and the City
• Expands the types of benefit improvements the pension board may authorize, with the consent of the City.

The bill would allow the Houston Municipal Employees Retirement system to increase benefits without a change in statute. In other respects it would remain a statutory plan, but the most significant part of plan design would no longer reside in statute. Currently, any benefit improvements require a change in statute, and an accompanying actuarial impact statement. In particular, such a statutory change requires a review by an outside actuary of the plan's economic assumptions as well as whether assumptions used in estimating the cost of the benefit improvement are reasonable. The actuarial impact statement addresses whether the plan is currently actuarially sound based on the latest actuarial valuation, whether the plan would be actuarially sound after the change in benefits, and, generally, if it would not be sound, what level of contributions would be required to make it actuarially sound. It can also comment on changes in economic conditions, if they may be viewed as having a significant impact on the actuarial status of the plan. Under the provisions of the bill, none of this oversight would be required for benefit improvements; benefit improvements could be made without the city or its citizens even knowing the cost of increased contributions needed to keep it actuarially sound.

The bill quotes a standard for benefit improvements, that

"a qualified actuary selected by the pension board determines that the increase cannot reasonably be considered to jeopardize the pension system's ability to pay any existing benefit; "

This standard is not an actuarial standard; i.e. it is not defined in an actuarial standard of practice. So its meaning is not clear, and it is unclear that any actuarial standards would apply to the determination. Under the proposed standard, the plan could raise benefits to a level that required increased contributions to maintain actuarial soundness, but not tell the city what that level was or require them to pay the increased contributions when the benefits were increased. Indeed the plan could be actuarially unsound and provide a benefit increase without an immediate contribution increase, as long as the city proposed increasing contributions at some point in the future.

To illustrate the potential changes, we use information from the reported 2001 actuarial valuation and from the actuarial impact statement that accompanied the benefit improvement made last legislative session, in House Bill 1573, 77^th Legislature. The actuarially required city contributions were at 9.5 percent prior to the improvement, and the plan was actuarially sound. The city contribution was projected to increase to 14.1 percent after the improvement, though this projected increase was calculated after some actuarial assumption changes that reduced the actuarially required contributions. From the impact statement- "The PRB (Pension Review Board)  did not receive an experience study justifying the change in actuarial assumptions and no sensitivity analysis was provided. The PRB actuary stated that the proposed actuarial assumptions are very optimistic and less optimistic economic assumptions would result in higher plan obligations. Experience less favorable than assumed would result in increased costs."

At the next valuation (2001), required contributions were to estimated to increase to 17.7 percent in 2002, and were estimated to be 20.1 percent by 2005. If additional investment losses increased the required contribution for actuarial soundness to 27 percent in 2006, and the plan made a similar benefit improvement with simultaneous assumption changes, the actuarially required contribution rate would be 31 percent.

The city is currently contributing 10 percent of payroll, rather than the 14 percent suggested for actuarial soundness by the analysis for HB 1573, 77th legislature, or the 17.7 percent suggested for actuarial soundness by the 2001 valuation. The additional 7 percent increase over the 2001 valuation figures in required contributions due to additional investment losses is only illustrative, since the plan did not perform a valuation in 2002. However, it may be reasonably accurate given the fund balance as of December 31, 2002, estimated by the system to be $1,183.6 million. The actuarial analysis that accompanied HB 1573, 77th Legislature, had actuarial accrued liabilities estimated to be $2,044 million on July 1, 2002, and estimated to be $2,198 million on July 1,2003. 

Generally, statute changes that make no explicit changes in benefits are presumed to have no actuarial impact. But this bill would allow benefit increases while removing actuarial standards for assumptions, determination of current actuarial soundness, and determination of contribution rates required for actuarial soundness after a benefit increase. Together with the fact the plan currently appears to be actuarially unsound without significant increases in contributions, it is not clear that this bill would have no actuarial impact on the plan.

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.