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

Under HB 752, the HPOPS present value of future benefits will increase by $426.2 million from $2,795,208,000 to $3,221,398,000. This amount may be thought of as the cost to the city for the current plan participants. The Unfunded Actuarial Liability will increase by $232.9 million from $23.7 million to $256.6 million. To preserve the current actuarial funding status of the HPOPS and fund the actuarial accrued liability by the end of the statutory period, the City contribution should be at least equal to the amounts shown above should the bill be enacted into law.

The prior structure would be adequately financed by a long-term city contribution rate of 12.4% of pay per annum. The agreed-to structure is adequately financed by a long-term city contribution rate of 24.4% of pay per annum, if all deferred investment losses were made up by investment gains of over 8.5 percent.

For fiscal years 2003 through 2012, the actuarially determined city contribution rates range from 9.8% of payroll to 22.5% of payroll under the prior structure, and from 20.5% of payroll to 35.4% of payroll under the current structure, as agreed to by the board and city. City contributions agreed to for fiscal years 2003, 2004, and 2005 range from 12.1% of payroll to 16.0% of payroll, significantly less than the actuarial rate. As a result, the projected city contributions increase sharply to more than 34% of payroll, beginning with the plan year which begins July 1, 2005.

This bill, to be effective September 1, 2003, would provide the following changes to statute. The changes were agreed to by the city and the pension board by an agreement which provided for the following, effective as of July 1, 2001:

• Eliminated service eligibility requirement for off-duty and survivor benefits.
• Increases multiplier for first 20 years of service from 2.5% to 2.75% of "total direct compensation".  
• Increased off-duty disability and survivor benefit to 2.75% of final compensation times service up to 20 years (minimum 27.5%).
• Proportionate members injured while on duty, as a municipal worker will receive immediate off-duty benefit upon Board approval.
• Added an education allowance for up to four years for off-duty and duty-related disability retirement equal to 100% of final compensation less the disability benefit payable.
• Added a "back DROP" option for current active and DROP members.
• Increased monthly retiree insurance stipend from $88.05 to $150.00 per month.
• Increased benefit accruals for service less than or equal to 20 years from 50% of final compensation to 55% of final compensation. Benefit increases to retirees exclude COLA adjustment.
• Reset city contribution schedule.
• The monthly benefit for DROP members will be recalculated at retirement to be the greater of:

1. The current monthly benefit or
2. Recalculated benefit based on service at DROP entry and Total Direct Pay at retirement.

• Changed the interest rate earned on PROP accounts from the 30-year treasury rate to the 5-year average return earned by the Pension System. The credit rate for both DROP and PROP will be greater than or equal 0.0%.
• Members who have service credit in more than one City of Houston Pension Plan may use their combined service to qualify for DROP participation.
• The Unfunded Actuarial Accrued Liability (Surplus) is amortized over 30 years, rather than to December 31, 2022.
• Members involuntarily transferred to the System from the Houston Municipal Employees System will receive service under this plan for years worked while serving as a City Marshall, Airport Police or Park Police.
• Changed the definition of Total Direct Pay from the average of the last 26 pay periods to the highest bi-weekly pay period during the last 26 pay periods, annualized. Also, include motorcycle allowance in definition of Total Direct Pay.
• Increased the disability benefit for "catastrophic injuries" to 100% of Total Direct Pay at retirement.
• Changed the maximum allowable age requirement for an eligible full-time student beneficiary from age 22 to age 24.
• Changed the definition of "normal retirement age" from the age at which the member attains 20 years to the earlier of (i) the age at which the member attains 20 years and (ii) the age at which the member attains 60 years and at least 10 years of service.

The actuarially determined contribution rate projections for future fiscal years 2003 through 2012 exceed the long-term city contribution rate determined as of July 1, 2002. The excess may be explained by a couple of reasons. First, a significant unrecognized loss on assets exists, as of July 1, 2002. In the absence of future asset gains or losses, such unrecognized loss will be recognized and amortized in future years. Second, City contributions for 2003, 2004, and 2005, appear to be materially less than the actuarial rate for such years. Such deficiency is recognized in 2006 and later.

It is a matter of significant concern that proposed contribution rates in the statute for fiscal years 2003, 2004, and 2005 are significantly less than the long term costs of the plan, which would require a doubling of the contribution rate. Benefit improvements that require dramatic increases of future contributions, but provide no increases from current budgets will only cause greater disruptions in future budgets as the shortfalls must eventually be covered, with interest. And the Funding Ratio (assets divided by liabilities), a prime indicator of the actuarial health of the fund, will decrease for several years after the improvement is enacted. Unless the plan continually earns a rate of return in excess of 8.5% from December 31, 2002, further additional contribution rate increases will be required to pay for additional investment experience losses, estimated to be $235 million as of that date. 

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the July 1, 2002 actuarial valuation of HPOPS. 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 Adam S. Berk, Actuary, Towers Perrin, March 6, 2003

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