Austin, Texas
March 24, 2003

Honorable Allan Ritter, Chair, House Committee on Pensions & Investments
John Keel, Director, Legislative Budget Board
HB950 by Isett (Relating to an optional defined contribution retirement plan for persons eligible to participate in the Teacher Retirement System of Texas.), As Introduced





State Contribution

Employee Contribution

Total Contribution

6.00 %

6.40 %

12.40 %

6.00 %

6.40 %

12.40 %

0.0 %

0.0 %

0.0 %

Normal Cost (%of payroll)

12.67 %

13.07 %

+0.40 %

Unfunded Actuarial Accrued Liability (millions)

$ 10,085

$ 9,239


Amortization Period (years) as of 02/28/2003




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


HB 950 would allow the irrevocable election of an optional defined contribution plan (ODCP) by new emplyees which is estimted to increase the normal cost of payroll by 0.40%, from 12.67% of payroll to 13.07% of payroll. The unfunded accrued actuarial liability (UAAL) would decrease by $846 million, from $10,085 million to $9,239 million.

Since the percentage of new eligible members electing the ODCP in the future will be heavily weighted towards the younger aged new hires, the normal cost as a percentage of payroll for TRS will increase. Since TRS is currently underfunded and since the total contribution rate, which includes both member and state contributions, is less than the normal cost rate, the overall cost of TRS as a percent of pay will increase.

Optional DC plan members and the state contribute to the DC plan based on contribution rates that members and the state make to the existing TRS defined benefit (DB) plan. Contribution rate increases for the state could be required. A higher required DB plan state contribution rate would trigger a corresponding higher contribution rate by the state to the DC plan. Since the normal cost of TRS is greater than the current contribution rate to TRS, and since the UAAL is greater than zero both before and after the change, the funding period would remain infinite. The state contribution rate required to achieve a 30-year funding period is 8.94% of payroll under the current structure, and would increase to 9.15% of payroll under the proposal.


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


The effect of HB 950 on individual members has varying impacts. The TRS actuary points out that members who elect to participate in the ODCP will lose the pre- retirement inflation protection provided through the TRS defined benefit plan structure. In addition, they will lose the death and disability benefits under TRS. Members who terminate in the first five years of employment will gain due to the proposed five-year graded vesting schedule.

If HB 950 is adopted, net cash flow patterns will change, and may necessitate revisions to the asset allocation policy, which in turn may reduce investment return, according to the PRB actuary.

The TRS actuary expressed concern that more comprehensive study is needed to understand the full long-term impact of HB 950. The TRS actuary suggests a possible modification to create an IRC 401(c) plan, with administration and investment authority vested in the TRS Board of Trustees, rather than being structured as an IRC 403(b) program, which lacks centralized oversight.

The TRS actuary points out several items on the bill that may need clarification, including the following:

The TRS actuary states that the analysis does not fully reflect the deferred asset losses from FY 2001, FY 2002 and the first six months of FY 2003 that have yet to be realized in the actuarial value of assets. There are currently approximately $19.2 billion in deferred asset losses. The market value at February 28, 2003 was $68.6 billion, while the actuarial value of assets on this date was $82.3 billion.


The TRS actuary was required to adjust assumptions to exhibit a higher average entry age based upon industry studies of defined benefit/defined contribution preferences by employees to estimate the normal cost. These assumptions are shown below:

Age at hire

ODCP Election Rate

TRS Election Rate

Below 35



35 - 49



50 - 59



Over 60



The analysis relies on the membership data and actuarial assumptions/methods used in the August 31, 2002 actuarial valuation of TRS. The actuarial value of assets reflects the mid-year update of those assets as of February 28, 2003. 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. The analysis considers only those changes contained in the proposal and cautions that the combined economic impact of several proposals currently under consideration could exceed the economic impact of each such proposal considered individually.


Actuarial Analysis by Lewis Ward, Consultant and W. Michael Carter, Actuary, Gabriel, Roeder, Smith & Company, March 19, 2003

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 21, 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.

Source Agencies:
338 Pension Review Board
LBB Staff: