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

HB1388 would increase the Houston Firefighters' Relief and Retirement Fund (HFRRF) member contribution rates by .65%, from the current 7.7% to 8.35% effective September 1, 2003 and by .65%, from 8.35% to 9.0% effective July 1, 2004. The actuary for HFRRF concluded that the City's statutory contribution rate would increase by 2.6% from 15.4% to 18% since the minimum City rate is equal to twice the member rate. The actual statutory city contribution rate will remain below the actuarially determined contribution rate of $20.6%. Under the current structure, the City of Houston contributions are expected to increase from 20.5% of payroll to 33.1% of payroll from fiscal years 2004 through 2012. As proposed, city contributions would grow from 20.6% of payroll to 28.2% of payroll over the same period.

The surplus or excess of assets over the actuarial accrued liability is projected to drop $4.3 million under the proposal from $44.9 million to $40.6 million. The HFRRF actuary estimates the provisions of SB297 would increase the present value of future benefits by $5,967,000 from $2,273,795,000 to $2,279,762,000. HB1388 would extend the amortization period from the current 40-year fixed period ending December 31, 2022, to a rolling 30-year period.

The bill would allow the pension board to form a pension benefits committee, which would have the authority to increase benefits. No actuarial standards are specified in the determination of these benefits. If benefits were increased, the actuarial impact could be significant. It is unclear the degree of influence the city would have on any decisions. The board is absolved of all liabilities for actions taken or omissions made in good faith in the performance of their duties for the fund.

HB1388, to be effective September 1, 2003, would provide the following changes:

• Increases member contribution rate by 1.3% from 7.7% to 9% over a two-year period beginning July 1, 2004. Increases the minimum City contribution rate by 2.6% from 15.4% to 18% since the minimum City contribution rate is equal to twice the member rate.
• Changes the amortization period of the unfunded actuarial accrued liability from a level percentage of payroll ending December 31, 2022 to a level percentage of payroll over 30 years (constant).
• Revises the deferred retirement option plan rules, including the addition of a floor of 5% and a ceiling of 10% on DROP account earnings.
• Authorizes the review and prospective reclassification of certain disabilities as "on duty" disabilities
• Revises existing law concerning the fund, the board of trustees, and the other powers of the board.
• Expands the definitions to include a definition for active service, changes rules on service pension benefits, and other administrative changes.

Actual city contributions under the proposal for fiscal years 2004 and 2005 are expected to be less than the actuarially determined city contribution rate contained in the projections, pending adoption of an actuarial report by the trustees. The projections include recognition of the unrecognized asset losses.

The HFRRF actuary states that the actuarially determined City contribution rate of 20.6% is sufficient to pay the normal cost of the Fund and to fully amortize the unfunded actuarial liability (surplus), including the effects of actuarial gains and losses, as a level percentage of payroll over 30 years. If the actuarial determined contributions are made, the Fund will continue to be actuarially sound.

The HFRRF actuary informed the PRB actuary that the addition of a floor and ceiling to the return credited to the DROP accounts is expected to be cost neutral. Assuming the absence of future gains and losses, the use of a 30-year rolling amortization period essentially means the unfunded actuarial accrued liability will never be completely amortized.

The December 31, 2002 market value of the fund is $1,590 million. An estimate based on the actuarial accrued liability (AAL) and market value of assets from the July 1, 2002 valuation shows the difference between the market value of assets and AAL has grown by approximately $150 million as of the end of calendar year 2002, from $315 million to $465 million. Unless returns are significantly above 8.5 percent for an extended period, the required contributions may increase by an additional 5 percent of payroll due to this loss.

Allowing the board to increase benefits in the absence of actuarial standards, with no clear oversight role for the city, and absolving the board of liabilities for any actions taken or omissions made in good faith, would not appear to afford much protection on the actuarial health of the fund. In combination with the current funding level that leaves it actuarially unsound, these provisions may combine towards benefit improvements at a level the city of Houston would find difficult to afford in the long term.

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the July 1, 2001 and July 1, 2002 actuarial valuation of HFRRF. The trustees have not adopted the 2002 actuarial valuation. 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. Except as otherwise noted, the conclusions contained in the analysis seem reasonable.

Actuarial Analysis by Adam S. Berk, Actuary, Towers Perrin, February 28, 2003

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 3, 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.