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

While SB1243 does not increase the Teacher Retirement System (TRS) normal cost, the unfunded actuarial liability (UAAL) would increase by $604 million, from $10,085 million to $10,689 million. Since the funding period of TRS exceeds 30.9 years, passage of this bill without additional funding would violate statutory requirements. Because the TRS normal cost is greater than the current contribution rate and the UAAL is greater than zero both before and after the change, the funding period would remain infinite.

State contribution rates of 8.94% of payroll under the current structure, and 9.10% of payroll under the proposed structure will amortize the unfunded actuarial accrued liability over 30 years. The current state/member contribution rate of 6% will never result in the complete amortization of the unfunded actuarial accrued liability for either the current or the proposed structures. Passage of the proposal without additional funding would violate applicable funding statutes.

SB1243 amends the Education Code, the Insurance Code, and other laws affecting TRS, to be effective September 1, 2003, and would provide the following changes:

• Allows active members of the Optional Retirement Plan (ORP) a one-time election to cease active participation in ORP and become a member of TRS.
• Disallows transferring members to establish credit for the member's period of service under ORP.
• Extends the suspension of benefit rules to "third party entity" employment arrangements for future retirees.

The legislation requires that a favorable determination letter be received from the Internal Revenue Service before the provision allowing the transfer from ORP to TRS takes effect..

The TRS actuary states that the cost impact of the bill, even though no prior service is being granted, is based upon the significantly older age of the special new entrants into TRS resulting from the legislation. Since these new entrants are closer to retirement, this results in a higher normal cost percentage of payroll than the average. Because TRS' actuarial methodology will continue to use a new entrant profile in determining normal cost, the cost impact is passed to the actuarial accrued liability (AAL). If a new entrant profile was not used, then the addition of these new entrants would increase the normal cost rather than the AAL.

The PRB actuary observes that SB1243 revises the existing suspension of benefit rules. The existing suspension rules are apparently being avoided when retirees resume employment with Texas public educational institutions through so-called third party entities. As a result, TRS is making benefit payments to certain retirees that would otherwise be suspended. The proposal extends the suspension of benefit rules to such third party entity arrangements, in the case of future retirees. Current retirees may continue to avoid the suspension rules through employment by a third party entity.

There are currently $16 billion in deferred asset losses from FY 2001 and FY 2002, which have not yet been recognized in the actuarial value of assets. Market value of assets was $71.7 billion, while actuarial value of assets was $86 billion on August 31, 2002. As these losses are recognized in future valuations, the effect will be to increase the required contributions.

The actuarial analysis is contained in a letter dated April 30, 2003 addressed to the TRS Deputy Director and signed by W. Michael Carter and Lewis Ward. The analysis discusses the impact of the option to leave the optional retirement program, and contains words of caution regarding benefit improvements. The analysis does not discuss the proposed change to the suspension rules.

Given the recent performance of the financial markets and the inherent value of a defined benefit plan to older employees, the TRS actuary forecasts that a significant portion of the members covered in the ORP would make the election to become members of TRS. The TRS actuary assumed that approximately 40,000 employees currently covered under ORP would be eligible to transfer to TRS.

The TRS actuary further concludes that the overall aggregate impact on TRS can be estimated based upon an assumption that approximately 24,000 will elect to join TRS, based upon the following assumptions:

• 100% of all eligible participants age 50 or older will elect to become members of TRS
• 60% of all eligible participants ages 35-50 will elect to become members of TRS
• Transferring members will not be allowed to establish prior credit under TRS for their service under ORP
• The average pay for these members will be approximately $60,000
• The age/service/sex distribution of the eligible participants is consistent with the distribution of current TRS active members

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2002 actuarial valuation, updated 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.

• Actuarial Analysis by Lewis Ward, Consultant and W. Michael Carter, Actuary, Gabriel, Roeder, Smith & Company, April 30, 2003
• Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., May 2, 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.