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

CSSB 1243 does not have a material effect on the actuarial soundness of the Teacher Retirement System (TRS). 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 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.

CSSB 1243 provides the following changes:

• Eliminates the requirement that an employee of a home-rule school district be covered under TRS and provides that such employee does not qualify for membership in TRS.

• Extends the suspension of benefit rules to "third-party entity" employment and establishes a window between September 1, 2003 and September 1, 2005 for the changes in benefit rules by granting an exemption for certain retirees who are re-employed in public school districts with fewer than 6,800 and for whom the sum of the retiree’s age and years of service credit is equal to or greater than 90.

• Provides exemption from the suspension of benefit rules for "third-party entity" employment for retirees who retired prior to January 1, 2003 and who are employed by a school district or an open-enrollment charter school.

• Establishes a deadline of December 31, 2003 for election in the deferred retirement option plan (DROP) and extends the deadline for a member in the plan on September 1, 2003 to elect to discontinue participation in DROP by December 31, 2003.

• Amends various sections of Government and Insurance code to related to TRS provisions, including membership, voluntary investment options, and limitations to the administration of health care programs.

CSSB 1243 revises the existing suspension of benefit rules. The existing 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. CSSB 1243 extends the suspension of benefit rules to "third-party entity" employment and establishes a window between September 1, 2003 and September 1, 2005 for the changes in benefit rules by granting an exemption for certain retirees who are re-employed in public school districts with fewer than 6,800 and for whom the sum of the retiree’s age and years of service credit is equal to or greater than 90. 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 analysis on the original SB 1243 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. The Teacher Retirement System did not provide an actuarial analysis of CSSB 1243, but informed the Pension Review Board that CSSB 1243 would have no actuarial effect. 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.

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-II benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.