LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
79TH LEGISLATURE 3rd CALLED SESSION - 2006
 
April 26, 2006

TO:
Honorable Craig Eiland, Chair, House Committee on Pensions & Investments
 
FROM:
John S. O'Brien, Deputy Director, Legislative Budget Board
 
IN RE:
HB73 by Eiland (Relating to public financing of public education employee retirement; making an appropriation.), As Introduced

Fiscal Year 2007

Teacher Retirement System

Current

Proposed

Difference

State Contribution

Employee Contribution

Total Contribution

6.00 %

     6.40 %

12.40 %

                 7.19 %

      6.40 %

13.59 %

+1.19%

      0.0%

+1.19%

Normal Cost (% of payroll)

10.40 %

10.40 %

 0.0%

Amortization Period (years)

Infinite*

N/A**

0.0

*The current contribution rate is insufficient to amortize the unfunded liability over a 30-year period. Currently, based on the August 31, 2005 actuarial valuation, the state contribution rate necessary to maintain a 30-year funding period is 7.19% of payroll.

**Not available in the actuarial analysis.

 

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

 

ACTUARIAL EFFECTS: HB 73 would increase the state contribution rate to the Teacher Retirement System (TRS) for fiscal year 2007 and beyond. The bill appropriates an additional $300 million for fiscal year 2007, which represents an estimated increase in the state contribution rate of 1.19% of payroll, bringing the total state contribution to an estimated 7.19% of payroll from the current state contribution rate of 6.0%. The amounts to be appropriated for fiscal year 2008 and beyond are projected to be sufficient to fund the liability of TRS.

 

 

SYNOPSIS OF PROVISIONS

 

This bill, to be effective immediately if receiving required votes or if not, August 15, 2006, would provide the following changes:

 

 

·         Appropriate $300 million, an amount based on an estimated state contribution rate of 7.19% of payroll for fiscal year 2007 and an amount estimated to be sufficient to fund the liability of TRS for service retirement benefits, disability retirement benefits, and death benefits provided under Government Code for members, retirees, and beneficiaries for fiscal year 2008 and beyond. The bill removes the 10% statutory ceiling on state contributions to TRS.

 

 

FINDINGS AND CONCLUSIONS

 

HB 73 proposes to increase the state contribution to the Teacher Retirement System (TRS) for fiscal year 2007 and the state contribution rate for fiscal year 2008 and beyond. The amount specified to be appropriated for fiscal year 2007 is $300 million, which represents an estimated state contribution rate of 7.19% of payroll, an increase of 1.19% of payroll from the current state contribution rate of 6.0%. The amounts to be appropriated for fiscal year 2008 and beyond are to be sufficient to fund the liability of TRS.

 

According to the TRS actuary, the amortization period, based on the August 31, 2005 actuarial valuation, would be within a 30-year period by 2009 if the 8% annual investment return assumption is realized and all other assumptions are met. It is possible that the additional contributions during fiscal year 2007 could produce a funding period of 30 years or less depending on the actual demographic and economic experience of the fund during fiscal year 2006. The analysis does not contain information regarding the change in the UAAL in fiscal years 2007 and 2008 under the proposal. The actuarial analysis also does not indicate what the contribution rate would need to be staring in 2008 if the current 6% is contributed for 2006 and 7.19% is contributed 2007.

 

 

METHODOLOGY AND STANDARDS

 

The analysis assumes no further changes are made to TRS and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually. The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2005 actuarial valuation of TRS. The actuarial analysis does not take into account the impact on future valuations of the recognition of the deferred investment losses that have yet to be recognized in the actuarial value of assets. Without offsetting asset returns in excess of the assumed rate, the contribution rates and funding periods shown above could both be greater in the future. According to the PRB actuary, the actuarial assumptions, methods, and procedures 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.

 

 

SOURCES:

 

Actuarial Analyses by Lewis Ward & W. Michael Carter, Gabriel, Roeder, Smith & Co. April 25, 2006.

 

GLOSSARY OF ACTUARIAL TERMS:

 

Normal Cost-- the current annual cost as a percentage of payroll that is necessary to pre-fund pension benefits adequately during the course of an employee's career.

 

Net Asset / Net Liability--This is the difference between the Actuarial Value of Assets and the Actuarial Accrued Liability. A Net Asset (also called the "Overfunded Actuarial Liability) exists only when the Actuarial Value of Assets exceeds the Actuarial Accrued Liability, and is the amount of this excess. This only occurs when a plan is overfunded. A Net Liability (also called the Unfunded Actuarial Liability) exists only when the Actuarial Accrued Liability exceeds the Actuarial Value of Assets. This only occurs when a plan is underfunded.

 

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:
JOB, SR, JSc