*Under current law and the proposal, the state contribution rate would need to increase from 6.0% of payroll to 7.121% of payroll in fiscal year 2005 and to 7.483% of payroll for fiscal year 2006 to achieve a 31-year funding for ERS under the requirements of Section 811.006 of Texas Government Code.

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

ACTUARIAL EFFECTS:

Employees' Retirement System (ERS): HB 139 will not increase the normal cost of ERS. The ERS unfunded liability will increase approximately $200,000, from $555.2 million to $555.4 million.  The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Under current law, the state contribution rate would need to increase from 6.0% of payroll to 7.121% of payroll in fiscal year 2005 and to 7.483% of payroll for fiscal year 2006 to achieve a 31-year funding for ERS under the requirements of Section 811.006 of Texas Government Code.

Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): HB 139 will, by .002% of payroll, decrease the normal cost from 1.621% to 1.619% for the LECOSRF.  The net asset balance will decrease by $900,000 in FY 2007, from $4.3 million to $3.4 million. The current contribution rate is sufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years only through fiscal year 2006. Under current law, the state contribution rate necessary to comply with the requirements of Section 811.006 of Texas Government Code is 1.282% of payroll for fiscal year 2007. Under the proposal, to comply with the requirements of Section 811.006 of Texas Government Code, the state contribution must be increased for fiscal year 2007 to 1.353% of payroll.

SYNOPSIS OF PROVISIONS:

HB 139, to be effective September 1, 2005, would provide the following changes:

·         Allows custodial officers employed by the Texas Department of Criminal Justice on September 1, 2005 to count certain service before July 1, 1988 as creditable custodial officer service for ERS and LECOSRF. To qualify under the provisions, members must have served in a hazardous duty position as an employee of the Texas Department of Mental Health and Retardation at the maximum security unit of Rusk Hospital and received a step increase in pay for that period of service before July 1, 1988.

FINDINGS AND CONCLUSIONS:

The bill would entitle certain current custodial officers with service before July 1, 1988 currently credited as regular employee service to include that service as custodial officer service to determine retirement eligibility and benefit amounts under ERS and LECOSRF. The ERS/LECOSRF actuary state that ERS staff provided data for approximately 160 members potentially affected by the provisions of this bill. The members would be entitled to increase their credited custodial officer service by, on average, approximately 3.5 years. The additional service could potentially allow the member to be eligible for an earlier service retirement under ERS and LECOSRF. It could also increase the credited service used to determine the standard service retirement annuity under the LECOSRF.

The proposal will not increase the normal cost of ERS; however the ERS unfunded liability will decrease approximately $200,000 in FY 2006.  Though the provisions will decrease the normal cost of LECOSERF by .002% of payroll, from 1.621% to 1.619%, the net asset balance will also decrease, from $4.3 million to $3.4 million.

The current contribution rate for ERS is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Under current law, the state contribution rate would need to increase from 6.0% of payroll to 7.121% of payroll in fiscal year 2005 to achieve a 31-year funding for ERS. The ERS/LECOSRF actuary states that ERS will remain actuarially sound only if the state contribution is increased to 7.483% of payroll for fiscal year 2006. LECOSRF will remain actuarially sound at the current state contribution rate only through fiscal year 2006. In fiscal year 2007, a state contribution rate of 1.282% of payroll will be necessary for LECOSRF to remain actuarially sound and comply with the requirements of Section 811.006 of Texas Government Code. Under the proposal, that rate will increase by 0.071% of payroll to 1.353% for LECOSRF to remain actuarially sound.

METHODOLOGY AND STANDARDS:

The analysis assumes no further changes are made to ERS and LECOSRF 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, 2004 actuarial valuation of ERS and LECOSRF. 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 Analysis by Steven R. Rusher, Actuary, Towers Perrin, February 14, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., February 25, 2005

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.