The Texas County and District Retirement System (TCDRS) is an agent multiple-employer system, which is an aggregation of over 550 single-employer plans, with pooled administrative and investment functions.  For each employer, a separate account is maintained to assure that its contributions are used exclusively for the benefit of its employees. 

ACTUARIAL EFFECTS:

The changes proposed by HB 633 are not expected to have any material effect on the actuarial status of TCDRS; nor is there any immediate financial impact expected on any TCDRS subdivision or on TCDRS in total. As many of the benefit features in TCDRS are optional and dependent on the actions of the individual employer or employee, it is not possible to evaluate the cost for any one plan prior to knowing if the action will occur or not.

SYNOPSIS OF PROVISIONS:

HB 633, to be effective September 1, 2005, would provide the following changes:

·         Permits voluntary and involuntary termination of a district’s plan in TCDRS. The termination agreement must provide for the complete funding of all accrued benefits as of the date indicated in the termination agreement. No further employee contributions are made during the funding period and the Board may set the rate for interest crediting to the employer’s Subdivision Accumulation Fund (SAF) account. All members become fully vested in their accrued benefits earned with that employer upon completion of the terms of the termination agreement. The employer assets are to be transferred to either the retired members’ accounts or the member accounts. Excess funds remaining after transfers are returned to the employer and the subdivision has no further future funding responsibility for the plan.

·         Requires a subdivision to determine an employee’s qualification for participation, as long as they are not a temporary employee. The subdivision may continue to apply the current participation requirements until the first pay period after December 31, 2006.

·         Allows any political subdivision not participating in any other statewide retirement system to participate in TCDRS.

·         Eliminates the restriction for participation in the System due to age at time of employment and permits employees previously excluded by this provision to join as of January 1, 2006.

·         Allows individual employees who are accruing benefits in another statewide retirement system to participate in TCDRS on an optional basis, if made eligible by the employing subdivision, to the extent of compensation received from the subdivision; including district judges and district attorneys.

·         Eliminates absence from work as a cause for TCDRS membership termination and would reinstate the account of members whose membership was terminated after December 31, 2004 due to absence from service of five years, provided the account has not been refunded.

·         Allows a subdivision to assume benefit obligations for another subdivision that may be in the process of dissolution or that no longer exists, but the assumption of obligations can not take place if the terminating subdivision has entered into a voluntary termination agreement or if the Board initiates involuntary termination proceedings.

·         Eliminates the cessation of benefit payments for retirees who are rehired by their former employer so long as the employee was retired with a service retirement annuity and had a bona fide termination of employment with a break in service of at least one month.

·         Permits members with more than 20 years of military service to receive service credits in the same manner as members with less than 20 years, as long as any month of service is not otherwise credited by another retirement system.

·         Affects a subdivision's ability to grant annual cost of living increases. Currently, a subdivision may grant an increase of up to 80% of the CPI-U (the Consumer Price Index for All Urban Consumers). This is increased to 100% of the CPI-U.

·         Allows the Board to restrict the maximum percentage increase granted under the flat percentage cost-of-living adjustments (COLAs). Each subdivision may annually decide whether to elect a flat percentage COLA and the percentage of increase to grant to retirees, up to the maximum permitted by the Board.

·         Permits the Board to approve an alternative funding method for a subdivision for which the normally approved funding method is inappropriate, if it results in reasonable actuarial contributions to fund its obligations.

·         Increases the optional multiple matching percentage that a subdivision may elect to adjust its benefits for its members, without changing the maximum allowed percentage, by allowing for adjustments to the matching percentages in 5% increments. Permits subdivisions to elect multiple matching percentage increases on a prospective-only basis and establishes a relationship between the maximum prior service matching percentage and the prospective-only matching percentage increases.

·         Provides that the administration expenses be funded from the general reserve accounts.

·         Permits the payment to a terminating subdivision of remaining funds in that subdivisions SAF account once there are no longer benefit obligations with the System.

·         Changes the way the Board may use its authority to allocate the current year’s investment returns to assist in smoothing the investment volatility by modifying how the allocation of net investment income is determined so as to allow the Board more flexibility in determining the need for reserves for other unexpected risks. Authorizes the Board to decide the best use of the investment income credits and the reserves to manage the funds available to the plans that is consistent with the administration of the trust.

FINDINGS AND CONCLUSIONS:

Most provisions of the bill are not expected to have any material effect on the actuarial status of TCDRS.

The most significant changes proposed by HB 633 are plan termination provisions for certain districts. Currently, TCDRS has no means for a district plan that has become inactive or that has discontinued enrolling new employees to terminate the plan until the final monthly benefit has been paid. The provisions of the bill allow a district to voluntarily enter into a termination agreement with the consent of the Board, provided that the district would have to agree to fund the accrued benefits as of the termination date. If a plan has no active employees, the employer is not enrolling new employees, or the employer is not following the terms of a voluntary termination agreement, the TCDRS Board would be able to terminate a district’s plan without its consent. If the plan’s assets are insufficient to fully fund the accrued benefits, certain benefits would be reduced until the accrued liability on a termination basis was equal to the plan assets.

Since an actuarial valuation is performed for each employer, the impact of this bill would need to be reviewed based upon each subdivision in TCDRS, not just the system as a whole. Additionally, the impact for non-terminating plans is generally anticipated to not be significant, as the majority of the changes would only allow additional costs at the plan sponsor's discretion.

METHODOLOGY AND STANDARDS:

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the December 31, 2003 actuarial valuation of TCDRS. 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 Ms. Karen I. Steffen, Actuary, Milliman USA, February 16, 2005

Actuarial Review by Mr. Mark R. Fenlaw, Actuary, Rudd & Wisdom, February 21, 2005

GLOSSARY OF ACTUARIAL TERMS:

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.