Projected for Fiscal Year 2006

*Under current law, a state contribution rate of 7.044% of payroll is needed for fiscal year 2006 to achieve a 31-year funding for ERS under the requirements of Section 811.006 of Texas Government Code. Under the proposal, a state contribution rate of 7.045% of payroll is needed to achieve a 31-year funding for fiscal year 2006.

Projected for Fiscal Year 2006

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

ACTUARIAL EFFECTS:

Employees' Retirement System (ERS): HB 1809 will not change the projected normal cost of ERS for fiscal year 2006. The fiscal year 2006 estimated ERS net liability balance will increase approximately $100,000, from $506.0 million to $506.1 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 7.044% 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. Under the proposal, the state contribution rate necessary to achieve a 31-year funding for ERS would increase to 7.045% of payroll.

Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): HB 1809 will not change the projected normal cost as a percentage of payroll for the LECOSRF for fiscal year 2006.  Though the provisions will not change the normal cost as a percentage of payroll of LECOSRF in fiscal year 2006, the total covered payroll would increase thus generating an increase in the dollar amount of the normal cost by approximately $33,000. The fiscal year 2006 estimated net asset balance will decrease by $400,000, from $49.5 million to $49.1 million. The current contribution rate is sufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31-years through fiscal year 2007.  

SYNOPSIS OF PROVISIONS:

HB 1809, to be effective September 1, 2005, would provide the following changes:

·         The definition of law enforcement officer would include law enforcement employees in the Texas Department of Insurance and the State Fire Marshall

FINDINGS AND CONCLUSIONS:

HB 1809 would expand the definition of law enforcement officer to include law enforcement employees in the Texas Department of Insurance and the State Fire Marshall. According to ERS, the expanded definition would include approximately 47 members with average salaries of $42,079, average commissioned law enforcement service of 5.9 years, and average state service of 10.4 years.

The proposal will not change the normal cost of ERS for fiscal year 2006. However, the estimated ERS net liability balance for fiscal year 2006 will increase approximately $100,000, from $506.0 million to $506.1 million.  Though the provisions will not change the normal cost as a percentage of payroll of LECOSRF in fiscal year 2006, the total covered payroll would increase thus generating an increase in the dollar amount of the normal cost by approximately $33,000. The projected net asset balance of LECOSRF in fiscal year 2006 will decrease by $400,000, from $49.5 million to $49.1 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 7.044% of payroll in fiscal year 2006 to achieve a 31-year funding for ERS. Under the proposal, the necessary state contribution for 31-year funding would increase to 7.045%. LECOSRF will remain actuarially sound at the current state contribution rate through fiscal year 2007. According to the ERS/LECOSRF actuary, it is anticipated that at some point in fiscal year 2008 that the actuarial accrued liability will exceed the actuarial value of assets for LECOSRF. A state contribution of 1.621% of payroll will be required when the net asset balance is depleted.

METHODOLOGY AND STANDARDS:

The ERS/LECOSRF actuary assumed that all current and future commissioned law enforcement service of active officers of the Texas Department of Insurance and the State Fire Marshall would be treated as law enforcement service for LECOSRF. The analysis further assumed that this group will have similar patterns of pay increases, terminations, and retirements as other law enforcement officers.

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. Except as otherwise noted, the analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2005 update of 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, April 11, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April 13, 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.