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 7.073% of payroll is needed to achieve a 31-year funding for fiscal year 2006.

Projected for Fiscal Year 2006

*Under current law, normal cost plus 30-year amortization for TRS will require a state contribution rate of 8.11% of payroll for fiscal year 2006. Under the proposal, a state contribution rate of 8.12% of payroll is needed to achieve a 30-year funding for fiscal year 2006. According to TRS, passage of the bill without the increase in the state contribution rate would violate TRS funding rules.

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

ACTUARIAL EFFECTS:

Employees' Retirement System (ERS): HB 1960 will decrease, by .001% of payroll, the projected normal cost of ERS for fiscal year 2006. Though the provisions will slightly decrease the projected normal cost as a percentage of payroll, the total covered payroll would increase thus generating an increase in the dollar amount of the normal cost by approximately $9.3 million for ERS (though there would be a similar decrease in the dollar amount of the normal cost for TRS). The fiscal year 2006 estimated ERS net liability balance will increase approximately $33.1 million, from $506.0 million to $539.1 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 7.073% of payroll.

Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): HB 1960 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 $1.2 million for LECOSRF. The fiscal year 2006 estimated net asset balance will decrease by $7.4 million, from $49.5 million to $42.1 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. 

Teacher Retirement System (TRS): HB 1960 will not change the normal cost as a percentage of payroll for the TRS, though the total dollar amount of normal cost would decrease overall. The net liability balance will increase by $22.0 million, from $11,053.0 million to $11,075.0 million. The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over a 30-year period. Under current law, the state contribution rate would need to increase from 6.0% of payroll to 8.11% of payroll to achieve a 30-year funding for TRS. Under the proposal, the state contribution rate necessary to achieve a 30-year funding for TRS would increase to 8.12% of payroll.

SYNOPSIS OF PROVISIONS:

HB 1960, to be effective September 1, 2005, would provide the following changes:

·         The definition of law enforcement officer would include law enforcement employees employed by institutions of higher education, transferring the members from TRS to ERS and LECOSRF.

FINDINGS AND CONCLUSIONS:

HB 1960 would expand the definition of law enforcement officer to include law enforcement employees employed by institutions of higher education, transferring the members from TRS to ERS and LECOSRF. All service as a commissioned law enforcement officer accrued to the effective date under TRS would be considered under ERS and LECOSRF to determine eligibility for and amounts of retirement or death benefits. At retirement or death, TRS would be required to pay a proportionate share of the combined ERS and LECOSRF benefits based on the ratio of TRS service to total TRS and ERS service under Section 805.008 of Government Code.

The proposal will decrease, by .001% of payroll, the projected normal cost of ERS for fiscal year 2006. Though the provisions will not change the normal cost as a percentage of payroll of LECOSRF in fiscal year 2006 and decrease slightly for ERS, the total covered payroll would increase thus generating an increase in the dollar amount of the normal cost by approximately $1.2 million for LECOSRF and $9.3 million for ERS. The estimated ERS net liability balance for fiscal year 2006 will increase approximately $33.1 million, from $506.0 million to $539.1 million.  The projected net asset balance of LECOSRF in fiscal year 2006 will decrease by $7.4 million, from $49.5 million to $42.1 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 7.073%. 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, at which point a state contribution of 1.621% of payroll will be necessary to keep the fund adequately financed.

HB 1960 would not affect the normal cost, as a percentage of payroll, of TRS. As noted above, the transfer of members will change the dollar amount of normal cost of the systems involved and thus TRS will experience an overall decrease in the total dollar amount of the system’s normal cost. The net liability balance for TRS will increase by $22.0 million, from $11,053.0 million to $11,075 million. The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 30 years. Under current law, the state contribution rate would need to increase from 6.0% of payroll to 8.11% of payroll to achieve a 30-year funding for TRS. Under the proposal, the state contribution rate necessary to achieve a 30-year funding for TRS would increase to 8.12% of payroll. According to TRS, passage of the bill without this increase in the state contribution rate would violate TRS funding rules.

METHODOLOGY AND STANDARDS:

The analyses from ERS and TRS assumed the expanded definition would include approximately 1,700 to 2,000 employees and that all current and future service of active law enforcement officers of institutions of higher education would be treated as law enforcement service for both ERS and LECOSRF. The ERS/LECOSRF 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 TRS, 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 TRS, 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 12, 2005

Actuarial Analysis by Lewis Ward, Actuary, Gabriel, Roeder, Smith & Co, April 12, 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.