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

ACTUARIAL EFFECTS:

The ERS actuary indicated HB 2366 may be expected to generate actuarial losses at the plan level of approximately $400,000 per year. HB 2366 will not change the projected normal cost of ERS for fiscal year 2006. The fiscal year 2006 estimated ERS net liability balance will remain at $506.0 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 and under the proposal, the state contribution rate would need to increase from 6.0% of payroll to 7.044% of payroll for fiscal year 2006 and 7.071% of pay for fiscal year 2007 to achieve a 31-year funding for ERS; unless contributions were raised to these levels passage of the proposal would violate Section 811.006 of Texas Government Code.

SYNOPSIS OF PROVISIONS

This bill, to be effective September 1, 2005, would provide the following changes:

·         Allow members to purchase military service for service in the Texas National Guard or the reserves of the United States armed forces at a rate of one month for each three months served. This purchase of military service would require release under honorable conditions.

FINDINGS AND CONCLUSIONS

This bill would expand the purchase of military service credit. Currently, the purchase of military service is not explicitly anticipated by the actuarial assumptions. When such service is purchased, it would generate actuarial losses for ERS. The total net actuarial losses for the purchase of military service during fiscal year 2004 were estimated to be $4.0 million. Similar amounts of net actuarial losses occurred in prior years. Allowing members to purchase military service for service with the Texas National Guard or reserves of the armed forces of the United States would be expected to increase the net actuarial loss by approximately 10%, or $400,000 a year. From the perspective of the members who would establish credit under the proposal, the value of the net incremental benefit attributable to such service would likely be significant for such members.

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 and 7.071% for fiscal year 2007 to achieve a 31-year funding for ERS. The current proposal does not have a material affect on the contribution rates.

This Act takes effect immediately if it receives a vote of two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution.  If this Act does not receive the vote necessary for immediate effect, this Act takes effect September 1, 2005

METHODOLOGY AND STANDARDS

For this actuarial analysis, the ERS actuary assumed that the purchase of this additional military service would result in net actuarial losses of approximately $400,000 per year (approximately 10% of the current amount of annual net actuarial losses expected for military service). The analysis assumes no further changes are made to ERS, 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, except as otherwise noted, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2004 actuarial valuations of ERS. 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 15, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April 18, 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.