Projected 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 2617 will decrease, by 0.130% of payroll, the projected normal cost of ERS for fiscal year 2006. The fiscal year 2006 estimated ERS net liability balance will decrease approximately $87.0 million, from $506.0 million to $419.0 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, 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 proposal, the state contribution rate necessary to achieve a 31-year funding for ERS would decrease to 6.821% of payroll for fiscal year 2006.

Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): HB 2617 will not change the projected normal cost for the LECOSRF for fiscal year 2006.  The fiscal year 2006 estimated net asset balance will remain $49.5 million under the proposal. 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 2617, to be effective immediately if receiving required votes or if not, September 1, 2005, would provide the following changes:

·         The current 90-day waiting period for new or re-employed state employees or officers to become members of ERS and LECOSRF, applicable to those hired or rehired through August 31, 2005, is extended to those hired or rehired after August 31, 2005.

·         Reduces the credit purchase option available to members of ERS and LECOSRF who wish to establish equivalent membership service from 60 months to 36 months.

·         Authorizes ERS to make a lump-sum payment to a retiree or beneficiary of ERS in lieu of an annuity if the actuarial present value of an annuity is no more than $10,000.

·         Restricts disability retirement benefits to members who are contributing to ERS at the time of disability.

·         Increases the interest charges to members of ERS who re-establish service credit from an annual rate of 5% to an annual rate of 10%, effective September 1, 2006.

·         Service under the optional retirement program (ORP) is no longer used to determine eligibility for non-occupational disability retirement.

·         Members must apply for non-occupational disability retirement within two years of the date of the member ceased making contributions to ERS.

·         Actuarially reduces the standard disability retirement annuity for commencement before the age that the member would be eligible for a service retirement annuity.

·         Restricts death benefit plans to members contributing to ERS at the time of death.

·         Service with other Texas governmental employers will no longer be considered in determining eligibility for a service retirement annuity.

FINDINGS AND CONCLUSIONS:

HB 2617 would extend the 90-day waiting period for membership in ERS and LECOSRF for state employees and officers hired or rehired beyond August 31, 2005. The waiting period will decrease the covered payroll for future years and decrease the actuarial accrued liability; however, it will also decrease the value of assets in the future because fewer contributions are received. The waiting period extension will also cause future ERS and LECOSRF normal cost rates to increase slightly because the entry age of future members will be higher. The higher normal cost rates will be applied to a lower covered payroll, resulting in a lower dollar amount of normal cost in the future. The net liability balance is amortized as a level percentage of future payroll and the amortization amount as a percentage of payroll will be higher because the amount will be amortized against a lower future payroll.

HB 2617 also provides for actuarially reduced disability annuities, which will decrease the normal cost and the net liability balance. Many of the proposed changes in the bill are for plan provisions that are recognized as actuarial gains or losses when the events occur, but they would not have an immediate impact. The ERS actuary estimates the overall increase in actuarial gains or decrease in actuarial loses for ERS to be approximately $10 million to $20 million annually in total. Changing the rate of interest to re-establish service credit is considered the most significant in the analysis, at approximately $5 million to $10 million annually. Other changes in the bill are expected to increase the actuarial gains or decrease the actuarial loses by lesser amounts. The analysis estimates that the net actuarial loses will be reduced or the net actuarial gains will be increased for ERS by $5 million for fiscal year 2006 and by $15 million per year thereafter.

The proposal will decrease, by 0.130% of payroll, the projected normal cost of ERS for fiscal year 2006. The estimated ERS net liability balance for fiscal year 2006 will decrease approximately $87.0 million, from $506.0 million to $419.0 million.  The provisions will not change the normal cost as a percentage of payroll of LECOSRF in fiscal year 2006 and the projected net asset balance of LECOSRF in fiscal year 2006 will remain $49.5 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 decrease to 6.821%. 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 for the provisions of actuarially reduced disability annuities, that the reductions will be based on actuarial factors that are similar to the actuarial basis for other ERS actuarial factors, such as optional benefit forms and the credit purchase option (1994 Group Annuity Mortality, 50% male/50% female, and 8% interest).

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 8, 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.