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.

Projected for Fiscal Year 2006

*Under current law, a state contribution rate of 0.0% of payroll is sufficient for fiscal year 2006 to achieve a 31-year funding for LECOS. Under the proposal, a state contribution rate of 1.946% of payroll is needed to achieve a 31-year funding for fiscal year 2006 under the requirements of Section 811.006 of Texas Government Code.

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

ACTUARIAL EFFECTS:

Employees' Retirement System (ERS): HB 2670 will reduce the normal cost rate 0.032% from 12.45% to 12.418%, and reduce the net liability balance $41.3 million. The proposal will not trigger an increase in the state contribution rate under Section 811.006. Under current law the state contribution rate required to pay normal cost and amortize the unfunded actuarial accrued liability over 31 years is 7.044% of payroll for fiscal year 2006, and 7.129% of payroll for fiscal year 2007. Under the proposal, the corresponding contribution rates drop to 6.964% of pay for fiscal year 2006, and to 7.045% of pay for fiscal year 2007.

Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): HB 2670 will increase the normal cost 0.222% of payroll, from 1.621% of payroll to 1.843% of payroll. The actuarial accrued liability will increase $72.6 million. The net asset balance of $49.5 million will become a net liability balance of $23.1 million. The state does not make contributions to the LECOSRF under the current structure because of the existence of the net asset balance. Eventually, state contributions of at least 1.621% of payroll will be required as the net asset balance is depleted sometime in fiscal 2008. Under Section 811.006, the proposal will trigger state contributions to LECOSRF of 1.946% of payroll for fiscal 2006 and 1.952% of payroll for fiscal 2007.

SYNOPSIS OF PROVISIONS:

HB 2670, to be effective September 1, 2005, would allow Law Enforcement and Custodial Officers (LECOSRF) members with at least 25 years of LECOSRF service to retire under the LECOSRF with unreduced benefits. For many such members, this will allow them to receive unreduced benefits earlier than under the current plan provisions. Because the ERS portion of the member’s service retirement benefit begins at the member’s normal retirement age (NRA), which this bill does not change, this bill will not provide for earlier commencement of benefits payable from the ERS.

FINDINGS AND CONCLUSIONS:

The availability of unreduced service retirement benefits at younger retirement ages under this bill and the assumed increase in retirement rates at these ages will increase the actuarial accrued liability and the normal cost for the LECOSRF. The assumed increase in retirement rates at ages before the NRA with no change in the ERS commencement age of service retirement benefits will decrease the actuarial accrued liability and the normal cost for the ERS.

The ERS actuary certifies that the changes in this bill would not require an increase in the State contribution to the ERS to comply with the requirements of Texas Government Code Section 811.006. However, the State contribution rate necessary to fund the normal cost and amortize the unfunded liabilities over a 31-year period would be 6.964% of payroll for fiscal year 2006 and 7.045% for fiscal year 2007.

The ERS actuary also certifies that the changes in this bill would allow the LECOSRF to remain actuarially sound and to comply with the requirements of Texas Government Code Section 811.006 only if the State contribution is increased to 1.946% of payroll for fiscal year 2006 and to 1.952% for fiscal year 2007.

METHODOLOGY AND STANDARDS:

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 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.