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

ACTUARIAL EFFECTS:

1.       The normal cost of TRS would be increased by 0.12% of pay, from 11.72% of pay to 11.84% of pay.

2.       The unfunded actuarial accrued liability (UAAL) would increase by $1,208 million, from a UAAL of $11,053 million to $12,261 million.

3.       Since the current funding period is infinite and the UAAL would increase under the proposal, the funding period would remain infinite.

4.       The state contribution rate to maintain 30 year funding would increase from the current 8.11% to 8.55% of pay as determined by the August 31, 2004 actuarial valuation as updated for the actuarial value of assets as of February 28, 2005.

Based on the above information, since the funding period of TRS already exceeds 30 years by one or more years, the passage of this bill without additional funding would violate TRS funding statutes.

SYNOPSIS OF PROVISIONS:

HB 2757 increases the benefit multiplier from the current 2.3% to 2.5% if the sum of a member’s age and service is greater than or equal to 90 (rule of 90). The higher multiplier will be applicable to all years of service, not just service accrued after attaining the Rule of 90.

FINDINGS AND CONCLUSIONS:

Under the proposal, the TRS normal cost rate would increase 0.12% of payroll, from 11.72% to 11.84%, and the unfunded actuarial accrued liability would increase $1,208 million, from $11,053 million to $12,261 million. If adopted, the proposal would provide an enhanced service retirement annuity in the case of members where the sum of age and service credit equal 90 or more. The enhanced annuity equals 2.5% of the best 3 year average compensation per year of service credit. Under current law, the annuity would equal 2.3% of best 3 year average compensation per year of service credit.

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:

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. The analysis uses revised retirement rates, and assumes a 15% reduction in retirement rates for eligible members who have met the rule of 80, along with an corresponding increase in the first year after reaching the rule of 90. According to the PRB actuary, the actuarial assumptions, methods, procedures, and conclusions appear to be reasonable, except as otherwise noted. 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 Lewis Ward & W. Michael Carter, FSA, GRS, April 8, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., April 11, 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.