Honorable Robert Duncan, Chair, Senate Committee on State Affairs
FROM:
John S. O'Brien, Deputy Director, Legislative Budget Board
IN RE:
HB3169 by Crownover (Relating to purchase of equivalent membership service credit in the Teacher Retirement System of Texas.), As Engrossed
HB 3169 as engrossed would repeal on January 1, 2006 Section 823.405 of the Government Code, which allows members of the Teacher Retirement System (TRS) with seven years of actual membership service to purchase up to three years of “air time” service. The service is not required to be related to any actual employment history with a public employer.
TRS currently assumes that no member will purchase “air time”. When a member purchases “air time”, the current provisions of Section 823.405 of the Government Code require the employee to pay the full actuarial cost of the service purchased.
The bill is not estimated by the TRS actuary to have a material actuarial effect on TRS.
TRS currently incurs certain actuarial losses from the purchase of service credit. While the provision requires payment of the actuarial present value of additional retirement benefits, there is an early retirement table applicable to employees with more than 20 years of service credit but who do not yet meet the rule of 80. The reductions made by this table fall well short of the actuarial cost of retiring earlier and are used where applicable to estimate the cost of service credit, allowing significant reductions in the cost to participants.
There are two other sources of losses from the purchase of service credit. One is that people who choose to purchase annuities may be generally in better health and likely to live longer on average; certainly those who believe themselves to be in poor health are unlikely to purchase service when they could just retire earlier under the early retirement reduction tables. The other source is the assumed rate of return. TRS currently assumes an 8 percent rate of return, while in the private market the rate of return on an annuity would only be 5.5 to 6 percent. If TRS earns 8 percent over the period of the annuity there is no loss, but there is a substantial risk that earnings fall short and that the state will have to make up the difference; no "risk premium" is charged.
Passage of the bill would eliminate these sources of loss to the pension fund. Additionally, to the extent that the bill encourages later retirement, it would have a positive impact on TRS-Care.
SOURCE:
Actuarial Analysis by Lewis Ward & W. Michael Carter, Gabriel, Roeder, Smith & Co. April 18, 2005