TO: | Honorable Kent Grusendorf, Chair, House Committee on Public Education |
FROM: | John S. O'Brien, Deputy Director, Legislative Budget Board |
IN RE: | HB3254 by Van Arsdale (Relating to hiring Teacher Retirement System of Texas retirees to fill positions in acute shortage areas.), As Introduced |
Teacher Retirement System |
Current |
Proposed |
Difference |
State Contribution Employee Contribution Total Contribution |
6.00 % 6.40 % 12.40 % |
6.00 % 6.40 % 12.40 % |
0.0% 0.0% 0.0% |
30-year Funding Contribution Required |
8.11% |
8.23% |
+0.12% |
Normal Cost (% of payroll) |
11.72 % |
11.78 % |
+ 0.06% |
Net Liability (millions) |
$11,053 |
$11,287 |
+$234.0 |
Amortization Period (years) |
Infinite* |
Infinite |
0.0 |
A Glossary of Actuarial Terms is provided at the end of this impact statement.
ACTUARIAL EFFECTS: HB 3254 will increase the normal cost of the Teacher Retirement System (TRS) by .06% of payroll, from 11.72% to 11.78%. The unfunded actuarial accrued liability will increase under the proposal by $234 million, from $11,053.0 million to $11,287.0 million. Currently, a state contribution of 8.11% of payroll is necessary to amortize the unfunded actuarial accrued liability over 30 years. The proposed change would require an increase to 8.23% of payroll to amortize the unfunded actuarial accrued liability over 30 years. Due to statutory requirements, HB 3254, if enacted without additional funding, would violate TRS funding statutes since the TRS funding period already exceeds 30 years by one or more years.
SYNOPSIS OF PROVISIONS
This bill, to be effective immediately if receiving required votes or if not,
· Modify the “return to work” provision to permit teachers to return to work under certain conditions after only one month separation from service instead of the current law of one year, without a suspension of their retirement annuity. These conditions would require that they are certified teachers, in a position as a classroom teacher, retired with an annuity that is unreduced for early age, and are rehired in an acute shortage area as defined by the Commissioner of Education.
FINDINGS AND CONCLUSIONS
Under current TRS rules, with certain exceptions, a retiree is not entitled to service or disability retirement benefit payments for any month in which the retiree is employed in any position by a Texas Public Educational Institution. HB 3254 would modify the existing return to work provisions to permit teachers to return to work after only one month separation from service without a suspension of their retirement annuity if they are certified, in a position as a classroom teacher on as much as a full-time basis, retired with an annuity that is unreduced for early age, and are rehired in an acute shortage area as defined by the Commissioner of Education. Current law requires a twelve month separation of service for such teachers employed more than half time to not have a reduction in their annuity.
The normal cost, under the proposal, will increase by .06% of payroll from 11.72% to 11.78%. The unfunded actuarial accrued liability will increase by $234 million, from $11,053.0 million to $11,287.0 million. The current state contribution of 6.0% of payroll is insufficient to amortize the unfunded actuarial accrued liability over 30 years. Instead, a state contribution of 8.11% of payroll is necessary to amortize the unfunded actuarial accrued liability over 30 years. The proposed change would require an increase to 8.23% of payroll to amortize the unfunded actuarial accrued liability over 30 years.
The TRS actuary noted that the provisions of the bill may conflict with an Internal Revenue Code (IRC) prohibition against providing an in-service distribution to a plan participant in a defined benefit plan while that participant is actively employed by the employer, and recommends legal counsel to resolve any uncertainty.
METHODOLOGY AND STANDARDS
In the analysis of HB 3254, the TRS actuary assumed that approximately 30% of the retiring members of TRS are certified teachers, that 25% of eligible teachers are in acute shortage areas as defined by the Commissioner of Education, and that 100% of eligible certified teachers working in an acute shortage will retire at the time they are initially eligible to retire without a reduction for early age and return to work one month later under the provisions of the bill. Therefore, the TRS actuary has increased the retirement rates for members in their first year of eligibility for unreduced retirement.
The analysis assumes no further changes are made to TRS 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 valuations of TRS. 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 Analyses by Lewis Ward & W. Michael Carter, Gabriel, Roeder, Smith & Co.
Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc.,
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.
Source Agencies: | 338 Pension Review Board
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LBB Staff: | JOB, WM
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