*The current contribution rate is insufficient to amortize the unfunded liability over a 30-year period. Currently, the state contribution rate necessary to maintain a 30-year funding period is 7.31% of payroll. Under the proposal, the required 30-year amortization rate would increase by .10% of payroll, from 7.31% to 7.41%.

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

ACTUARIAL EFFECTS:

SB 482 would increase the normal cost of the Teacher Retirement System (TRS) by .03% of payroll, from 11.72% to 11.75% . The unfunded actuarial accrued liability would increase under the proposal by $244 million, from $7.953 billion to $8.197 billion. Currently, a state contribution of 7.31% of payroll is necessary to amortize the unfunded actuarial accrued liability over 30 years. The proposed change would require an increase to 7.41% of payroll to amortize the unfunded actuarial accrued liability over 30 years. Due to statutory requirements, SB 482, 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 September 1, 2005, would provide the following changes:

·         Allows a retired teacher to be rehired without suspension of their retirement annuity, if the teacher is rehired primarily as a mentor to other teachers. In order to qualify for the program, the teacher must be certified and have taught in a public school for a minimum of 5 years.

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. Exceptions include certain work as a substitute, certain work in positions other than a substitute on no more than on a half-time basis for the month, in one or more positions on as much as a full-time basis under certain limitations as to when the work occurs, in a position other than as a substitute on no more than half-time basis for no more than 90 days in a school year, if the retiree is a disability retiree, certain acute shortage positions, certain principal or assistant principal positions, and certain bus driver positions. SB 482 would expand the exceptions to include certain positions as a mentor for classroom teachers.

The normal cost, under the proposal, will increase by .03% of payroll from 11.72% to 11.75%. The unfunded actuarial accrued liability will increase by $244 million, from $7.953 billion to $8.197 billion. 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 7.31% of payroll is necessary to amortize the unfunded actuarial accrued liability over 30 years. The proposed change would require an increase to 7.41% of payroll to amortize the unfunded actuarial accrued liability over 30 years.

METHODOLOGY AND STANDARDS

In the analysis of SB 482, the TRS actuary assumed that approximately 30% of the retiring members of TRS are certified teachers and that approximately 40% of the eligible teachers would take advantage of the mentoring program by electing to retire at their first eligibility for unreduced retirement. The TRS actuary, therefore, 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. The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in 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. February 28, 2005

Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., February 28, 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.