TO: | Honorable Craig Eiland, Chair, House Committee on Pensions & Investments |
FROM: | John S. O'Brien, Deputy Director, Legislative Budget Board |
IN RE: | SB1176 by Armbrister (Relating to systems and programs administered by the Employees Retirement System of Texas.), Committee Report 2nd House, Substituted |
Projected for Fiscal Year 2006
EMPLOYEES' RETIREMENT SYSTEM |
Current |
Proposed |
Difference |
State Contribution Employee Contribution Total Contribution |
6.0 % 6.0 % 12.0 % |
6.0 % 6.0 % 12.0 % |
0.0% 0.0% 0.0% |
31-year Funding Contribution Required |
7.044% |
6.821% |
-0.223% |
Normal Cost (% of payroll) |
12.450 % |
12.320 % |
-0.130% |
Net Liability Balance(millions) |
$506.0 |
$419.0 |
-$87.0 |
Funded Ratio |
97.6% |
98.0% |
+0.4% |
Amortization Period (years) as of actuarial valuation |
Infinite |
Infinite |
|
Projected for Fiscal Year 2006
LAW ENFORCEMENT CUSTODIAL OFFICERS' SUPPLEMENTAL RETIREMENT FUND |
Current |
Proposed |
Difference |
State Contribution Employee Contribution Total Contribution |
0.0 % 0.0 % 0.0 % |
0.0 % 0.0 % 0.0 % |
0.0% 0.0% 0.0% |
Normal Cost (% of payroll) |
1.621 % |
1.621 % |
0.00% |
Net Asset Balance (millions) |
$49.5 |
$49.5 |
$0.0 |
Funded Ratio |
107.6% |
107.6% |
0.0% |
Period (years) as of that net asset funds normal cost |
2.6 |
2.7 |
+0.1 |
A Glossary of Actuarial Terms is provided at the end of this impact statement.
ACTUARIAL EFFECTS:
Employees' Retirement System (ERS): SB 1176 will decrease, by 0.130% of payroll, the projected normal cost of ERS for fiscal year 2006. The fiscal year 2006 estimated ERS net liability balance will decrease approximately $87.0 million, from $506.0 million to $419.0 million. The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Under current law, the state contribution rate would need to increase from 6.0% of payroll to 7.044% of payroll for fiscal year 2006 to achieve a 31-year funding for ERS. Under the proposal, the state contribution rate necessary to achieve a 31-year funding for ERS would decrease to 6.821% of payroll for fiscal year 2006.
Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): SB 1176 will not change the projected normal cost for the LECOSRF for fiscal year 2006. The fiscal year 2006 estimated net asset balance will remain $49.5 million under the proposal. The current contribution rate is sufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31-years through fiscal year 2007.
SYNOPSIS OF PROVISIONS:
SB 1176, to be effective
FINDINGS AND CONCLUSIONS:
SB 1176 would extend the 90-day waiting period for membership in ERS and LECOSRF for state employees and officers hired or rehired beyond
SB 1176 also provides for actuarially reduced disability annuities, which will decrease the normal cost and the net liability balance. Many of the proposed changes in the bill are for plan provisions that are recognized as actuarial gains or losses when the events occur, but they would not have an immediate impact. The ERS actuary estimates the overall increase in actuarial gains or decrease in actuarial loses for ERS to be approximately $5 million to $20 million annually in total. Changing the rate of interest to re-establish service credit is considered the most significant in the analysis, at approximately $5 million to $10 million annually. Other changes in the bill are expected to increase the actuarial gains or decrease the actuarial loses by lesser amounts. The analysis estimates that the net actuarial loses will be reduced or the net actuarial gains will be increased for ERS by $5 million for fiscal year 2006 and by $15 million per year thereafter.
The proposal will decrease, by 0.130% of payroll, the projected normal cost of ERS for fiscal year 2006. The estimated ERS net liability balance for fiscal year 2006 will decrease approximately $87.0 million, from $506.0 million to $419.0 million. The provisions will not change the normal cost as a percentage of payroll of LECOSRF in fiscal year 2006 and the projected net asset balance of LECOSRF in fiscal year 2006 will remain $49.5 million.
The current contribution rate for ERS is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Under current law, the state contribution rate would need to increase from 6.0% of payroll to 7.044% of payroll in fiscal year 2006 to achieve a 31-year funding for ERS. Under the proposal, the necessary state contribution for 31-year funding would decrease to 6.821%. LECOSRF will remain actuarially sound at the current state contribution rate through fiscal year 2007. According to the ERS/LECOSRF actuary, it is anticipated that at some point in fiscal year 2008 that the actuarial accrued liability will exceed the actuarial value of assets for LECOSRF. A state contribution of 1.621% of payroll will be required when the net asset balance is depleted.
The changes in the service purchase option and the lump sum payment in lieu of an annuity are not anticipated to have a material impact on the ERS or LECOSRF because the revised benefits are assumed to be actuarially equivalent to the current benefits.
METHODOLOGY AND STANDARDS:
The ERS/LECOSRF actuary assumed that for the provisions of actuarially reduced disability annuities, that the reductions will be based on actuarial factors that are similar to the actuarial basis for other ERS actuarial factors, such as optional benefit forms and the credit purchase option (1994 Group Annuity Mortality, 50% male/50% female, and 8% interest).
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
SOURCES:
Actuarial Analysis by Steven R. Rusher, Actuary, Towers Perrin,
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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