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

ACTUARIAL EFFECTS: CSHB 2568 would decrease, by 1.31% of pay, the normal cost from 11.72% to 10.41% of payroll.  The Unfunded Actuarial Accrued Liability (UAAL) would increase by $1,144.0 million, from $11,053.0 million to $12,197.0 million. However the Present Value of Future Benefits would decrease by $1,501 million, from $121,267 million to $119,766 million. The current contribution rate necessary to amortize the UAAL over 30 years is 8.11% of payroll. Under the proposal, the 30-year contribution rate would decrease by 1.10% to 7.01% of payroll.

The provisions of this bill result in cost savings to the plan, as demonstrated by the reduction in the Present Value of Future Benefits and the 30-Year contribution rate percentage. The increase in the UAAL is caused by the interaction between the actuarial methodology used in the actuarial valuation based on entry age and the fact that the provision changes will affect new employees more that current employees. This causes a shift in the allocation of projected plan liabilities from future service to past service. Thus while the UAAL increases, the Present Value of Future Benefits declines.  

SYNOPSIS OF PROVISIONS

This bill, to be effective September 1, 2005, would provide the following changes:

·         Require members, hired on or after January 1, 2006, making out-of-state service purchases to pay the full actuarial cost of such purchases.

·         Increase the minimum age required for an unreduced retirement benefit to age 60 for members hired on or after September 1, 2006 and for these participants, adds a new reduced retirement benefit for members who have satisfied the Rule of 80, with a 5% reduction for each year under the age of 60.

·         Eliminate the early retirement subsidy provided by Section 824.202(c). This provision will not apply to TRS members who have already met eligibility for retirement or who have, on or before August 31, 2005, met one of the following: (i) age 50, (ii) 25 years of service, or (iii) age and years of service equal to 70.

·         Increase the number of years included in the final average salary calculation from 3 years to 5 years. This provision will not apply to TRS members who have already met eligibility for retirement or who have, on or before August 31, 2005, met one of the following: (i) age 50, (ii) 25 years of service, or (iii) age and years of service equal to 70.

·         Require a member to satisfy the rule of 90 to be eligible to elect a partial lump sum distribution. This provision will not apply to TRS members who have already met eligibility for retirement or who have, on or before August 31, 2005, met one of the following: (i) age 50, (ii) 25 years of service, or (iii) age and years of service equal to 70.

·         Require local employers to pay  contributions to TRS during the first 90 days of an employee’s employment. The Texas Constitution requires the state to make contributions of 6% or more for all members, so TRS would potentially receive double contributions for these members.

·         Require employers of a TRS retiree to pay the member contribution and the employer contribution unless they were reported to TRS in January 2005.

·         Repeal the section, effective January 1, 2006, that allows members with seven years of actual membership service to purchase up to three years of “air-time” service.

FINDINGS AND CONCLUSIONS

CSHB 2568 proposes numerous changes to the Education Code and Government Code. The proposal would impact the benefit and contribution provisions of TRS. Certain provisions in the bill will not apply to TRS members who have already met eligibility for retirement or who have, on or before August 31, 2005, met one of the following: (i) age 50, (ii) 25 years of service, or (iii) age and years of service equal to 70.

According to the TRS actuary, certain provisions in the bill can not be effectively modeled through an actuarial valuation, but may produce a cost savings. The bill would require that new hires after December 31, 2005 pay the full actuarial cost for purchasing out-of-state service. Under current law, members may purchase this credit at a reduced cost. The bill will require that employers who employ a TRS retiree pay the employee and employer contribution for any retiree employed during a pay period. Currently, no contributions are made to TRS for an employed TRS retiree, though the retiree continues to receive their annuity (under certain conditions) and receive coverage in the current retiree medical plan. This provision will produce additional monies that are not currently being received by TRS and will encourage current employees to defer their retirement, decreasing plan costs over time. Additionally, the provisions of the bill would require that a member meet the rule of 90 to be eligible for a partial lump sum option (the ability under current law for TRS members to elect to an actuarially reduced benefit along with a lump sum payment). This will also encourage non-grandfathered current employees to defer their retirement, decreasing plan costs over time. The proposal would also eliminate the ability of a member with seven years of actual TRS membership to purchase up to an additional three years of “air time”.

CSHB 2568 would decrease, by 1.31% of pay, the normal cost from 11.72% to 10.41% of payroll.  The Unfunded Actuarial Accrued Liability (UAAL) would increase by $1,144.0 million, from $11,053.0 million to $12,197.0 million. However, the Present Value of Future Benefits would decrease $1,501 million, from $121,267 million to $119,766 million. The current contribution rate necessary to amortize the UAAL over 30 years is 8.11% of payroll. Under the proposal, the 30-year contribution rate would decrease by 1.10% to 7.01% of payroll. Though the provisions of the bill would generate a cost savings for TRS, the UAAL of TRS increases under the proposal. According to the TRS actuary, this is the result of the funding methodology employed that allocates the present value of future benefits among future years’ costs, current year’s costs, and prior years’ costs. As the modifications impact new hires more than the current population, along with the use of a new entrant profile for determining the normal cost rate, the normal cost rate decreased more than the present value of future benefits for current employees and resulted in more of the liabilities being allocated to prior years of service, thus increasing the net liability balance.

METHODOLOGY AND STANDARDS

The TRS actuary modified the retirement rates for employees who are eligible for early retirement but who will no longer be eligible for the subsidy that is currently available for employees who are at least age 55 with 20 or more years of service. Also, the retirement rates at age 60 for all members who reach the rule of 80 before age 60 have been correspondingly increased. For each year that a member must extend their career to reach eligibility for an unreduced benefit, the age 60 retirement rate will be increased by 10%.

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 valuation of TRS. The actuarial analysis does not take into account the impact on future valuations of the recognition of the deferred investment gains that have yet to be recognized in the actuarial value of assets. 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. May 5, 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.

Present Value of All Projected Benefits—The discounted value of all benefits expected to be paid to current plan participants. As a part of the actuarial valuation process, this total projected liability is allocated to past service (the Actuarial Accrued Liability), to current service (the Normal Cost), and to future sevice (the Present Value of Future Normal Costs).

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.