Projected 2007          

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

ACTUARIAL EFFECTS:

HB 1019 would not change the normal cost of the Employees Retirement System (ERS), though the proposal would increase the unfunded actuarial accrued liability (UAAL) of ERS by $900,000. This increase in the UAAL is not sufficient to change the funding rate necessary to satisfy a 31-year retirement.

HB 1019 would not change the normal cost rate of the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF), but would increase the UAAL by $2.8 million. This increase in the UAAL would cause the funding rate necessary to satisfy a 31-year funding requirement to increase from 1.60% to 1.61%.  The dollar amount of the normal cost and 31-year funding contribution are additionally increased because the proposal increases the LECOSRF valuation payroll. For fiscal year 2008, the ERS actuary projects that the proposal would increase the LECOSRF normal cost by approximately $138,000, and the 31-year funding contribution by approximately $276,000.  These dollar amounts are projected to grow at 4% per year in the future years (at the same rate as the growth in the payroll).

Actuarial Soundness of ERS

The ERS analysis indicates that under the current benefit structure, the current contribution rates are not actuarially sound. The analysis indicates that the additional rate needed to satisfy a 31-year funding requirement is projected to be 0.85% at August 31, 2007. The changes under HB 1019 are sufficiently small that they do not change the rate increase needed to attain a 31-year funding requirement. However, the ERS analysis indicates that this change would improve benefits and increase the actuarial cost of the plan; therefore, the ERS actuary certifies that if the bill were enacted, employer contributions for fiscal year 2008 would need to increase by 0.85% in order the make the plan actuarially sound and comply with the requirements of Texas Government Code Section 811.006.

Actuarial Soundness of LECOSRF

The ERS analysis indicates that under the current benefit structure, the current contribution rates are not actuarially sound. The analysis indicates that the additional rate needed to satisfy a 31-year funding requirement is projected to be 1.60% at August 31, 2007. The changes under HB 1019 increase the rate needed to attain a 31-year funding requirement to 1.61%. The ERS analysis indicates that this change would improve benefits and increase the actuarial cost of the plan; therefore, Buck certifies that if the bill were enacted, state contributions for fiscal year 2008 would need to increase by 1.61% in order the make the plan actuarially sound and comply with the requirements of Texas Government Code Section 811.006.

SYNOPSIS OF PROVISIONS

This bill, to be effective September 1, 2007, would provide the following:

The funding and benefit provisions that apply to Commissioned Peace Officer and Custodial Officer (CPO/CO) service would also apply to service performed as a Parole Support Employee (PSE). PSE service is service performed by employees of the parole division of the Texas Department of Criminal Justice (TDCJ) who are not custodial officers, but who are eligible for hazardous duty pay and whose duties require them to have regular contact with inmates of or defendants in the TDCJ, or with persons released on parole or mandatory supervision under the jurisdiction of the Board of Pardons and Paroles.

FINDINGS AND CONCLUSIONS

The proposal would allow for the funding and benefit provisions that apply to CPO/CO service to apply to service performed as a PSE. The bill would not increase the number of employees or the valuation payroll of ERS, but it would increase the number of employees covered by LECOSRF by the size of the PSE workforce (364) and increase the projected fiscal year 2008 valuation payroll of LECOSRF by approximately $8.9 million. HB 1019 would not change the normal cost of the Employees Retirement System (ERS), though the proposal would increase the unfunded actuarial accrued liability (UAAL) of ERS by $900,000. HB 1019 would not change the normal cost rate of LECOSRF, but the proposal would increase the UAAL of LECOSRF by $2.8 million.

METHODOLOGY AND STANDARDS

The analysis uses the actuarial assumptions that apply to CPO/CO employee class members to the parole support employees after the plan change. The affected workforce is assumed to remain constant in size (at 364) and payroll increases are assumed to be 4% per annum. For purposes of projecting the state contributions, the normal cost rate is assumed not to change and the actuarially sound contribution rate for fiscal years 2008 and 2009 is assumed to remain constant through fiscal year 2012.

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2006 actuarial valuation of ERS and LECOSRF.  The analysis assumes no further changes are made to ERS and LECOSRF.  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. Finally, the analysis assumes no further changes are made to ERS and LECOSRF and cautions that the combined effect of several changes can exceed the effect of each change considered individually.

SOURCES:

Actuarial Analyses by Kim Nicholl & S. Lynn Hill, Actuaries, Buck Consultants March 04, 2007.

Actuarial Review by Mr. Richard E. White, & Robert L. Schmidt, Actuaries, Milliman, March 27, 2007

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.

Unfunded Actuarial Accrued Liaiblity--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.