Teacher Retirement System (T.R.S.)

ACTUARIAL EFFECTS:

HB 1371 would provide an incentive for classroom teachers to teach longer before retiring. The impact of this bill would be dependent on the utilization, where utilization refers to how much less likely eligible teachers would be to retire in a given year. If the utilization is over 10% the bill would produce a long term cost savings versus the current benefit provisions of TRS. If the utilization is 10% or less, it would have a negative impact. The estimated impact for utilization assumptions of 0%, 10%, 20% and 30% are summarized in the table below. 

ge plusService Additional Anual

SYNOPSIS OF PROVISIONS

This bill applies beginning with the 2007-2008 school year.

This bill provides for additional compensation to be paid to classroom teachers based upon a combination of their age and years of service, thus providing an incentive for classroom teachers to extend their careers beyond their eligibility for retirement benefits.The table below summarizes the additional annual compensation provided:

FINDINGS AND CONCLUSIONS

The TRS analysis indicates that the impact of the changes would depend on how the additional compensation affects the retirement patterns of the classroom teachers. Therefore, the results are presented under different scenarios, depending on what percentage of those classroom teachers who would have retired elect to defer their retirement by at least one year (referred to as “utilization”).

The TRS actuary emphasized that it is difficult to predict what actual utilization will be, but that if the legislation becomes law, they would choose to use a 20% utilization assumption in the valuation.

The TRS actuary has stated that the loss under the 0% utilization scenario is primarily due to the increase in salary for members currently meeting the age and service terms of the increase, and assumes that all other across the board increase assumptions are met. If general payroll increases are less than assumptions, there may not be an experience loss related to the increase proposed here. 

The LBB notes that under the 0% utilization scenario, there is only a minimal increase in normal cost. This implies that the majority of the impact would be for teachers currently meeting the age and service requirements of the bill. It seems  likely that at least those members eligible to receive a $3,000 or $4,000 increase would consider staying longer (up to 3 years) to maximize their retirement annuity. So the likelihood of the bill having a negative impact on the retirement fund seems small.

METHODOLOGY AND STANDARDS

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2006 actuarial valuation and the actuarial value of assets as of February 28, 2007 of TRS. The analysis assumes no further changes are made to 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. Finally, the analysis assumes no further changes are made to TRS and cautions that the combined effect of several changes can exceed the effect of each change considered individually.

SOURCES:

Actuarial Analyses by Lewis Ward & W. Michael Carter, Actuaries, Gabriel, Roeder, Smith & Co. April 10, 2007.

Actuarial Review by Mr. Richard E. White, & Robert L. Schmidt, Actuaries, Milliman, April 11, 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.

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.