Projected for Fiscal Year 2008

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

ACTUARIAL EFFECTS:

HB 1543 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 $500,000.

HB 1543 would not change the normal cost rate of the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF), but the bill would increase the UAAL of LECOSRF by $1.2 million. The increase in the UAAL would not increase the contribution rate needed to amortization the UAAL over a 31-year period; however, because the proposal increases the LECOSRF valuation payroll, it also increases the dollar amount of the normal cost requirement and 31-year funding requirement. For fiscal year 2008, the ERS actuary projects that the proposal would increase the LECOSRF normal cost by $108,500, and the 31-year funding contribution by $112,000. These amounts are projected to grow by 4% per year in future years (at the same rate as the growth in 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 1543 do not change the rate increase needed to attain a 31-year funding requirement because of rounding the rate to the nearest basis point. 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. 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 1.60% 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:

Under the proposal, effective September 1, 2007, the definition of “Law Enforcement Officer” contained in Texas Government Code Section 811.001(9)(A) would be expanded to include law enforcement officers commissioned by the attorney general. As a result of this change, 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 law enforcement officer commissioned by the attorney general.

FINDINGS AND CONCLUSIONS

The office of the attorney general (OAG) provided data about 117 current OAG law enforcement officers, and advised that this workforce will likely expand to 141 in the near future. Proposed titles and salaries for the additional positions were provided. Eleven members of the workforce are employee class retirees who have returned to work (and are thus not eligible to accrue additional benefits); the others are regular active employees. For purposes of this cost estimate, it was assumed that the changes in HB 1543 would be recognized in the August 31, 2007 actuarial valuation, that the active workforce affected by the bill would remain approximately 130 in number in the future (a total workforce of 141 minus 11 returned-to-work retirees), and that the actuarial assumptions used to value CPO/CO employees would be considered appropriate for determining the liability and normal cost requirements of the new benefits for these employees.

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 of ERS.  The analysis assumes no further changes are made to ERS.  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 Kim Nicholl & S. Lynn Hill, Actuaries, Buck Consultants March 15, 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.

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.