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

For the ERS, the current contribution rate is insufficient to amortize the unfunded liability over a 31-year period. Currently the total contribution rate necessary to maintain a 31 year funding period is 12.94%. Under the proposal, the required 31-year contribution rate would increase 0 .01% from 12.94% to 12.95%.

For the LECOSRF, the current contribution rate is insufficient to amortize the unfunded liability over a 31-year period. Currently the total contribution rate necessary to maintain a 31 year funding period is 1.59%. The proposal does not increase this contribution rate.

ACTUARIAL EFFECTS:

HB 2131 would not change the normal cost of the Employees Retirement System (ERS). Instead, it is anticipated that Federal government will be charged any increase in the accrued liability of ERS occurring due to this bill, assumed to be $300,000. Furthermore, HB 2131 will not change the normal cost of the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF).  Similar to ERS, the Federal government should be charged the accrued liability of $700,000 occurring under this bill.

Actuarial Soundness of ERS

The actuarial analysis of ERS 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 0.49% at August 31, 2007. Independent of this bill, the rate increase needed to attain a 31-year funding requirement rises one basis point to 0.50%. HB 2131 would have no effect on the actuarial soundness of the ERS because of the Federal government’s payments of benefits.  However, the inclusion of Federal funding eliminates any extra cost to the state of Texas, so there is no projected change in the state’s portion of the ERS normal cost requirement.

Actuarial Soundness of LECOSRF

The actuarial analysis of LECOSRF 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 1.59% at August 31, 2007. The changes under HB 2131 would have no effect on the rate needed to attain a 31-year funding requirement. Independent of this bill, the state should contribute 1.59% in order the make the plan actuarially sound and comply with the requirements of Texas Government Code Section 811.006.  However, all additional liabilities generated by this bill are covered by Federal funding, leaving no state obligation.  Therefore, there is no change projected in the state’s portion of the normal cost requirement.

SYNOPSIS OF PROVISIONS

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

HB 2131 adds emergency personnel to LECOSRF that were hired by the Adjutant General to extinguish aircraft fires at Texas National Guard installations.  Currently, subsection (a) of 811.006 of the government code forbids a plan to provide certain benefit increases (or a reduction in contributions) if it would create an unfunded actuarial accrued liability that would take longer than 31-years to pay off.  However, this bill exempts those employees whose contributions or benefits are entirely paid for by the Federal Government from the 31-year test.

FINDINGS AND CONCLUSIONS

HB 2131, if passed, would change the requirement of 811.006 of the government code that would restrict a plan from adopting a new benefit if it increased the unfunded actuarial liabilities beyond 31-year amortization period.  If the employee’s benefits are paid for by a Federal entity then this bill would not restrict the benefit as applied to these workers.  It is anticipated that the Federal government will pay for the employees added under this bill (i.e. emergency personnel hired by the adjutant general to extinguish aircraft fires at Texas National Guard installations). 

According to the ERS actuary, owing to the fact that the 811.006 standard will change and that the Federal government will pay the benefits of the added employees, the bill may be enacted without regard to 811.006 standards.  This is true even though this bill adds benefits through adding 29 new members to the LECOSRF.  If any of these members are not covered by Federal funds than the actuarial assumptions would need to be reconsidered; this does not appear to be the current situation.

METHODOLOGY AND STANDARDS

The analysis uses the actuarial assumptions that apply to employee class members eligible for LECOSRF. The affected workforce is assumed to increase in size by 29 people, that wages increase at 4 percent per annum, and that the number of employees remain constant. For purposes of projecting the state contributions, the Federal government is assumed to make lump sum payments to both ERS and LECOSRF to cover any change in accrued liability due to HB 2131, as of August 31, 2007. Furthermore, the Federal government would be charged an employer contribution for each plan member equal to the state’s per employee rate and any excess caused by the inclusion of the new members. 

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2007 update to 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 April 24, 2007.

Actuarial Review by Mr. Richard E. White, & Robert L. Schmidt, Actuaries, Milliman, April 25, 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.