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

SYNOPSIS OF PROVISIONS

HB 2421, to be effective immediately if receiving required votes or if not, September 1, 2007, would provide the following:

·         Add a surcharge of $1 on each insurer for each policy written by the insurer that is classified as fire and allied lines insurance and other related insurance and would require that $1 million from the surcharges collected be deposited to the credit of the Texas Emergency Services Retirement System (TESRS) trust fund on or before June 15^th of each fiscal year.

·         Allocate a percentage of the tax on gross premiums for fire insurance and allied lines sufficient to provide that $1 million be deposited to the credit of TESRS trust fund on or before March 15^th of each fiscal year.

ACTUARIAL EFFECTS:

Based on the analysis provided by the TESRS actuary, the most recent actuarial valuation of TESRS showed that in order to have a 30-year amortization period for the unfunded actuarial accrued liability (UAAL), TESRS would have to receive the maximum state contribution, defined as one-third of the total of all contributions by local governing bodies in a particular year, for approximately 21 years. If enacted, HB 2421 would provide two new funding sources for TESRS and together with the expected annual contributions from the local governing bodies, the total contributions would amortize the UAAL in 12 years assuming that after the fiscal year ending August 31, 2007, the maximum state contributions and the additional $400,000 each year to pay for part of TESRS’s administrative expenses would be discontinued. According to the TESRS actuary, the two new funding sources that would result from the passage of HB 2421 would significantly improve the actuarial condition of TESRS.

FINDINGS AND CONCLUSIONS

HB 2421 proposes to add a surcharge of $1 on each insurer for each policy written by the insurer that is classified as fire and allied lines insurance and other related insurance and would require that $1 million from the surcharges collected be deposited to the credit of the Texas Emergency Services Retirement System (TESRS) trust fund on or before June 15^th of each fiscal year. The bill would also allocate a percentage of the tax on gross premiums for fire insurance and allied lines sufficient to provide that $1 million be deposited to the credit of TESRS trust fund on or before March 15^th of each fiscal year.

According to the actuarial analysis, the August 31, 2006 actuarial valuation showed that without the provisions of HB 2421, TESRS would be adequately financed on an actuarially sound basis only if the state provided the maximum annual contribution as needed in accordance with the state law governing TESRS and approximately $400,000 each year to pay part of TESRS administrative costs.

If enacted, HB 2421 would provide two new funding sources for TESRS and together with the expected annual contributions from the local governing bodies, the total contributions would amortize the UAAL in 12 years assuming that after the fiscal year ending August 31, 2007 the maximum state contributions and the additional $400,000 each year to pay for part of TESRS’s administrative expenses would be discontinued. According to the TESRS actuary, the two new funding sources that would result from the passage of HB 2421 would significantly improve the actuarial condition of TESRS.

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 valuation of TESRS. The PRB actuary reviewed the actuarial assumptions and methods and indicated they appear to be reasonable. The conclusions contained in the analysis seem 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 Analysis by Mark R. Fenlaw, Actuary, & Robert M. May, Actuary, Rudd and Wisdom, Inc., March 21, 2007.

Actuarial Review by Mr. Richard E. White, Actuary, Milliman, March 21, 2007.

GLOSSARY OF ACTUARIAL TERMS:

Normal Cost-- the current cost as a percentage of payroll that is necessary to pre-fund pension benefits adequately during the course of an employee's career.

Unfunded Liability-- the amount of total liabilities that are not covered by the total assets of a retirement system.  Both liabilities and assets are measured on an actuarial basis using certain assumptions including average annual salary increases, the investment return of the retirement fund, and the demographics of retirement system members.

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.