Projected for Fiscal Year 2008

Projected for Fiscal Year 2008

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

ACTUARIAL EFFECTS:

Teacher Retirement System (TRS): HB 2888 would not change the normal cost rate for TRS, but the proposal would increase the unfunded actuarial accrued liability by $20 million. The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 30 years. Under current law, the total contribution rate would need to increase from 12.40% of payroll to 13.00% of payroll for fiscal year 2008 to achieve a 30-year funding for TRS. Under the proposal, the total contribution rate necessary to achieve a 30-year funding for TRS would increase to 13.01% of payroll for fiscal year 2008. The analysis did not provide any information regarding the proposal’s effect on TRS valuation payroll.

Employees' Retirement System (ERS): HB 2888 would increase, by 0.07% of payroll, the projected normal cost of ERS for fiscal year 2008. The fiscal year 2008 estimated ERS UAAL will not change.  The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Under current law, the total contribution rate would need to increase from 12.45% of payroll to 12.94% of payroll for fiscal year 2008 to achieve a 31-year funding for ERS. Under the proposal, the state contribution rate necessary to achieve a 31-year funding for ERS would increase to 12.96% of payroll for fiscal year 2008. The proposal would increase the valuation payroll of ERS by approximately $77.8 million; therefore the normal cost requirement and the 31-year funding requirement will increase by approximately $13.12 million and $11.15 million respectively.

Law Enforcement and Custodial Officers' Supplemental Retirement Fund (LECOSRF): HB 2888 would increase, by 0.10% of payroll, the projected normal cost for the LECOSRF for fiscal year 2008.  The fiscal year 2008 estimated UAAL would not change. The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Under current law, the total contribution rate would need to be 1.59% of payroll for fiscal year 2008 to achieve a 31-year funding for LECOSRF. Under the proposal, the state contribution rate necessary to achieve a 31-year funding for LECOSRF would increase to 1.64% of payroll for fiscal year 2008. The proposal would increase the valuation payroll of LECOSRF by approximately $77.8 million; therefore the normal cost requirement and the 31-year funding requirement would increase by approximately $2.64 million and $1.59 million respectively.

SYNOPSIS OF PROVISIONS:

HB 2888, to be effective September 1, 2007, would provide the following changes:

·         Transfer the membership of all persons who are contributing members of TRS on August 31, 2007 and who are employed as public education law enforcement officers on both August 31, 2007 and September 1, 2007 from TRS to ERS on September 1, 2007. All previous TRS public education law enforcement service credit will be treated as ERS service credit for the purposes of determining eligibility for ERS benefits. At the time of retirement or death, ERS and TRS will share responsibility for the benefit payments based on the provisions of Texas Government Code Section 805.008. Persons employed as public education law enforcement officers on or after September 1, 2007 are automatically members of ERS.

·         Expand the definition of “Law Enforcement Officer” in Section 811.001(9)(A) of Texas Government Code to include members of ERS who are public education law enforcement officers and extend to such members the funding and benefit provisions to apply to a Commissioned Peace Officer/Custodial Officer (CPO/CO).

FINDINGS AND CONCLUSIONS:

HB 2888 would transfer the membership public education law enforcement officers from TRS to ERS on September 1, 2007. HB 2888 would also extend membership in the LECOSRF to public education law enforcement officers as of September 1, 2007. According to the analysis, TRS currently has an estimated 1900 contributing members who meet the definition of public education law enforcement officer and would be eligible to transfer to ERS and LECOSRF. The immediate effect on the normal cost rate of the transfer of these officers would be an increase for both ERS and LECOSRF; though the analysis indicates that over time, as the transfer employees retire and are replaced by new hires, the normal cost rate for ERS would adjust down to the current rate and the LECOSRF would only increase one basis point (from 1.55% to 1.56%).

According to the ERS actuary, the proposed bill would require additional contributions to both ERS and LECOSRF in order to comply with the funding requirements of Texas Government Code 811.006. The projected increase for fiscal year 2008 would be an additional contribution of 0.50% of payroll for ERS and 1.61% of payroll for LECOSRF.

METHODOLOGY AND STANDARDS:

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2007 update of the August 31, 2006 actuarial valuation of TRS, ERS and LECOSRF. Note there was no review of the actuarial methodologies and standards by the PRB actuary.

SOURCES:

Actuarial Analysis by Lewis Ward & W. Michael Carter, Actuaries, Gabriel, Roeder, Smith & Co. April 24, 2007.

Actuarial Analysis by Kim M. Nichol, Actuary, Buck Consultants, April 24, 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 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.