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 3330 would not change the normal cost of the Employees Retirement System (ERS) in the current period. However, the plan would add two basis points to normal cost over time as older workers are replaced by new hires.  The bill would not affect the number of employees covered by the ERS plan.  HB 3330 would not change the normal cost of the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF).  This is true even though the bill increases the number of employees covered by the LECOSRF by 2,402 members.

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, which would increase to 0.50% under the bill. In order to pass HB 3330 under 811.006 of the Government Code, the state contribution rate would need to increase from 6.45 percent of payroll to 6.95 percent and thereby pay off the unfunded liability in 31 years.   HB 3330 would not increase the unfunded accrued actuarial liability and have no effect on the normal cost of ERS.

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 3330 would have no effect on the rate needed to attain a 31-year funding requirement. Before this bill can be passed, 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, this bill would add valuation payroll of $75.1 million to LECOSRF by adding 2,402 new members.  The percentage of the new payroll required to cover the liabilities created by the new members would remain at the current normal cost rate of 1.55 percent.  This implies that the dollar amount of the normal cost under the new bill is about $1.2 million.  Furthermore, the rate required to make LECOSRF actuarially sound rate would remain constant at 1.59 percent.  For this reason, the inclusion of new members would not increase the normal cost rate of LECOSRF.

SYNOPSIS OF PROVISIONS

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

HB 3330 adds juvenile correction officers from the Texas Youth Commission to the LECOSRF.  This change is effectuated by including the correctional officers as part of the definition of “Custodial Officer” in 811.001(8) of the Government Code. However, only service with the Texas Youth Commission after September 1, 2007 is counted under the LECOSRF.

FINDINGS AND CONCLUSIONS

HB 3330, if passed, would add 2,402 new members to the LECOSRF.  Though there are no new employees being added to the ERS the cost the existing liabilities, independent of this bill, imply that ERS would need to increase funding by 0.5 percent (to 6.95 percent) to pay unfunded liabilities within a 31-year period.  Similarly, the earnings that the 2,402 new members potentially bring to LECOSRF would allow the percent of payroll necessary to fund unfunded liabilities within 31-years to remain fixed at an additional 1.59 percent.  Currently, the state does not contribute any money to LECOSRF.

According to the ERS actuary, the current plan provisions do not meet the demands of 811.006 of the government code, that no increase in benefits may be considered when a plan has an amortization period longer than 31-years.  Currently both ERS and LECOSRF amortization periods are longer than 31-years.  Because this bill improves benefits and increases actuarial costs, in order for the state to pass this legislation it will need to increase its contributions to ERS by 0.5 percent (to 6.95 percent) and to LECOSRF by 1.59 percent (to 1.59 percent) of payroll.

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 2,402 people. For purposes of projecting the state contributions, aside from the proposed changes under HB 3330, the actuarial assumptions used in the February 2007 update of the August 2006 actuarial valuations were used. This assumes a 4 percent annual increase in wages and a constant workforce size within ERS.  Normal cost rate increase 2 basis points in future years as the 24 workers, not eligible for the proposed benefits, retire and new, eligible, workers replace them.

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 20, 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.