Projected for Fiscal Year 2008

*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% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.14% of payroll to 1.73%.

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

ACTUARIAL EFFECTS:

HB 3380 would increase, by .03% of payroll, the projected normal cost of Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF) for fiscal year 2008 from 1.55% to 1.58%. The fiscal year 2008 estimated LECOSRF unfunded actuarial accrued liability (UAAL) would increase approximately $28.4 million, from $11.8 million to $40.2 million. 

According to the analysis, the DPS provided data for 120 law enforcement officers who are actively employed as Texas Rangers or as Director of DPS. The analysis assumed that the size of the active workforce would remain constant in the future, and that all members who become eligible for the enhanced benefit would elect to receive them. For the purposes of projecting increased benefits after retirement, the analysis assumed that compensation for the position or classification held by an employee at retirement would increase by 4 percent per annum, which is the salary inflation assumption used for the LECOSRF actuarial valuation.

SYNOPSIS OF PROVISIONS

This bill, to be effective immediately if receiving the required votes, or if not, September 1, 2007, would provide the following changes:

·         Allows an eligible individual, who retires on or after September 1, 2007, for a standard service retirement annuity with at least 20 years of LECOSRF service credit, who was employed by the Department of Public Safety (DPS) and commissioned as a Texas Ranger, who is retiring honorably after at least eight years of creditable service as a Texas Ranger or as a director of DPS, and who has at least two years of creditable service in the commissioned position or employee classification from which the person is retiring, may elect to have their LECOSRF standard service annuity computed on the basis of the monthly compensation that is in effect for the position of classification that was held by the person at the time of retirement. Benefits computed under these provisions would automatically be increased after retirement every time there is an increase in the compensation for the position that the employee held at retirement.

FINDINGS AND CONCLUSIONS

HB 3380 proposes to allow an eligible individual for a standard service retirement annuity to elect to have their LECOSRF standard service annuity computed on the basis of the monthly compensation that is in effect for the position of classification that was held by the person at the time of retirement. Benefits computed under these provisions would automatically be increased after retirement every time there is an increase in the compensation for the position that the employee held at retirement. While the impact on the Actuarial Accrued Liability on the LECOSRF Fund would be relatively modest (the current liability is $760.8 million), the increase on an individual basis would be relatively significant.

Under current provisions, the standard service retirement annuity for a member who has at least 20 years of service credit as a law enforcement or custodial officer is computed on the basis of the member’s average monthly compensation for the highest 36 months of compensation in the employee class and there are no automatic increases in the benefit after retirement.

While no contribution will be made to LECOSRF in 2007, the LECOSRF contribution rate for 2008 and 2009 specified in the General Appropriations Act as Introduced is 1.7%. This would make LECOSRF actuarially sound under current law, but under HB 3380, the 31 year funding period contribution rate would be 1.73%, and unless contributions were increased, the proposal would exceed actuarial funding requirements specified in Government Code 811.006.

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 to the August 31, 2006 actuarial valuations of LECOSRF. The analysis assumes no further changes are made to 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.

SOURCES:

Actuarial Analyses by Kim M. Nicholl & S. Lynn Hill, Buck Consultants, April  9, 2007.

Actuarial Review by Mr. Richard E. White, & Robert L. Schmidt, Actuaries, Milliman, April 10, 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.