Fiscal Year 2006

*The current contribution rate is insufficient to amortize the unfunded liability over a 30-year period. Currently, the total contribution rate necessary to maintain a 30-year funding period is 42.50% of payroll. The actual contribution rate, based on the July 1, 2005 actuarial valuation, is 32.80%, or a shortfall of 9.7% of payroll.

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

ACTUARIAL EFFECTS:

According to the actuary of the Houston Firefighters’ Relief and Retirement Fund (HFRRF), the proposals in SB 619 do not pose any material actuarial effect to the fund. The effect of prorating the 2% increase in the monthly benefit upon exiting the Deferred Retirement Option Plan (DROP) could result in a modest savings to the fund, but the savings are small enough that the actuary did not attempt to quantify the actual savings. Under the proposal to establish a Post-Retirement Option Plan (PROP), fund earnings above the return ceiling of 10% would provide a gain for the fund; however, fund earnings below the minimum crediting rate of 5% would result in losses to the fund.

SYNOPSIS OF PROVISIONS:

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

• Exempt the fund from state law regarding trusts
• Require the municipality to make contributions every 2 weeks instead of monthly
• Establish a Post-Retirement Option Plan (PROP), which allows certain retirees to defer receipt of certain payments from the plan into an account that grows with interest.
• Prorate the 2% increase in monthly benefit upon exiting the Deferred Retirement Option Plan (DROP)
• Designate an Adult Child as beneficiary
• Provide that the Board of Trustees may use fund assets to pay the chair of the Board annual compensation in an amount not to exceed ½ of the annual base salary of a firefighter with 17 years of service, if the position of chair is assigned to serve full-time at the fund
• Clarify the benefit commencement date for certain members eligible for retirement benefits
• Provide that certain benefit increases provided to retirees are not included in the allocation of annual supplemental benefits for certain retired members and eligible survivors
• Clarify the role of a qualified actuary in limiting benefit accruals when those accruals would result in an annual benefit in excess of the 415 limits of Internal Revenue Code
• Repeal the statutory provision that Board members cannot receive compensation for service on the Board
• Provide other administrative changes related to the Board of Trustees 

FINDINGS AND CONCLUSIONS:

According to the actuary of the Houston Firefighters’ Relief and Retirement Fund (HFRRF), the proposals in SB 619 do not pose any material actuarial effect to the fund. The effect of prorating the 2% increase in the monthly benefit upon exiting the Deferred Retirement Option Plan (DROP) could result in a modest savings to the fund, but the savings are small enough that the actuary did not attempt to quantify the actual savings. Under the proposal to establish a Post-Retirement Option Plan (PROP), fund earnings above the return ceiling of 10% would provide a gain for the fund; however, fund earnings below the minimum crediting rate of 5% would result in losses to the fund.

The July 1, 2005 actuarial valuation of HFRRF indicated a 30-year contribution rate for fiscal year 2006 of 42.50% of payroll, whereas the actual contribution rate for HFRRF was 32.80%, representing a shortfall of 9.7% of payroll. Actual city contributions for fiscal year 2007are expected to be less than the actuarially determined city contribution rate, with a projected shortfall of 7.2% of payroll.

METHODOLOGY AND STANDARDS:

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the July 1, 2005 actuarial valuation of HFRRF.  According to the PRB actuary, the actuarial assumptions and methods 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. The cost estimates in the analysis are subject to the uncertainties of a regular valuation; the costs are inexact because they are based on assumptions that are themselves necessarily inexact, even though considered reasonable. Thus, the emerging costs may vary from those presented in the analysis to the extent actual experience differs from that projected by the actuarial assumptions.

SOURCES:

Actuarial Analysis by Bruce W. Jenkins, Actuary, Buck Consultants, March 5, 2007

Actuarial Review by Mr. Richard E. White, & Robert L. Schmidt, Actuaries, Milliman USA, Inc., March 5, 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.