| TO: | Honorable Robert Duncan, Chair, Senate Committee on State Affairs |
| FROM: | John S. O'Brien, Director, Legislative Budget Board |
| IN RE: | SB681 by Williams (Relating to contributions to, benefits from, and the administration of the Texas Municipal Retirement System.), As Introduced |
ACTUARIAL EFFECTS:
According to the Texas Municipal Retirement System actuary, the funding requirements and cost impact are the responsibility of the member cities of TMRS, therefore, the changes proposed in HB 1244 are not expected to have a financial impact on TMRS as a system. Also, according to the TMRS actuary the proposed changes would not materially increase the actuarial liability of any individual city or TMRS as a whole. The additional contributions are at the discretion of each city.
SYNOPSIS OF PROVISIONS:
This bill, to be effective September 1, 2008, would provide the following changes:
· Provides an exception to the TMRS anti-garnishment rule.
· Provides that certain retired members may continue to receive service retirement benefits after they return to work.
· Provides that the board of trustees may limit by rule the increase in a member’s average updated service compensation from year to year.
· Expands the formula for the calculation of the base updated service credit.
· Provides that the board of trustees may set the amortization periods.
· Provides that municipalities may make lump-sum or periodic contributions.
· Updates the maximum contribution rates for municipalities.
· Provides that current retirees who have been rehired and have their benefits currently suspended, and who would have been eligible for their payment to continue under the provisions of this bill, will have their benefit recommence on January 1, 2008.
· Provides that certain changes made by this bill are only effective for members whose effective date of retirement is on or after January 1, 2009.
· Provides that the change in contribution rate proposed in this bill is only effective for municipalities that elect to provide an increased current service annuity reserve on or after January 1, 2009.
FINDINGS AND CONCLUSIONS:
HB 1244 proposes changes in administrative procedures that would have no affect on city liabilities. The bill stipulates that certain retired members who have returned to service may continue to receive retirement benefits after returning to work if certain conditions are met. The bill provides more options to municipalities for contributions and authorizes the Board to set amortization periods for participation municipalities.
The PRB actuary expressed concerns with the analysis of the return to work provision. Under current law, retirees who are reemployed by a municipality have their benefits suspended. The suspension of those benefits produces an actuarial gain at the following valuation. If benefits are continued to the member after reemployment, the municipality that is reemploying the member loses those gains. The Segal actuarial valuation treats retired members as if they are in pay status even if the members’ benefits are suspended. So HB 1244 would not change the actuarial valuation results for any of the participating municipalities. However, the loss of those gains could affect future valuation results for those municipalities. The Segal analysis made no estimate of the impact on the system or on municipalities from these gains no longer being available.
Another concern is that the new Return to Work provisions may be more attractive to the members considering retirement and reemployment. This may induce more retirement/reemployment situations than are currently experienced. In some cases this may change the Normal Cost Rate and/or the Actuarial Accrued Liability of a participating municipality. The Segal analysis indicates that these
effects will be minimal, but is sparse on supporting detail. More analysis of how the Normal Cost Rates and Actuarial Liability would be effected if there is a substantial increase in the number of members retiring and then returning to employment is needed to reliably assess the potential impact of this change. If these members are concentrated in a small number of municipalities, the effect on the overall TMRS might be minimal but the impact on the affected municipalities could be significant.
The LBB is in agreement with the PRB actuary that TMRS municipalities realize significant gains from the complete suspension of retirement annuities during reemployment. An analysis of the basic benefit shows that there would be losses to TMRS from people retiring earlier than they otherwise would, and coming back to work. These losses are greatly mitigated by the purchase of an actuarially equivalent annuity at the time of retirement, as suggested by the Segal actuary. However, there would still be losses. The Teacher Retirement System has provided testimony that suggests for them, suspending an annuity for 7 months of each year of reemployment would be a break even point for the system, at least under the rule of 80. The TRS benefit is not based on purchasing an actuarially equivalent annuity for those meeting the rule of 80, so any losses to TMRS would be far less. So the break even point for TMRS municipalities suspending annuities during reemployment would be far less than 7 months of the year; indeed it could even be less than a month a year- we just don't know. Only the TMRS actuary could calculate a precise amount. And the break even point would likely differ somewhat among different municipalities that have adopted differing plan designs, and for differing ages at retirement.
METHODOLOGY AND STANDARDS:
The analysis assumes no further changes are made to TMRS and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually. The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the December 31, 2005 update of the actuarial valuation of TMRS. According to the PRB actuary, the actuarial assumptions, methods and procedures appear to be appropriate under the circumstances for the sections of the bill that do not deal with Return to Work. In addition, the analysis appears to appropriately show the economic effect of the bill for the sections of the bill that do not pertain to Return to Work. The PRB and LBB believe that more analysis is needed to justify the conclusion that the Return to Work provisions will not have a significant impact on the TMRS or participating municipalities. 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 Leon F. Joyner, Jr., Actuary, The Segal Company, March 19, 2007.
Actuarial Review by Mr. Richard E. White, Actuary, Milliman USA, Inc., March 21, 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.
| Source Agencies: | 338 Pension Review Board
|
| LBB Staff: | JOB, KJG, WM
|