Projected for Fiscal Year 2008

*Under current law, a total contribution rate of 12.94% of payroll is needed for fiscal year 2008 to achieve a 31-year funding for ERS under the requirements of Section 811.006 of Texas Government Code. Under the proposal, a total contribution rate of 12.92% of payroll is needed to achieve a 31-year funding for fiscal year 2008.

ACTUARIAL EFFECTS:

SB 1194 would not change the projected August 31, 2007 normal cost, unfunded actuarial accrued liability (UAAL), funded ratio or amortization period of the Employees Retirement System (ERS). Currently, the total contribution rate needed for fiscal year 2008 to achieve a 31-year funding for ERS is 12.94% of payroll. Under the proposal, a total contribution rate of 12.92% of payroll would be needed to achieve a 31-year funding for fiscal year 2008. Due to the provisions in the bill, the number of legislators participating in the elected class of membership gradually declines to zero. Though there would be no immediate impact on the normal cost of ERS, ultimately, the normal cost rate will decline by six basis points to 11.92%.

SYNOPSIS OF PROVISIONS:

SB 1194, to be effective September 1, 2007, would provide the following:

• Prohibit any new legislators from participating in ERS. Any person who first served as a member of the legislature before September 1, 2007 would be grandfathered in the current plan.

FINDINGS AND CONCLUSIONS:

SB 1194 would prohibit any new legislators from participating in the elected class of membership of ERS. Any person who first served as a member of the legislature before September 1, 2007 would be grandfathered in the current plan.

Currently, members of the Legislature may elect to participate in ERS, provided that they contribute 8% of their legislative salaries to ERS. Members of the elected class are eligible to retire at age 60 with eight years of credited elected class service, or at the age of 50 with twelve years of credited elected class service. The standard service retirement annuity equals the number of years of such credited service times 2.3% of the state salary, as adjusted from time to time, being paid a district judge, to a maximum of 100% of such district judge salary. (The state salary of a district judge is currently $125,000 annually.)

According to the analysis, because SB 1194 does not reduce contributions or interest rates, credit additional service or provide any improvements in the benefit formula or eligibility requirements for ERS, the requirements of Texas Government Code Section 811.006 do not apply to the proposed changes and the ERS actuary certifies that the bill would not require an increase in the contributions to ERS to comply with the requirements of Section 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 of the August 31, 2006 actuarial valuation of ERS. The analysis assumes no further changes are made to ERS and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually. According to the PRB actuary, the actuarial assumptions, methods, procedures, and conclusions 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 Analysis by Kim M. Nichol, Actuary, Buck Consultants, March 27, 2007

Actuarial Review by Mr. Richard E. White, Actuary, and Mr. Robert Schmidt, Actuary, Milliman, April 13, 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.