LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
80TH LEGISLATIVE REGULAR SESSION
 
May 26, 2007

TO:
Honorable David Dewhurst , Lieutenant Governor, Senate
Honorable Tom Craddick, Speaker of the House, House of Representatives
 
FROM:
John S. O'Brien, Director, Legislative Budget Board
 
IN RE:
SB1846 by Duncan (Relating to funding for, and benefits provided under, the Teacher Retirement System of Texas.), Conference Committee Report


 

Teacher Retirement System

Current

Proposed

Difference

State Contribution

Employee Contribution

Total Contribution

6.00 %

     6.40 %

12.40 %

6.58 %

      6.58 %

13.16%

+0.58%

     + 0.18%

+0.76 %

Normal Cost (% of payroll)

10.40 %

10.40 %

0.0%

Net Liability (millions)

$12,060

$12,419

$359.0

Amortization Period (years)

76.9

30.9*

-46.0

*The analysis does not specify the exact change to the TRS amortization period.

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

 

ACTUARIAL EFFECTS:

 

SB 1846, Conference Committee Report, would not increase the normal cost of the Teacher Retirement System (TRS). Assuming the supplemental payment is made, the unfunded actuarial accrued liability (UAAL) would increase under the proposal by $359 million, from $12.060 billion to $12.419 billion. According to the analysis, though the provisions of the bill would increase the UAAL of TRS, the additional contributions provided by the bill would produce a funding period which would not exceed 30 years by one or more years and passage of the bill would not violate statutory requirements.

 

SYNOPSIS OF PROVISIONS

 

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

 

         Increases employee contributions to 6.58% of payroll, contingent on provision of a supplemental payment.

         Provides a floor for the state contribution to be equal to the applicable employee contribution rate, and requires the state contribution to be 6.58% for fiscal years 2008 and 2009.

         Contingent upon determining the system would be actuarially sound after making the payment and increasing the employee contributions to 6.58%, provide a supplemental payment for eligible annuitants, paid not later than September 2007, in an amount equal to their monthly benefit, but not to exceed $2,400.

 

 

FINDINGS AND CONCLUSIONS

 

SB 1846, Conference Committee Report, contingent on provision of a supplemental payment, would increase employee contributions to 6.58% of payroll and would require a minimum state contribution to be equal to the applicable employee contribution rate. Contingent upon determining the system would be actuarially sound after making the payment and increasing the employee contributions to 6.58%, the bill also would provide a supplemental payment for eligible annuitants, paid not later than September 2007, in an amount equal to their monthly benefit, but not to exceed $2,400.  All retirees and beneficiaries who have retired on or before December 31, 2006 would be eligible for the supplemental payment, except disability retirees with less than 10 years of service credit, members in the deferred retirement option program, retiree survivor beneficiaries receiving a survivor annuity in an amount fixed by statute, and active survivor beneficiaries receiving a survivor annuity in an amount fixed by statute.

 

SB 1846, Conference Committee Report, would not increase the normal cost of the Teacher Retirement System (TRS). Assuming the supplemental payment is made, the unfunded actuarial accrued liability (UAAL) would increase under the proposal by $359 million, from $12.060 billion to $12.419 billion. According to the analysis, though the provisions of the bill would increase the UAAL of TRS, the additional contributions provided by the bill would produce a funding period which would not exceed 30 years by one or more years and passage of the bill would not violate statutory requirements.

 

 

METHODOLOGY AND STANDARDS

 

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2006 actuarial valuation of TRS, as well as the February 28, 2007 actuarial valuation update.  The analysis assumes no further changes are made to TRS.  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 Lewis Ward & W. Michael Carter, Actuaries, Gabriel, Roeder, Smith & Co. May 18, 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