TO:  Honorable Robert Duncan, Chair, Senate Committee on State Affairs 
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.), As Introduced 
ACTUARIAL EFFECTS:
The provisions of SB 1846 include a local employer contribution rate ranging from 0.25% of payroll to 0.75% of payroll, with the exact amount to be specified in the General Appropriations Act for each biennium. Also included in the bill is a provision to provide additional compensation to classroom teachers whose age and years of service total 80 or greater, in an effort to keep those qualified teachers in the classroom and postpone their retirement. The analysis provided by the TRS actuary includes multiple scenarios, depending on the portion of eligible classroom teachers who would utilize the additional compensation and delay their retirement. The analysis examined 0% utilization, 10% utilization, 20% utilization and a 30% utilization,. For each utilization rate, the TRS actuary included the impact of both the floor and the ceiling for the local employer contribution, .25% and .75% of payroll, respectively. Based on the analysis, the following are four scenarios and the actuarial impact of each:
Scenario I: 0% Utilization and 0.25% Local Employer Contribution Rate
This scenario corresponds with the case where teachers would receive extra payments, but nobody would adjust their retirement patterns. There would be a $269 million increase in unfunded liabilities with this option, along with a 0.04% increase in normal costs. The increase in liabilities (and normal cost) shown is due to the salary increase shown by the bill. While the full assumptions used were not disclosed in the analysis, it appears that this analysis assumes everyone else gets their normally anticipated salary increase, well over 3%. If those increases were not provided, then the salary impact of the bill with this utilization could be much lower.The amortization period of TRS would decrease by 46 years, from 76.9 years to 30.9 years. Currently, a total contribution rate of 13.00% of payroll is necessary to amortize the unfunded actuarial accrued liability over a 30year period. The proposed change would decrease the 30year amortization rate to 12.84% of payroll.
Scenario II: 10% Utilization and 0.25% Local Employer Contribution Rate
SB 1846 would increase, by .01% of payroll, the normal cost of the Teacher Retirement System (TRS) from 10.40% to 10.41% of payroll. The unfunded actuarial accrued liability would decrease under the proposal by $27 million from $12.060 billion to $12.033 billion. The amortization period of TRS would decrease by 48.3 years, from 76.9 years to 28.6 years. Currently, a total contribution rate of 13.00% of payroll is necessary to amortize the unfunded actuarial accrued liability over a 30year period. The proposed change would decrease the 30year amortization rate to 12.74% of payroll.
Scenario III: 20% Utilization and 0.25% Local Employer Contribution Rate
SB 1846 would decrease, by .03% of payroll, the normal cost of the Teacher Retirement System (TRS) from 10.40% to 10.37% of payroll. The unfunded actuarial accrued liability would decrease under the proposal by $332 million from $12.060 billion to $11.728 billion. The amortization period of TRS would decrease by 50.6 years, from 76.9 years to 26.3 years. Currently, a total contribution rate of 13.00% of payroll is necessary to amortize the unfunded actuarial accrued liability over a 30year period. The proposed change would decrease the 30year amortization rate to 12.64% of payroll.
Scenario IV: 20% Utilization and 0.75% Local Employer Contribution Rate
SB 1846 would decrease, by .03% of payroll, the normal cost of the Teacher Retirement System (TRS) from 10.40% to 10.37% of payroll. The unfunded actuarial accrued liability wwould decrease under the proposal by $332 million from $12.060 billion to $11.728 billion. The amortization period of TRS would decrease by 56.4 years, from 76.9 years to 20.5 years. Currently, a total contribution rate of 13.00% of payroll is necessary to amortize the unfunded actuarial accrued liability over a 30year period. The proposed change would decrease the 30year amortization rate to 12.14% of payroll.
According the analysis submitted by the TRS actuary, predicting the utilization rate for this type of incentive on behavior patterns is difficult. The actuary goes on to state that if forced to make a prediction, the 20% utilization would be selected; however, choosing a utilization rate without years of evidence of any change in retirement patterns is an educated guess. The analysis indicates that the 0% utilization could be a greater cost to the system, with the unfunded actuarial accrued liability increasing by $269 million. The 30% utilization would provide even greater savings to the system, with the unfunded actuarial accrued liability decreasing by $672 million.
This bill, to be effective September 1, 2007, would provide the following:
· Allows employee contributions to be increased to a maximum of 6.6% of payroll.
· Provides a floor for the state contribution to be equal to the applicable employee contribution rate.
· Requires current employers to make contributions to TRS, with a minimum contribution rate of 0.25% of payroll and a maximum contribution rate of 0.75% of payroll. The exact amount would be stated in the General Appropriations Act for each biennium.
· Deposits federal and other local contributions directly in the retirement fund, instead of the General Revenue Fund.
· Allows retiree benefit payments to be temporarily increased if authorized in the General Appropriations Act.
· Provides additional compensation to classroom teachers based on their age and years of service.
SB 1846 would allow employee contributions to be increased to a maximum of 6.6% of payroll and provide a floor for the state contribution to be equal to the applicable employee contribution rate. The provisions of SB 1846 include a local employer contribution rate ranging from 0.25% of payroll to 0.75% of payroll, with the exact amount to be specified in the General Appropriations Act for each biennium. Also included in the bill is a provision to provide additional compensation to classroom teachers whose age and years of service total 80 or greater, in an effort to keep those qualified teachers in the classroom and postpone their retirement.
According the analysis submitted by the TRS actuary, predicting the utilization rate for this type of incentive on behavior patterns is difficult. The actuary goes on to state that if forced to make a prediction, the 20% utilization would be selected; however, choosing a utilization rate without and years of evidence of any change in retirement patterns is an educated guess. The analysis indicates that the 0% utilization could be a greater cost to the system, with the unfunded actuarial accrued liability increasing by $269 million. The 30% utilization would provide even greater savings to the system, with the unfunded actuarial accrued liability decreasing by $672 million. The 10% utilization shows the unfunded actuarial accrued liability decreasing by $27 million. The 20% utilization shows the unfunded actuarial accrued liability decreasing by $332 million.
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. 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. Finally, the analysis assumes no further changes are made to TRS and cautions that the combined effect of several changes can exceed the effect of each change considered individually.
SOURCES:
Actuarial Analyses by Lewis Ward & W. Michael Carter, Actuaries, Gabriel, Roeder, Smith & Co. March 27, 2007.
Actuarial Review by Mr. Richard E. White, & Robert L. Schmidt, Actuaries, Milliman, March 30, 2007
GLOSSARY OF ACTUARIAL TERMS:
Normal Cost the current annual cost as a percentage of payroll that is necessary to prefund pension benefits adequately during the course of an employee's career.
Net Asset / Net LiabilityThis 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 payoff 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 JRS2 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, WM
