LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
80TH LEGISLATIVE REGULAR SESSION
 
April 24, 2007

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.), Committee Report 1st House, Substituted

 

Teacher Retirement System

Current

Proposed

Difference

State Contribution

Employee Contribution

Employer Contribution

Total Contribution

6.00 %

     6.40 %

                 0.00 % 

12.40 %

6.40 - 6.60 %

      6.40 - 6.60 %

0.19 - 0.56**%

12.99 - 13.76%

+0.4 - 0.6%

0.0   - 0.2%

      0.19 - 0.56%

+0.59 1.36%

Normal Cost (% of payroll)

10.40 %

10.40 %

0.0%

Net Liability (millions)

$12,060

$12,470

$410.0

Amortization Period (years)

76.9

> 30 to < 30

N/A

*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 13.00% of payroll. Under the proposal, the required 30-year amortization rate would increase by 0.10% of payroll to 13.10%, which is within the range of the proposed bill.  

**The proposal calls for a range of Employer Contributions from .25% to .75% of payroll. The TRS actuary estimates that due to certain exemptions to this contribution for local school districts that pay Social Security tax out of local funds, the aggregate average rate would be 75% of this nominal rate range, or an aggregate range of approximately .19% to .56%.

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

 

ACTUARIAL EFFECTS:

 

CSSB 1846 would not increase the normal cost of the Teacher Retirement System (TRS). The unfunded actuarial accrued liability would increase under the proposal by $410 million, from $12.060 billion to $12.470 billion. According to the TRS actuary, for the provisions of the bill to pass without violating statutory funding requirements, the total contribution rate would need to be increased to approximately 13.10% of payroll. The provisions of CSSB 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. The proposal also requires that the state contribution be at least the level of employee contributions. Assuming that the employee contribution rate remains at 6.4% of payroll, the total contribution required by this bill will range from 12.99% to 13.76% of payroll. Any rate in excess of 13.10% of payroll will be sufficient to reduce the amortization period to 30 years or less.

 

SYNOPSIS OF PROVISIONS

 

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.

         Require 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. Employers may deduct from the contribution amount matching contributions paid into Social Security from local funds.

         Provide a supplemental payment for eligible annuitants in an amount equal to their monthly benefit, paid no later than September 2007.

 

 

FINDINGS AND CONCLUSIONS

 

CSSB 1846 would require a minimum state contribution to be equal to the applicable employee contribution rate. The bill also would provide a supplemental payment for eligible annuitants in an amount equal to their monthly benefit, paid no later than September 2007. 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.

 

CSSB 1846 would not increase the normal cost of the Teacher Retirement System (TRS). The unfunded actuarial accrued liability would increase under the proposal by $410 million from $12.060 billion to $12.470 billion.

 

CSSB 1846 would increase benefit payments for current retirees and cause the unfunded liability to increase. Since the funding period of TRS already exceeds 31 years, passage of the bill without additional funding would violate statutory requirements. The total contribution would need to be 13.10%, and the state would have to contribute at least 6.4%. If there were no increase above 6.4% by the state or members, for the system to be actuarially sound, local districts would need to contribute a nominal 0.4% (assuming a net contribution of 0.3%).  

 

 

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.

 

 

SOURCES:

 

Actuarial Analyses by Lewis Ward & W. Michael Carter, Actuaries, Gabriel, Roeder, Smith & Co. April 23, 2007

Actuarial Review by Mr. Richard E. White, & Robert L. Schmidt, Actuaries, Milliman, April 23, 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, WM