Projected for Fiscal Year 2008

*The current contribution rate is insufficient to amortize the unfunded liability over a 31-year period. Currently, the total contribution rate necessary to maintain a 31-year funding period is 12.94% of payroll, so the funding shortfall is .49. Under the proposal, the required 31-year amortization would increase by .07% of payroll to 13.01%, resulting in a shortfall of .16%. Thus, the proposal would reduce the funding shortfall by .33%.

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

ACTUARIAL EFFECTS:

SB 1847, engrossed, would increase, by .03% of payroll, the projected normal cost of ERS for fiscal year 2008 from 11.98% to 12.01% and ultimately, to 12.09%. The fiscal year 2008 estimated ERS unfunded accrued actuarial liability would increase approximately $5.9 million, from $1,031.2 million to $1,037.1 million.  The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Under current law, the total contribution rate would need to increase from 12.45% of payroll to 12.94% of payroll 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, the total contribution rate necessary to achieve a 31-year funding for ERS would increase by .07% to 13.01% of payroll. However, the state contribution rate to achieve a 31-year funding for ERS would drop by 0.33%, from 6.94% to 6.61%.

SYNOPSIS OF PROVISIONS

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

·         Increase the employee contribution rate for ERS from 6.0% of compensation to 6.4% of compensation.

FINDINGS AND CONCLUSIONS

SB 1847, engrossed, proposes to increase the employee contribution rate for ERS from 6.0% of compensation to 6.4% of compensation.  This increase in employee contribution also increases plan liabilities, since the plan liabilities include anticipated refunds of employee contributions, and these future refunds will now be larger.

SB 1847, engrossed, would increase, by .03% of payroll, the projected normal cost of ERS for fiscal year 2008 from 11.98% to 12.01% and ultimately, to 12.09%. The fiscal year 2008 estimated ERS unfunded accrued actuarial liability would increase approximately $5.9 million, from $1,031.2 million to $1,037.1 million.  The current contribution rate is insufficient to provide for normal cost plus amortize the unfunded actuarial accrued liability over 31 years. Under current law, the total contribution rate would need to increase from 12.45% of payroll to 12.94% of payroll 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, the total contribution rate necessary to achieve a 31-year funding for ERS would increase by .07% to 13.01% of payroll. However, the state contribution rate to achieve a 31-year funding for ERS would drop by 0.33%, from 6.94% to 6.61%.

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 to the August 31, 2006 actuarial valuations of ERS. The analysis assumes no further changes are made to ERS.  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 Kim M. Nicholl & S. Lynn Hill , Buck Consultants  March 22, 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 pre-fund pension benefits adequately during the course of an employee's career.

Unfunded Actuarial Accrued 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.