Established in 1947, the Texas Municipal Retirement System (TMRS) is the statewide system, which administers retirement, disability, and death benefits for employees of those Texas cities which voluntarily elect to participate in the system.  The plan of each of the 827 participating cities is separately funded; funding is provided by employee contributions at a percentage of compensation selected by the city, and by employer contributions actuarially determined as necessary to provide the level of benefits selected. 

ACTUARIAL EFFECTS:

The provisions of HB 360 would, if enacted, provide TMRS the ability to create a long-term financially sound funding arrangement. The system is currently considered actuarially sound based on the assumption of a long-term interest rate of 7%. The system's actuaries do not feel this rate is acheivable with the current asset allocation of 100% fixed income. Failure to pass HB 360 would make other investments challenging, resulting in a lower long-term interest rate assumption. This would require significant increases in city contributions (from 30% to 100% increases) to maintain the system’s actuarial soundness. Due to changes in the funding policy and actuarial assumptions during the last eighteen months, maintenance of the current benefit levels and contribution rates requires the passage of HB 360.

SYNOPSIS OF PROVISIONS:

HB 360, to be effective immediately if receiving required votes or if not, September 1, 2009, would provide the following changes:

·         Allows TMRS to credit unrealized income and/or losses to city accounts.

·         Establishes for members a minimum annual interest credit of 5.0% to member accounts and a 5.0% annuity purchase rate for retirees.

·         Allows member city accounts variable annual interest rate credits, including negative interest.

FINDINGS AND CONCLUSIONS:

The provisions of the bill, if enacted, would provide TMRS the ability to create a long-term financially sound funding arrangement. Current statute only allows TMRS to provide interest credits to employee and employer accounts from realized investment income. The provisions of the bill allow for credit on unrealized income and/or losses, thus allowing TMRS to diversify the system’s assets. The provisions of the bill do not grant TMRS additional investment authority. If HB 360 is not enacted, TMRS will likely remain in the fixed income class and the interest credit on city accounts will likely fall below 5% in the future. The bill would also provide a minimum annual interest credit of 5.0% to member accounts and a 5.0% annuity purchase rate for retirees. Currently, the system maintains a “soft” floor for interest credit. The provisions would set the minimum floor in TMRS statute. Additionally, the provisions of the bill would separate the interest crediting of the accounts of the city and members (which have historically received the same interest crediting). Members will receive the minimum of 5.0%, but the city accounts would receive a percentage based on fund earnings. The effect of this provision will be to credit cities with higher rates in “good” years, and lower, or even negative rates, in “bad” years.

Though the system is currently considered actuarially sound based on the assumption of a long-term interest rate of 7%, failure to pass HB 360 would require changing the long-term interest rate assumption and thereby require significant increases in city contributions (from 30% to 100% increases) to maintain the system’s actuarial soundness. Due to changes in the funding policy and actuarial assumptions during the last eighteen months, maintenance of the current benefit levels and contribution rates requires the passage of HB 360.

METHODOLOGY AND STANDARDS:

The analysis rely on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the December 31, 2007 actuarial valuation of TMRS, with an update to certain actuarial assumptions adopted by the TMRS Board of Trustees in December 2008. The analysis assumes no further changes are made to TMRS 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 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 Analysis by Mr. Mark R. Randall, Executive Vice-President, and Mr. Joseph P. Newton, Senior Consultant, Gabriel, Roeder, Smith & Company, March 5, 2009.

Actuarial Review by Mr. Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board., March 23, 2009

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 Liability-- the amount of total liabilities that are not covered by the total assets of a retirement system.  Both liabilities and assets are measured on an actuarial basis using certain assumptions including average annual salary increases, the investment return of the retirement fund, and the demographics of retirement system members.

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 II benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.