Projected for Fiscal Year 2010

* 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 17.65% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.01% of payroll to 17.66%. If the provisions of this bill are enacted, it is anticipated that contributions for TRS will need to increase to 17.66% of payroll for fiscal year 2010 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 821.006.

Projected for Fiscal Year 2010

* The provisions of the bill propose a state contribution rate of 2.13 to fund POSRF.  According to the actuarial analysis provided by TRS, the required 31-year funding contribution rate is 4.77% of payroll. 

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

ACTUARIAL EFFECTS:

Teacher Retirement System of Texas (TRS):  HB 997 would increase the normal cost of TRS by 0.01% of payroll, from 10.42% to 10.43%, as the relaxed eligibility requirements and the 3 year compensation averaging period increases the normal cost from 10.40% to 13.57% for each member that is defined as a “peace officer”. The provisions of the bill would increase the estimated unfunded actuarial accrued liability (UAAL) of TRS, as of February 28, 2009, by $8 million, from $40.356 billion to $40.364 billion. The current total contribution rate is 12.98% for TRS, which is comprised of 6.40% member contributions and 6.58% employer contributions.  In order for the TRS funding period to be the statutory benchmark of 30 years, the State’s contribution rate would need to increase to 11.26% of pay if the members’ rate is to remain 6.40% of pay. A state contribution rate of 11.26% of pay is above the constitutional maximum of 10.00%.  An increase to 11.26% of pay would be an increase of 0.01% from the 30 year contribution requirement of 11.25% based on the February 28th update and an increase of 4.68% from the State’s current rate of 6.58%.  The 30 year state rate funding is based upon 6.40% of pay from all unchanged employees and 7.00% of pay from the impacted members.

Peace Officer Supplemental Retirement Fund (POSRF):  HB 997 would create the POSRF.  Under the proposal, the fund would be created with a UAAL of $41.0 million.  The normal cost of POSRF would be 2.01% of payroll.  The proposed contribution rate would be 2.13%; however, the projected 30 year funding rate is 4.77%, therefore, the proposed rate of 2.13% would result in an infinite amortization period. In addition, if the bill is passed, the Supplemental Fund would need its own actuarial valuation, incurring actuarial and administrative fees.    

SYNOPSIS OF PROVISIONS:

HB 997, to be effective immediately if receiving required votes or if not, September 1, 2009, would provide the following changes:

• Would provide enhanced benefits through TRS and a supplemental program for “peace officers”. The bill defines a “peace officer” as a member of the retirement system who has been commissioned by a public school district as a law enforcement officer under Section 37.081, Education Code. Currently, there are approximately 2,000 members of TRS who would fall under this definition.

• The bill would enhance the benefits payable to “peace officers” through more liberal retirement eligibility requirements, a three year averaging period for the calculation of the final average earnings, and increase from 2.3% to 2.8% of the benefit multiplier for members who attain 20 years of service as a “peace officer”.

FINDINGS AND CONCLUSIONS:

HB 997 would provide enhanced benefits through TRS and a supplemental program for “peace officers”. The bill defines a “peace officer” as a member of the retirement system who has been commissioned by a public school district as a law enforcement officer under Section 37.081, Education Code.  The provisions of the bill would enhance the benefits payable to “peace officers” through more liberal retirement eligibility requirements, a three year averaging period for the calculation of the final average earnings, and a 2.8% benefit multiplier for members who attain 20 years of service as a “peace officer”.

HB 997 would increase the normal cost of TRS by 0.01% of payroll, from 10.42% to 10.43%. The bill would also create POSRF, with a normal cost rate of 2.01%.  The provisions of the bill would increase the estimated unfunded actuarial accrued liability (UAAL) of TRS, as of February 28, 2009, by $8 million, from $40.356 billion to $40.364 billion. The newly created POSRF would have a UAAL of $41.0 million.

The analysis from TRS assumed the number of members who would be defined as “peace officers” was estimated as 2,038 and was provided by TRS staff. The TRS actuaries did not have the individual data for these members and therefore made the approximation that the age/service/salary distribution for these members matched the current population of TRS.

“Peace officers” would become eligible for unreduced retirement benefits (the Normal Retirement Age) at age 55 with 10 years of service as a “peace officer”, age 50 with 20 years of service as a “peace officer”, or the age when Rule of 80 is met. Members with 20 years of service as a “peace officer” who were less than the Normal Retirement Age would be eligible to retire with benefits actuarially reduced from the Normal Retirement Age.

Members who retire with a minimum of 20 years of service as a “peace officer” would be eligible for a total retirement benefit of the member’s average monthly compensation for the highest 36 months of compensation times the percentage factor used in Section 824.203(a) plus 0.50%. Currently, the percentage factor used in Section 824.203(a) is 2.3% and therefore the benefit multiplier used for “peace officer” benefits would be 2.8%. Members with less than 20 years of service as a “peace officer” would not be eligible for the additional benefit multiplier.

The analysis assumes no further changes are made to TRS/POSRF and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually.  The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2009 update of the August 31, 2008 actuarial valuation of 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:  

TRS Actuarial Analysis by W. Michael Carter, Lewis Ward, Joseph P. Newton, Gabriel Roeder Smith & Company, Consultants and Actuaries, April 13, 2009.

Actuarial Review by Mr. Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board, April 14, 2009

GLOSSARY OF ACTUARIAL TERMS:

Normal Cost-- the current 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.