ACTUARIAL EFFECTS:

The actuarial analysis assumes that the typical member that would look to establish military service in the retirement system under this proposal would be a CPO/CO class employee hired by the state between ages 45 and 50, whose cost of benefit in ERS (or normal cost rate) is approximately 17% of pay.  Since the member would only contribute 12.45% to the retirement system, each year of service purchased would cost the retirement system approximately 5.55% of the member’s pay.  For example, in order to establish 25 years of service credit it will cost ERS 138.75% of annual pay for each individual.  

Employees Retirement System of Texas (ERS):  The plan’s actuary estimated that every 1,200 eligible members that elect this option would increase the actuarially sound rate for ERS by 0.01% of payroll.  According to the actuarial analysis, assuming that far less than 1,200 eligible members elect to establish service credit under this proposed legislation, HB 1838 would increase the cost of the plan, but have no material impact on ERS.  The current funding period for ERS is infinite.

Law Enforcement and Custodial Officers Supplemental Retirement Fund (LECOSRF):  The plan’s actuary estimated that every 700 eligible members that elect this option would increase the actually sound rate for LECOSRF by 0.01% of payroll.  According to the actuarial analysis, assuming that far less than 700 eligible members elect to establish service credit under this proposed legislation, HB 1838 would increase the cost of the plan, but have no material impact on LECOSRF.  The current funding period for LECOSRF is infinite.

SYNOPSIS OF PROVISIONS:

HB 1838 would modify the Texas Government Code to allow members with 20 years or more of active federal military duty to establish service credit in the retirement system.  Currently, members with less than 20 years of active federal military duty can establish service credit in the retirement system by contributing six percent of their state salary for each year established.  Additionally, the state currently contributes an amount in the same ratio to the member’s contribution for current service.  If an eligible member elects to establish service credit under this proposal, this legislation would require members to also contribute the amount that would constitute the state’s contribution to establish the service in the retirement system.  The provisions of this bill would be effective September 1, 2009, unless it receives the vote necessary for immediate effect.

FINDINGS AND CONCLUSIONS:

At this time, state employees who currently have 20 or more years of federal military duty are not allowed to establish service credit in the retirement system. 

Under this proposal, Section 813.302 of the Texas Government Code would be amended to allow members with 20 years or more of active federal military duty to establish service credit in the retirement system.  Currently, members with less than 20 years of active federal military duty can establish service credit in the retirement system by contributing six percent of their state salary for each year established.  Additionally, the state currently contributes an amount in the same ratio to the member’s contribution for current service.  If an eligible member elects to establish service credit under this proposal, this legislation would require members to also contribute the amount that would constitute the state’s contribution to establish the service in the retirement system. 

The actuarial analysis assumes that the typical member that would look to establish military service in the retirement system under this proposal would be a CPO/CO class employee hired by the state between ages 45 and 50, whose cost of benefit in ERS (or normal cost rate) is approximately 17% of pay.  Since the member would only contribute 12.45% to the retirement system, each year of service purchased would cost the retirement system approximately 5.55% of the member’s pay.  For example, in order to establish 25 years of service credit it will cost ERS 138.75% of annual pay for each individual.  As a result, the plan’s actuary estimated that every 1,200 eligible members that elect this option would increase the actuarially sound rate for ERS by 0.01% of payroll.  Based on a similar analysis for LECOSRF, the plan’s actuary estimated that every 700 eligible members that elect this option would increase the actually sound rate for LECOSRF by 0.01% of payroll.

The effect of the proposal on ERS, assuming that far less than 1,200 eligible members elect to establish service credit under this proposed legislation, would be an increase in the cost of the plan, but it would have no material impact on ERS. 

The effect of the proposal on LECOSRF, assuming that far less than 700 eligible members elect to establish service credit under this proposed legislation, would be an increase in the cost of the plan, but it would have no material impact on LECOSRF. 

The bill considered here improves benefits and the plans’ actuary, Buck Consultants, certifies that if this bill is enacted, it is projected that total contributions for fiscal year 2010 will need to increase for both plans – from the current 12.45% to 19.38% of payroll for the ERS plan, and from 1.59% to 3.12% of payroll for LECOSRF – in order to become actuarially sound and comply with the requirements of Texas Government Code Section 811.006.

However, as long as a benefit change does not increase the actuarial cost of ERS, no additional State contribution would be required as a result of the legislation. The lack of material actuarial costs for this proposal provides an argument that no additional State contribution would be required for passage of this legislation. 

METHODOLOGY AND STANDARDS:

According to the actuarial analysis, it is assumed that the typical member that would look to establish military service in the retirement system under this proposal would be a CPO/CO class employee hired by the state between ages 45 and 50, whose cost of benefit in ERS (or normal cost rate) is approximately 17% of pay.  Since the member would only contribute 12.45% to the retirement system, each year of service purchased would cost the retirement system approximately 5.55% of the member’s pay. 

The analysis assumes no further changes are made to ERS and LECOSRF and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually.  The ERS and LECOSRF 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 ERS and LECOSRF.  According to the PRB actuary, the actuarial assumptions, methods and procedures used in both analyses 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:  

ERS Actuarial Analysis by Richard A. Mackesey and R. Ryan Falls, Actuaries, Buck Consultants, March 26, 2009

Actuarial Review by Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board, March 27, 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.