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 19.38% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.03% of payroll to 19.41%. If the provisions of this bill are enacted, it is anticipated that contributions for ERS will need to increase to 19.41% of payroll for fiscal year 2010 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006.

* 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 3.12% of payroll. Under the proposal, the required 31-year amortization rate would decrease by 0.11% of payroll to 3.01%. If the provisions of this bill are enacted, it is anticipated that contributions for LECOSRF will need to increase to 3.01% of payroll for fiscal year 2010 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006.

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

ACTUARIAL EFFECTS:

Employees’ Retirement System of Texas: According to the actuarial analysis, the effect of HB 2120 on the Employees’ Retirement System of Texas (ERS) would be a $1.4 million increase (from $3,957 million to $3,958.4 million) in the projected August 31, 2009 unfunded actuarial accrued liability (UAAL) and a 0.02% increase (from 13.37% to 13.39%) in the total normal cost rate. The current ERS total contribution rate is 12.45% of payroll.  Based on the February 28, 2009 update of the August 31, 2008 valuation, the UAAL will never be amortized with a 12.45% contribution rate and therefore the current amortization period is infinite. Since Section 811.006 of the Texas Government Code requires that changes in ERS contribution rates or benefit provisions may not be adopted if such changes would cause the time required to amortize the UAL to equal or exceed 31 years, ERS would be required to contribute at the actuarially sound rate in order to be in compliance with Section 811.006.  The current actuarially sound contribution rate is 19.38%.  HB 2120 would cause that rate to increase by 0.03%, to 19.41%.

Law Enforcement and Custodial Officer Supplemental Retirement Fund: According to the actuarial analysis, the normal cost rate for the juvenile correction officers and caseworkers employed by the Texas Youth Commission is less than the current contribution rate for the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF). So although the LECOSRF payroll would increase by $94.1 million, the normal cost as a percentage of payroll would decrease by 0.05% (from 2.18% to 2.13%). Under the proposal, because the LECOSRF payroll would increase by $94.1 million, the lower LECOSRF normal cost would be applied to a larger payroll and result in an increase in the total dollar amount of the normal cost and an increase in the total dollar amount of contributions. There would also be a 0.11% decrease (from 3.12% to 3.01%) in the actuarially sound contribution rate.  The UAAL would remain unaffected.  It should be noted that according to the actuarial analysis, this proposal does increase the benefits payable by LECOSRF even though the actuarially sound rate is reduced by this proposal. Therefore, LECOSRF would be required to increase the total contribution rate by 1.42% (from 1.59% to 3.01%) in order to contribute at the actuarially sound rate of 3.01% and comply with Section 811.006.

SYNOPSIS OF PROVISIONS:

This bill, to be effective September 1, 2009, would provide the following changes:

·         Amends the definition of “custodial officer” to include service performed after August 31, 2009 as a juvenile correction officer or caseworker employed by the Texas Youth Commission as commissioned peace officer service in ERS and LECOSRF

FINDINGS AND CONCLUSIONS:

Under HB 2120, Sections 811.001(8), 813.506(b), 813.506(c) and 815.505 of the Texas Government Code would be amended to add to the definition of custodial officer a juvenile correctional officer or caseworker employed by the Texas Youth Commission. This change in definition would include all service performed after August 31, 2009 as a juvenile correction officer or caseworker employed by the Texas Youth Commission as commissioned peace officer service in ERS and LECOSRF. According to the actuarial analysis, the bill would impact about 2,300 active members of ERS who would become members of LECOSRF.

The effect of  HB 2120 on ERS would be a $1.4 million increase in the projected August 31, 2009 UAAL and an increase in the actuarially sound contribution rate (from 19.38% to 19.41%).There is also an increase in the total normal cost rate (from 13.37% to 13.39%) under this proposal.

Since the normal cost rate for the juvenile correction officers and caseworkers employed by the Texas Youth Commission is less than the current contribution rate for LECOSRF, the effect of the HB 2120 on LECOSRF would be a decrease in the actuarially sound total contribution rate (from 3.12% to 3.01%) and a decrease in the normal cost rate (from 2.18% to 2.13%).

According to the actuarial analysis, based on the current plan provisions and the fiscal year 2009 total contribution rate of 12.45% for the ERS plan, and 1.59% for LECOSRF, the amortization periods for the UAAL of both plans are infinite. As long as a benefit change does not increase the actuarial cost of ERS, no additional contributions will be required as a result of the legislation. However, as required by Section 811.006 of the Texas Government Code, any legislation that reduces contributions or interest rates, credits additional service, or provides any benefit improvements that increase the actuarial cost of ERS, will require a total contribution at least equal to the normal cost plus an amount necessary to amortize the unfunded liabilities of the new benefit structure over a 31 year period. Since HB 2120 improves benefits of these plans and increases the actuarial costs of ERS; it is projected that total contributions for fiscal year 2010 would need to increase for both plans – to 19.41% of payroll for the ERS plan, and to 3.01% of payroll for LECOSRF – in order to become actuarially sound and comply with the requirements of Texas Government Code Section 811.006.

METHODOLOGY AND STANDARDS:

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 valuations of ERS and LECORF. The analysis assumes no further changes are made to ERS or LECOSRF 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 Richard A. Mackesey, Actuary, and R. Ryan Falls, Actuary, Buck Consultants, April 2, 2009

Actuarial Review by Mr. Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board., April 9, 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.