81(R) HB 2559 - House Committee Report version

Projected for Fiscal Year 2010 – Dollar Amounts in Millions

Employees Retirement System of Texas	Current	Proposed	Difference
State Contribution Employee Contribution Total Contribution*	6.45% 6.00% 12.45%	6.45% 6.45% 12.90%	0.00% +0.45% +0.45%
31-year Funding Contribution Required	19.38%	18.69%	-0.69%
Normal Cost (% of payroll)	13.37%	12.28%	-1.09%
Unfunded Actuarial Accrued Liability (millions)	$3,957.0	$4,405.5	$+448.5
Amortization Period (years)	Infinite	Infinite	N/A

*The current total contribution rate of 12.45% is insufficient to pay the normal cost of the plan and amortize the unfunded liabilities in less than 31 years. It is projected that a total contribution rate of 19.38% of payroll is needed for fiscal year 2010 to achieve a 31-year funding for ERS under the requirements of Section 811.006 of Texas Government Code. Under the proposal, the required 31-year amortization rate would decrease by 0.69% of payroll to 18.69% of payroll.

Projected for Fiscal Year 2010 – Dollar Amounts in Millions

Law Enforcement and Custodial Officer Supplemental Retirement Fund	Current	Proposed	Difference
State Contribution Employee Contribution Total Contribution	1.59 % 0.00 % 1.59 %	1.59 % 0.50 % 2.09 %	0.00% +0.50% +0.50%
31-year Funding Contribution Required*	3.12%	3.09%	-0.03%
Normal Cost (% of payroll)	2.18 %	2.08 %	-0.10%
Unfunded Actuarial Accrued Liability (millions)	$142.3	$164.2	+$21.9
Amortization Period (years)	Infinite	Infinite	N/A

*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 0.03% of payroll to 3.09% of payroll

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

ACTUARIAL EFFECTS:

Employees Retirement System of Texas (ERS): CSHB 2559 would decrease, by 1.09% of payroll, the normal cost of ERS, from 13.37% of payroll to 12.28% of payroll. The proposal would increase the unfunded actuarial accrued liability (UAAL) from $3,957.0 million to $4,405.5 million, a total increase of $448.5 million. The proposal would not change the amortization period, which will remain infinite. The current total contribution rate for ERS is 12.45% of payroll, which is comprised of 6.00% employee contributions and 6.45% employer contributions. The proposal would increase the employee contribution rate by 0.45% to 6.45% (Under the proposal, the required employee contribution rate to ERS would increase from 6.00% to 6.50%, provided that if the state contribution rate is less than 6.50% of payroll, the employee contribution rate would be set at the same rate as the state contribution rate. The current state contribution rate is 6.45% of payroll and as such, the analysis assumes the employee contribution rate to be 6.45% of payroll). Based on the February 28, 2009 update of the August 31, 2008 actuarial valuation, the actuary has projected that the actuarially sound 31-year rate for fiscal years 2010 and 2011 is 19.38% of payroll. Under the proposal, the actuarially sound 31-year rate would decrease by 0.69% of payroll to 18.69% of payroll.

Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF): CSHB 2559 would decrease, by 0.10% of payroll, the normal cost of LECOSRF, from 2.18% of payroll to 2.08% of payroll. The proposal would increase the unfunded actuarial accrued liability (UAAL) from $142.3 million to $164.2 million, a total increase of $21.9 million. The proposal would not change the amortization period, which would remain infinite. The current total contribution rate for LECOSRF is 1.59% of payroll, which is comprised of 0.00% employee contributions and 1.59% employer contributions. The proposal would increase the employee contribution rate by 0.50% of payroll to 0.50% of payroll. Based on the February 28, 2009 update of the August 31, 2008 actuarial valuation, the actuary has projected that the actuarially sound 31-year rate for fiscal years 2010 and 2011 is 3.12% of payroll. Under the proposal, the actuarially sound 31-year rate would decrease by 0.03% of payroll to 3.09% of payroll.

SYNOPSIS OF PROVISIONS:

CSHB 2559 would, effective September 1, 2009, provide the following changes:

· Establish a 90-day waiting period for members in the employee class who retire on or after May 31, 2009 and seek re-employment in the employee class, as well as add a surcharge payable by the state agency that rehires a retiree that equals the retirement contribution the agency would remit for a normal active member.

· Allow sick leave and annual leave to be used only in determining the member’s or beneficiary’s annuity but not retirement eligibility, for those members that are hired on or after September 1, 2009.

· Require that members of the employee class hired on or after September 1, 2009 to be at least 65 years old and have at least 10 years of service or have at least five years of service and the sum of age and service exceed 80 to be eligible to retire and receive a service retirement annuity.

· Calculate the service retirement annuity using an average compensation based on the 48 highest months of compensation for members hired on or after September 1, 2009.

· Reduce the standard service retirement annuity by five percent for each year the member retires before age 60, with a maximum possible reduction of 25 percent, for members hired on or after September 1, 2009.

· Calculate the standard service retirement annuity payable for at least 20 years of service credit as a law enforcement or custodial officer using an average compensation based on the 48 highest months of compensation for members hired on or after September 1, 2009.

· Reduce the standard service retirement annuity for law enforcement or custodial officers by five percent for each year the member retires before age 55, with a maximum possible reduction of 25 percent.

· Increase the required employee contribution to ERS from 6.00% to 6.50% of payroll, provided that if the state contribution rate to ERS is less than 6.50% of payroll, the employee contribution rate is set equal to the state contribution rate.

· Increase the employee contribution rate to LECOSF from 0.00% to 0.50% of payroll for law enforcement or custodial officers, provided that if the state contribution rate to LECOSRF is less than 0.50% of payroll, the employee contribution rate is set equal to the state contribution rate.

· Repeal several sections of the Texas Government Code, including 812.006 (Optional Membership), 833.1035 (Service in Excess of 20 Years), 833.104 (Service on Domestic Relations or Special Juvenile Court), 835.1015 (Contributions after 20 Years of Service Credit), 838.1035 (Service in Excess of 20 Years), 838.104 (Service on Domestic Relations or Special Juvenile Court), 840.1025 (Contributions after 20 Years of Service Credit), 840.1027 (Contributions after Attaining Rule of 70)

· Provide for the disposition of unclaimed beneficiary benefits and unclaimed contributions of former members.

· Specify two instances in which a member who is otherwise eligible to receive a disability retirement annuity may not receive the annuity.

· Amend several other portions of the Texas Government Code and the Texas Insurance Code relative to ERS.

FINDINGS AND CONCLUSIONS:

CSHB 2559 proposes to add or amend several sections of the Texas Government Code related to ERS and LECOSRF. Under the proposal, the required employee contribution rate to ERS would increase from 6.00% to 6.50%, provided that if the state contribution rate is less than 6.50% of payroll, the employee contribution rate would be set at the same rate as the state contribution rate. The current state contribution rate is 6.45% of payroll and as such, the analysis assumes the employee contribution rate to be 6.45% of payroll. Also, the employee contribution rate to LECOSRF would be 0.50% of payroll, provided that if the state contribution rate to LECOSRF is less than 0.50% of payroll, the employee contribution rate is set equal to the state contribution rate. Currently the employee contribution rate to LECOSRF is 0.00% of payroll. Additionally, the proposal would establish a 90-day waiting period for members in the employee class who retire on or after May 31, 2009 and seek re-employment in the employee class, as well as add a surcharge payable by the state agency that rehires a retiree that equals the retirement contribution the agency would remit for a normal active member. Other proposed changes that would effect only members hired on or after September 1, 2009 include requiring members of the employee class hired on or after September 1, 2009 to be at least 65 years old and have at least 10 years of service or have at least five years of service and the sum of age and service exceed 80 to be eligible to retire and receive a service retirement annuity; allowing sick leave and annual leave to be used only in determining the member’s or beneficiary’s annuity; calculating the service retirement annuity using an average compensation based on the 48 highest months of compensation; reducing the standard service retirement annuity for law enforcement or custodial officers by five percent for each year the member retires before age 55, with a maximum possible reduction of 25 percent; and reducing the standard service retirement annuity for regular employee class members by five percent for each year the member retires before age 60, with a maximum possible reduction of 25 percent.

The bill would make changes to the Judicial Retirement System Plan II (JRS II) which would increase the costs of the plan. It would repeal Government Code 838.1035(c), which effectively limits the maximum retirement benefit to 80% of salary, and would thereby allow the maximum benefit to be 90% of salary. The ERS actuary certifies JRS II is actuarially sound, however this is based on an smoothed actuarial value of assets (AVA) which is 50% greater than the market value of assets (MVA). JRS II is arguably actuarially unsound; even using an AVA only 40% greater than MVA would leave it actuarially unsound with an infinite funding period.

Government Code 840.106 limits increases in allowable creditable service if JRS II is actuarially unsound. However, in this case the increase would not lead to a material increase in long-term JRS costs, and the actuarial valuation already assumes members can acquire the additional service. Hence the increase would not be limited by Government Code 840.106.

CSHB 2559 would decrease, by 1.09% of payroll, the normal cost of ERS, from 13.37% of payroll to 12.28% of payroll. The proposal would increase the unfunded actuarial accrued liability (UAAL) from $3,957.0 million to $4,405.5 million, a total increase of $448.5 million. The proposal would not change the amortization period, which will remain infinite. The current total contribution rate for ERS is 12.45% of payroll, which is comprised of 6.00% employee contributions and 6.45% employer contributions. The proposal would increase the employee contribution rate by 0.45% to 6.45% (Under the proposal, the required employee contribution rate to ERS would increase from 6.00% to 6.50%, provided that if the state contribution rate is less than 6.50% of payroll, the employee contribution rate would be set at the same rate as the state contribution rate. The current state contribution rate is 6.45% of payroll and as such, the analysis assumes the employee contribution rate to be 6.45% of payroll). Based on the February 28, 2009 update of the August 31, 2008 actuarial valuation, the actuary has projected that the actuarially sound 31-year rate for fiscal years 2010 and 2011 is 19.38% of payroll. Under the proposal, the actuarially sound 31-year rate would decrease by 0.69% of payroll to 18.69% of payroll.

CSHB 2559 would decrease, by 0.10% of payroll, the normal cost of LECOSRF, from 2.18% of payroll to 2.08% of payroll. The proposal would increase the unfunded actuarial accrued liability (UAAL) from $142.3 million to $164.2 million, a total increase of $21.9 million. The proposal would not change the amortization period, which will remain infinite. The current total contribution rate for LECOSRF is 1.59% of payroll, which is comprised of 0.00% employee contributions and 1.59% employer contributions. The proposal would increase the employee contribution rate by 0.50% of payroll to 0.50% of payroll. Based on the February 28, 2009 update of the August 31, 2008 actuarial valuation, the actuary has projected that the actuarially sound 31-year rate for fiscal years 2010 and 2011 is 3.12% of payroll. Under the proposal, the actuarially sound 31-year rate would decrease by 0.03% of payroll to 3.09% of payroll.

Under CSHB 2559, both ERS and LECOS would have increased liabilities and lower normal costs from the benefit reductions for new members. The easiest way to see that the net impact is actuarially positive for both systems is that the 30 year funding rates decrease. Combined with the member contribution increases, the bill will make a significant improvement towards actuarial soundness for both systems.

METHODOLOGY AND STANDARDS:

The assumptions and methods used are the same as used in the ERS and LECOSRF actuarial valuations for August 31, 2008 and mid-year valuations as of February 28, 2009, except for the variation of the Entry Age Normal (EAN) cost method that was used to consider the benefit reductions for the new tier of benefits. The lower normal cost for new entrants in the new tier of benefits was considered in calculating liabilities for the current members. The result was a lower normal cost for current members and an increased liability for new members, even though benefits for current members were not changed. 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. 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.

SOURCES:

Actuarial Analysis by Richard A. Mackesey and R. Ryan Falls, Actuaries, Buck Consultants, May 22, 2009.

Actuarial Review by Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board, May 22, 2009.

Letter from R. Ryan Falls, Buck Consultants, to Mr. William Nail, ERS, May 7, 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.

LEGISLATIVE BUDGET BOARD
Austin, Texas

ACTUARIAL IMPACT STATEMENT

81ST LEGISLATIVE REGULAR SESSION


May 23, 2009

TO:	Honorable Robert Duncan, Chair, Senate Committee on State Affairs

FROM:	John S. O'Brien, Director, Legislative Budget Board

IN RE:	HB2559 by Truitt (Relating to the powers and duties of the Employees Retirement System of Texas.), Committee Report 2nd House, Substituted