Projected for Fiscal Year 2010 – Dollar Amounts in Millions

*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.  Currently, the total contribution rate necessary to maintain a 31-year funding period is 19.38% of payroll.  If the provisions of this bill are enacted, it is anticipated that contributions for ERS will need to increase 0.07% to 19.45% of payroll for fiscal year 2010 to achieve a 31-year funding for ERS under the requirements of Section 811.006 of Texas Government Code.

Projected for Fiscal Year 2010 – Dollar Amounts in Millions

*The current total contribution rate of 1.59% is insufficient to pay the normal cost of the plan and amortize the unfunded liabilities in less than 31 years.  Currently, the total contribution rate necessary to maintain a 31-year funding period is 3.12% of payroll.  If the provisions of this bill are enacted, it is anticipated that contributions for LECOSRF will need to increase 0.15% to 3.27% of payroll for fiscal year 2010 to achieve a 31-year funding for LECOSRF under the requirements of Section 811.006 of Texas Government Code.

Projected for Fiscal Year 2010 – Dollar Amounts in Millions

*The current total contribution rate of 12.98% is insufficient to pay the normal cost of the plan and amortize the unfunded liabilities in less than 31 years.  Currently, the total contribution rate necessary to maintain a 31-year funding period is 17.65% of payroll.  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 to achieve a 31-year funding period for TRS. 

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

ACTUARIAL EFFECTS:

Employees Retirement System of Texas (ERS):  HB 2913 would increase the actuarially sound contribution rate (from 19.38% to 19.45%).  The total actuarially sound contribution rate for fiscal years 2010 and 2011 is the rate projected to satisfy the 31-year funding requirement of Section 811.006 through fiscal year 2011.  This includes an increase in the total normal cost rate from 13.37% to 13.54% under this proposal.  The bill would result in additional funding for ERS because the ERS payroll would increase.

The fiscal year 2009 total contribution rate is 12.45% for ERS, which is comprised of 6.00% member contributions and 6.45% employer contributions.  The total normal cost rate, which is calculated to be a level percentage of active member payroll, is 13.37%.  Based on the February 28, 2009 update of the August 31, 2008 actuarial valuation, the actuary has projected that the Section 811.006 actuarially sound total contribution rate for fiscal years 2010 and 2011 is 19.38%, while at the current 12.45% contribution rate the funding period is infinite. 

Law Enforcement and Custodial Officers Supplemental Retirement Fund (LECOSRF):  HB 2913 would increase the actuarially sound total contribution rate from 3.12% to 3.27%.  The total actuarially sound contribution rate for fiscal years 2010 and 2011 is the rate projected to satisfy the 31-year funding requirement of Section 811.006 through fiscal year 2011.  There is also an increase in the total normal cost rate from 2.18% to 2.38% under this proposal. The bill would result in additional funding for LECOSRF because the LECOSRF payroll would increase.  

The current total contribution rate is 1.59% for LECOSRF, which is comprised entirely of employer contributions.  The total normal cost rate, which is calculated to be a level percentage of active member payroll, is 2.18%.  Based on the February 28, 2009 update of the August 31, 2008 actuarial valuation, the actuary has projected that the Section 811.006 actuarially sound total contribution rate for fiscal years 2010 and 2011 is 3.12%, while at the current 1.59% contribution rate the funding period is infinite.  

The bill would increase the actuarial costs of ERS/LECOSRF; therefore, the actuary for the two plans, 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 – to 19.45% of payroll for the ERS plan, and to 3.27% of payroll for LECOSRF – in order to become actuarially sound and comply with the requirements of Texas Government Code Section 811.006.

Teacher Retirement System of Texas (TRS):  HB 2913 would increase the estimated unfunded actuarial accrued liability, as of February 28, 2009, by $23 million.  The bill would result in less funding for TRS because TRS payroll would decrease.

The current total contribution rate is 12.98% for TRS, which is comprised of 6.40% member contributions and 6.58% employer contributions.  The total normal cost rate, which is calculated to be a level percentage of active member payroll, is 10.42%.   Based on the February 28, 2009 update of the August 31, 2008 actuarial valuation, the actuary has projected that the Section 821.006 actuarially sound total contribution rate for fiscal years 2010 and 2011 is 17.65%.  The current total contribution rate of 12.98% falls short of the Section 821.006 standard by 4.67% of payroll.  In order for the TRS funding period to be the statutory benchmark of 30 years, the State’s contribution would need to increase to 11.26% of the pay if the members’ rate is to remain 6.40% of pay; however, an 11.26% of pay state contribution is above the constitutional maximum of 10.00%.  Also, 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 29, 2009 update and an increase of 4.68% from the State’s current rate of 6.58%.  If the State and member rates are increased so that the 30 year contribution requirements are shared equally, the State and member contribution rates would need to be increased to 9.08% each.  Since the funding period is infinite before the proposal and there is no corresponding increase in funding, the funding period will remain infinite. 

SYNOPSIS OF PROVISIONS:

HB 2913 would amend the Texas Government Code to grant membership in ERS as of September 1, 2009 to all persons who are contributing members of TRS on August 31, 2009 and who are employed as commissioned law enforcement officers of a public institution of higher education on both August 31, 2009 and September 1, 2009.  The impacted employees would have their membership in TRS transferred to ERS and their TRS service credit would be treated as ERS service credit for eligibility purposes.   At the time of retirement or death of a transferred member, TRS will calculate and transfer money to ERS as prescribed by Section 805.008 of the Texas Government Code.  Newly employed persons serving as commissioned law enforcement officers of a public institution of higher education on or after September 1, 2009 will become members of ERS.  The service of these employees would be classified as custodial officer service in ERS and LECOSRF.  The provisions of this bill are effective September 1, 2009.

FINDINGS AND CONCLUSIONS:

HB 2913 would add Section 811.001(19) to the Texas Government Code and Sections 811.001(9), 812.003(a), 814.104(b), 815.505, 821.001(6) and 822.002 of the Texas Government Code would be amended to  grant membership in ERS as of September 1, 2009 to all persons who are contributing members of TRS on August 31, 2009 and who are employed as commissioned law enforcement officers of a public institution of higher education on both August 31, 2009 and September 1, 2009.  Their TRS service credit would be treated as ERS service credit for eligibility purposes and, at the time of retirement or death, TRS and ERS would share the cost of the benefits based on the provisions of Section 805.008 of the Texas Government Code.  Newly employed persons serving as commissioned law enforcement officers of a public institution of higher education on or after September 1, 2009 will become members of ERS.  The service of these employees would be classified as custodial officer service in ERS and LECOSRF.

Currently, commissioned law enforcement officers of public institutions of higher education are members of TRS.

According to the ERS actuarial analysis, approximately 1,800 contributing members of TRS are employed as commissioned law enforcement officers of public institutions of higher education.  It is assumed that this affected group has characteristics similar to the current members employed by the Department of Public Safety: an average age of 39, average service of 11 years and average pay of $57,000.

According to the TRS actuarial analysis, approximately 2,023 current TRS members will be impacted by the bill.  Since TRS data does not currently allow for the definite identification of the affected active TRS members, it is assumed these 2,023 eligible members will have the same age/service/pay distribution as the TRS active group as a whole. 

The effect of the proposal on ERS would be an increase in the actuarially sound contribution rate (from 19.38% to 19.45%).  The total actuarially sound contribution rate for fiscal years 2010 and 2011 is the rate projected to satisfy the 31-year funding requirement of Section 811.006 through fiscal year 2011.  There is also an increase in the total normal cost rate from 13.37% to 13.54% under this proposal.  The bill would result in additional funding for ERS because the ERS payroll would increase.

The effect of the proposal on LECOSRF would be an increase in the actuarially sound total contribution rate (from 3.12% to 3.27%).  The total actuarially sound contribution rate for fiscal years 2010 and 2011 is the rate projected to satisfy the 31-year funding requirement of Section 811.006 through fiscal year 2011.  There is also an increase in the total normal cost rate from 2.18% to 2.38% under this proposal.  The bill would result in additional funding for LECOSRF because the LECOSRF payroll would increase.

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 unfunded accrued liability of both these plans exceed 30 years by one or more years.  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 – to 19.45% of payroll for the ERS plan, and to 3.27% of payroll for LECOSRF – in order to become actuarially sound and comply with the requirements of Texas Government Code Section 811.006.

The effect of the proposal on TRS would be an increase in the estimated funded actuarial accrued liability, as of February 28, 2009, by $23 million.  The bill would result in less funding for TRS because TRS payroll would decrease.

The current total contribution rate is 12.98% for TRS, which is comprised of 6.40% member contributions and 6.58% employer contributions.  The total normal cost rate, which is calculated to be a level percentage of active member payroll, is 10.42%.   Based on the February 28, 2009 update of the August 31, 2008 actuarial valuation, the actuary has projected that the Section 821.006 actuarially sound total contribution rate for fiscal years 2010 and 2011 is 17.65%.  The current total contribution rate of 12.98% falls short of the Section 821.006 standard by 4.67% of payroll.  In order for the TRS funding period to be the statutory benchmark of 30 years, the State’s contribution would need to increase to 11.26% of the pay if the members’ rate is to remain 6.40% of pay; however, an 11.26% of pay state contribution is above the constitutional maximum of 10.00%.  Since the funding period is infinite before the proposal and there is no corresponding increase in funding, the funding period will remain infinite. 

METHODOLOGY AND STANDARDS:

Currently, commissioned law enforcement officers of public institutions of higher education are members of TRS.

According to the ERS actuarial analysis, approximately 1,800 contributing members of TRS are employed as commissioned law enforcement officers of public institutions of higher education.  It is assumed that this affected group has characteristics similar to the current members employed by the Department of Public Safety: an average age of 39, average service of 11 years and average pay of $57,000.

According to the TRS actuarial analysis, approximately 2,023 current TRS members will be impacted by the bill.  Since TRS data does not currently allow for the definite identification of the affected active TRS members, it is assumed these 2,023 eligible members will have the same age/service/pay distribution as the TRS active group as a whole. 

The analysis assumes no further changes are made to ERS/LECOSRF/TRS and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually.  The ERS/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/LECOSRF.  The TRS analysis and calculations are based on the member data of TRS as of August 31, 2008, the actuarial value of assets updated as of February 28, 2009, and the actuarial assumptions and methods in use as of August 31, 2008 for valuing the actuarial condition of TRS.  Finally, the TRS analysis is based on all other provisions of TRS in effect as of August 31, 2008.  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, April 9, 2009

TRS Actuarial Analysis by W. Michael Carter, Lewis Ward, Joseph P. Newton, Gabriel Roeder Smith & Company, Consultants and Actuaries, April 8, 2009.

Actuarial Review by 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.