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.  If the provisions of this bill are enacted, it is anticipated that contributions for ERS will need to increase to 19.38% 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 increase by 0.01% of payroll to 3.13%. If the provisions of this bill are enacted, it is anticipated that contributions for LECOSRF will need to increase to 3.13% 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, HB 3493 would increase the projected August 31, 2009 unfunded actuarial accrued liability (UAAL) by $0.5 million (from $3,597.0 million to $3,597.5 million).  There would be no increase in the normal cost and no material increase in the actuarially sound contribution rate. The current ERS total contribution rate of 12.45% is insufficient to amortize the UAAL over a 31-year period, and falls short of the actuarially sound contribution rate by 6.93% of payroll. Since HB 3493 has an actuarial cost to the plan, ERS would need to increase the total contribution rate by 6.93% of payroll (from 12.45% to 19.38%) to contribute at the actuarially sound rate and comply with Section 811.006.

Law Enforcement and Custodial Officer Retirement Fund: According to the actuarial analysis, HB 3493 would increase the projected August 31, 2009 UAAL by $1.7 million (from $142.3 million to $144.0 million); decrease the projected funded ratio (from 84.1% to 84.0%), and increase the actuarially sound total contribution rate by 0.01% (from 3.12% to 3.13%).  There would be no increase in the normal cost. Since the current contribution rate is insufficient to amortize the UAL over a 31-year period and HB 3493 would increase the actuarial cost of LECOSRF, total contributions to LECOSRF would have to increase by 1.54% (from 1.59% to 3.13%) in order to comply with Section 811.006 and contribute at an actuarially sound rate.

SYNOPSIS OF PROVISIONS:

HB 3493, to be effective immediately if receiving required votes or if not, September 1, 2009, would provide the following changes:

·         Would allow a member that was not actively employed by the state as of September 1, 1999 to establish service credit as a custodial officer in ERS and LECOS for service performed as a parole officer with the Board of Pardons or the Texas Department of Criminal Justice (TDCJ) before September 1, 1999.

FINDINGS AND CONCLUSIONS:

Senate Bill 1130, passed by the 76th Legislature, authorized the TDCJ to certify Parole Board service credit as custodial officer service for those who were actively employed by the state on September 1, 1999. Employees who were not active on this date and later returned to state employment are not eligible for retroactive service certification.

Under HB 3493, Section 813.5061 would be added to the Texas Government Code that would allow a member that was not actively employed by the state of September 1, 1999 to establish service credit as a custodial officer in ERS and LECOS for service performed as a parole officer with the Board of Pardons or the TDCJ before September 1, 1999.

According to the actuarial analysis, it is estimated that 35 current members of ERS would benefit from this legislation. While it is possible that additional members may be affected, TDCJ believes this number to be minimal.

The effect of HB 3493 on ERS would be a $0.5 million increase in the projected August 31, 2009 UAAL and no material increase in the actuarially sound contribution rate.  The current total contribution rate of 12.45% falls short of the Section 811.006 standard by 6.93% of payroll.  Since HB 3493 would increase the actuarial cost of the plan, ERS would have to increase the total contribution rate by 6.93% in order to comply with Section 811.006.  The normal cost of ERS would be unchanged by HB 3493.

HB 3493 would have no effect on the normal cost of LECOSRF, but would increase the projected August 31, 2009 UAAL by $1.3 million, decrease the projected funded ratio (from 84.1% to 84.0%), and  increase the actuarially sound total contribution rate (from 3.12% to 3.13%).  Since HB 3493 increases the actuarial cost of LECOSRF, the total contribution rate for LECOSRF would need to increase from 1.59% to 3.13% in order to comply with Section 811.006.

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 these 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. HB 3943 improves benefits and increases the actuarial costs of these plans; therefore, it is projected that total contributions for fiscal year 2010 would need to increase for both plans – to 19.38% of payroll for the ERS plan, and to 3.13% 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 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. Except otherwise noted, 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 LECOSRF. 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 8, 2009

Actuarial Review by Mr. Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board, April 8, 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.