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.  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.

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

ACTUARIAL EFFECTS:

Employees Retirement System of Texas (ERS):  HB 3634 would decrease, by $0.4 million, the projected August 31, 2009 unfunded actuarial accrued liability (UAAL).  This proposal would have no measurable impact on the projected funded ratio, actuarially sound contribution rate or normal cost rate. 

The current total contribution rate for ERS is 12.45%, which is comprised of 6.00% member contributions and 6.45% employer contributions.   The 12.45% rate falls short of the Section 811.006 standard by 6.93% of payroll and does not cover the normal cost requirements and there is no remaining contribution to pay down the existing unfunded accrued liability for the year.  Based on the February 28, 2009 update of the August 31, 2008 actuarial valuation, the actuary has projected that the actuarially sound total contribution rate for fiscal years 2010 and 2011 is 19.38%.  The unfunded accrued liability will never be amortized with a  current 12.45% total contribution rate; thus, the expected funding period is infinite.

Because the changes in this bill would not reduce contribution or interest rates, credit additional service or provide any improvements in the benefit formula or eligibility requirements for ERS, the requirements of Texas Government Code 811.006 do not apply to these changes; therefore, the plan’s actuary, Buck Consultants, certifies that this bill would not require an increase in the State contribution to ERS to comply with the requirements of Section 811.006.

SYNOPSIS OF PROVISIONS:

The provisions of this bill would only apply to service accruals or transfers after the effective date of the bill, which is September 1, 2009 unless it receives the vote necessary for immediate effect.

HB 3634 would amend the Texas Government Code to require that members or retirees of the elected class who served exclusively in the house of representatives and who hold a position as an employee of the house of representatives may accrue service credit for that position only if they are a full-time employee working 40 or more hours per week.  Additionally, these members or retirees may transfer service credit between the employee and elected classes only if the service credited in the employee class was as a full-time employee. 

FINDINGS AND CONCLUSIONS:

HB 3634 would add Sections 813.201(d) and 813.503(e) to the Texas Government Code and Section 813.503(a) of the Texas Government Code would be amended to require that members or retirees of the elected class who served exclusively in the house of representatives and who hold a position as an employee of the house of representatives may accrue service credit for that position only if they are a full-time employee working 40 or more hours per week.  Additionally, these members or retirees may transfer service credit between the employee and elected classes only if the service credited in the employee class was as a full-time employee. 

According to the actuarial analysis, there are currently only two members impacted by this bill.

The effect of the proposal would be a $0.4 million decrease in the projected August 31, 2009 Unfunded Accrued Liability.  This proposal would have no measurable impact on the projected funded ratio, actuarially sound contribution rate or normal cost rate.

Currently, the 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%. The current total contribution rate of 12.45% falls short of the Section 811.006 standard by 6.93% of payroll. The current funding period is infinite.

Based on the current plan provisions and the fiscal year 2009 total contribution rate of 12.45%, the amortization period for the unfunded accrued liability exceeds 30 years by one or more years.  As long as a benefit change does not increase the actuarial cost of ERS, no additional State contribution 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, credit additional service, or provides any benefit improvements that increase the actuarial cost of ERS, will require a State 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.  Because the changes in this bill do not reduce contribution or interest rates, credit additional service or provide any improvements in the benefit formula or eligibility requirements for ERS, the requirements of Texas Government Code 811.006 do not apply to these changes; therefore, the plan’s actuary, Buck Consultants, certifies that this bill would not require an increase in the State contribution to ERS to comply with the requirements of Section 811.006.

METHODOLOGY AND STANDARDS:

According to the actuarial analysis, there are currently only two members impacted by this bill.

The analysis assumes no further changes are made to ERS and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually.  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 valuation of ERS. 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 and R. Ryan Falls, Actuaries, Buck Consultants, April 6, 2009

Actuarial Review by Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board, April 6, 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.