BACKGROUND:

Established in 1947, TMRS is now a $15 billion statewide agent multiple-employer public employee retirement system that administers approximately 830 nontraditional, joint contributory, municipal defined benefit plans. TMRS provides cities in Texas voluntary access to retirement, disability, and death benefits for their employees. Each participating city chooses a plan of benefits from the various options available under TMRS. The plan of benefits selected is then funded separately for each city through a combination of employee contributions as a set percentage of compensation and employer contributions determined annually utilizing generally accepted actuarial principles and practices within the parameters established by the TMRS Act. These funding requirements are the responsibility of the individual member cities of TMRS.

The actuarial analysis states that the TMRS board is currently studying a revised and more conservative funding policy to be considered for adoption later this year. The revised funding policy would apply to ad hoc benefits under both the existing statute and SB 1358, if enacted. Specifically, the Board is considering a policy to shorten the closed amortization period from the current 25 or 30 years to 15 years for financing future ad hoc benefit enhancements. The 15 year amortization period approximates the average number of years over which the Annuity Increase would be paid to retirees. In addition, the Board is considering changing the payment schedule from the current level percent of payroll (increasing dollar) schedule to a fixed dollar (decreasing percent of payroll) schedule. This financing policy would allow each individual ad hoc benefit enhancement to be financed as a “standalone” arrangement consistent with Actuarial Standards of Practice (ASOP) No. 4 which requires funding on an actuarially sound basis such that sufficient assets are accumulated at all times to pay benefits as they become due.

ACTUARIAL EFFECTS:

SB 1358 provides additional flexibility in the design of a TMRS member city’s COLA provision. As a result, the bill should provide additional flexibility in allowing TMRS member cities to manage the actuarial funding costs associated with the COLA provisions.

According to the actuarial analysis, the funding requirements and cost impact are the responsibility of the member cities of TMRS; therefore, the changes under SB 1358 are not expected to have a financial impact on TMRS as a system. In addition, the changes proposed by the bill are not expect to have any material effect on the actuarial status of TMRS; nor is there any immediate or long-term financial impact expected on any TMRS subdivision or on TMRS in total.

SYNOPSIS OF PROVISIONS:

SB 1358 amends the Texas Government Code and provides changes relative to the Texas Municipal Retirement System (TMRS). The bill will provide more flexibility to member cities in granting Cost of Living Adjustments (COLAs) by allowing cities to adopt COLAs without the “catch up” feature of the current COLA under TMRS. The current methodology for providing COLAs under TMRS benefit provisions is to increase the retiree’s benefit, measured from the date of retirement, by the same proportion as a fraction of the increase in the Consumer Price Index (CPI), measured from the date of retirement.

SB 1358 would allow a city the option to grant a COLA without the cumulative aspects of this current COLA methodology. As a result, a COLA granted for a specific year can be based on a percentage of the CPI increase during the prior year only, and not the cumulative increase in the CPI since retirement. The bill also allows a city to decrease its future COLA expectations without eliminating the COLA for certain current retirees over the short term. In addition, if the city decided not to grant a COLA at all or grant a lesser COLA for a specific year, future COLAs will not become increasingly more expensive.

The provisions of this bill will take effect immediately if it receives a vote of two-thirds of all the members elected to each house. If this bill does not receive the vote necessary for immediate effect, it will take effect September 1, 2009.

FINDINGS AND CONCLUSIONS:

COLAs may be adopted on either an annually repeating or ad hoc basis. A city with an annually repeating feature is expected by the membership and city management to grant current and future COLAs, while COLAs adopted on an ad hoc basis are financed individually, with theoretically no expectation for future additional COLAs for current or future retirees.

Under current methodology, the COLA “catch up” provision may make it difficult for cities to either not grant a COLA in a specific year or to change the expectation to a lesser COLA going forward. If the city does not grant a COLA for one year, and then attempts to grant a COLA the following year, the city would effectively have to grant two COLAs, “catching up” the retirees based on the cumulative CPI since retirement. Furthermore, if the city were to lower its COLA provision (for example from 70% to 50%), then current retirees who are furthest from retirement would not receive a COLA for subsequent years until the 50% of CPI calculation “caught up” to the prior 70% of CPI levels. This would result in the more recent retirees receiving COLA increases sooner than the longer term retirees.

SB 1358 would allow a city the option to grant a COLA without the cumulative aspects of this current COLA methodology. As a result, a COLA granted for a specific year can be based on a percentage of the CPI increase during the prior year only, and not the cumulative increase in the CPI since retirement. The bill also allows a city to decrease its future COLA expectations without eliminating the COLA for certain current retirees over the short term. In addition, if the city decided not to grant a COLA at all or grant a lesser COLA for a specific year, future COLAs will not become increasingly more expensive.

If enacted, COLAs granted under SB 1358 would be subject to the same funding policy that currently exists for COLA adoptions – advance funding if adopted on an annually repeating basis and retroactive funding if adopted on an ad hoc basis. In an effort to reduce immediate contribution requirements, if a city chooses to remove the repeating feature of its COLAs and then continues to grant annual or consistent COLAs on an ad hoc basis, the financing of future COLAs would revert to the retrospective financing arrangement. The immediate artificial contribution relief from removing the advance funding of COLAs will only lead to higher contribution rates and a deteriorating funding status over the long term.

SB 1358 provides additional flexibility in the design of a TMRS member city’s COLA provision. The changes proposed by the bill are not expected to have any material effect on the actuarial status of TMRS. If ad hoc adoptions of COLAs under the bill are combined with a revised funding policy which more conservatively finances ad hoc benefit enhancements, there should not be any immediate or long term financial impact on any TMRS municipality. The actuarial analysis suggests the TMRS Board should continue to monitor the pattern of ad hoc benefit adoptions and ensure prudent funding policies are in place.

METHODOLOGY AND STANDARDS:

The analysis rely on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the December 31, 2007 actuarial valuation of TMRS, with an update to certain actuarial assumptions adopted by the TMRS Board of Trustees in December 2008. The analysis assumes no further changes are made to TMRS 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 Mark R. Randall, Executive Vice President, and Joseph P. Newton, Senior Consultant, Gabriel Roeder Smith & Company, Consultants & Actuaries, March 12, 2009.

Actuarial Review by Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board, March 13, 2009

GLOSSARY OF ACTUARIAL TERMS:

Normal Cost-- the current annual 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.