| TO: | Honorable Vicki Truitt, Chair, House Committee on Pensions, Investments & Financial Services |
| FROM: | John S O'Brien, Director, Legislative Budget Board |
| IN RE: | HB2506 by Chisum (Relating to creating defined contribution retirement plans for persons eligible to participate in the Employees Retirement System of Texas and the Teacher Retirement System of Texas.), As Introduced |
The bill would create new defined contribution (DC) plans for newly hired state employees and teachers, who would no longer be eligible to participate in the Employees Retirement System (ERS) or the Teacher Retirement System (TRS). The state would make the same contribution into the defined contribution plans as the benefit plans, even the portion that is earmarked for amortizing unfunded liabilities.
The bill proposes that current members of these retirement plans would have the option of joining the new DC plans by transferring the current value of their benefits to personal accounts, but does not suggest what to do with accompanying unfunded liabilities. This could leave the state with unfunded liabilities for the retirement plans yet no associated payroll base. It is unlikely the IRS would allow the removal of monies already held in the retirement trust funds without revoking the tax exempt status of the funds, which would significantly increase the tax liabilites of the state. None of the additional liabilites or costs discussed in this paragraph are included in the fiscal note tables.
| Fiscal Year | Probable Net Positive/(Negative) Impact to General Revenue Related Funds |
|---|---|
| 2012 | ($1,551,942,223) |
| 2013 | ($1,591,520,782) |
| 2014 | ($1,591,520,782) |
| 2015 | ($1,591,520,782) |
| 2016 | ($1,591,520,782) |
| Fiscal Year | Probable (Cost) from General Revenue Fund 1 |
Probable (Cost) from State Highway Fund 6 |
Probable (Cost) from Federal Funds 555 |
Probable (Cost) from GR Dedicated Accounts 994 |
|---|---|---|---|---|
| 2012 | ($1,551,942,223) | ($74,955,221) | ($86,057,012) | ($108,705,260) |
| 2013 | ($1,591,520,782) | ($75,322,135) | ($86,057,012) | ($111,762,976) |
| 2014 | ($1,591,520,782) | ($75,322,135) | ($85,606,367) | ($111,762,976) |
| 2015 | ($1,591,520,782) | ($75,322,135) | ($85,606,367) | ($111,762,976) |
| 2016 | ($1,591,520,782) | ($75,322,135) | ($85,606,367) | ($111,762,976) |
| Fiscal Year | Probable (Cost) from Other Special State Funds 998 |
|---|---|
| 2012 | ($4,303,314) |
| 2013 | ($4,324,630) |
| 2014 | ($4,324,630) |
| 2015 | ($4,324,630) |
| 2016 | ($4,324,630) |
The bill would require an increase in the actuarially sound state contribution rate of 7.9%, from 11.31% to 19.71% for ERS, assuming a 6 percent member contribution rate to match the proposed 6 percent state contribution rate for the 2012-13 biennium. The increase would be due to several reasons. First, some percentage of the current contribution goes to paying off unfunded liabilities for all members. Secondly, the percentage of the state contribution that goes towards paying benefits is much lower for newly hired employees, since most of them will not ever vest in the system. Thirdly, the percentage of salary needed to pay off unfunded liabilites would go up since the payroll they are based on- active members in the retirement plan- would go down.
A similar increase of 1% in the actuarially sound state contribution would be required for the Law Enforcement and Custodial Officers Retirement Fund (LECOS), going from 2.82 to 3.82 percent. TRS has indicated a 5% increase in contributions to amortize the actuarial liability would be required.
Amounts shown would decrease over time as fewer participants remain in the plan and liabilites became amortized, however the reduction in costs would take place over several decades.
The increase in actuarially sound contribution rates for ERS would be 7.90 percent; this is applied to the same payroll base used for the General Approprations Act as Introduced, with the 2013 payroll base used for 2014 and 2015. Similar approaches were used for LECOS and TRS, using the increase of 1.0 percent in the actuarially sound contribution rate for LECOS applied to LECOS payroll. TRS only described the increase to the contributions to amortize the unfunded liability of 5 percent, so this percentage was used instead of the increase in actuarially sound contribution rate.
| Source Agencies: | 323 Teacher Retirement System, 327 Employees Retirement System
|
| LBB Staff: | JOB, AG, SD, WM
|