In response to your request for an Actuarial Impact Statement on HB 1820 (relating to the number of hours certain employees must work to be eligible to participate in the Texas Municipal Retirement System) the Pension Review Board (PRB) has determined the following:

BACKGROUND:

Established in 1947, the Texas Municipal Retirement System (TMRS or System) is the statewide system, which administers retirement, disability, and death benefits for employees of those Texas cities which voluntarily elect to participate in the system.  Each of the 837 participating cities chooses a plan of benefits from the various options available under TMRS.  Each city’s plan of benefits is funded separately through a combination of employee contributions, as a set percentage of compensation, employer contributions, which are annually determined for each city utilizing generally accepted actuarial principles and practices within the parameters established by the TMRS Act, and investment earnings. These funding requirements are the responsibility of the individual member cities of TMRS.

ACTUARIAL EFFECTS:

According to the actuarial analysis, if the bill is enacted, municipalities would no longer contribute on the payroll of the members who work between 1,000 and 1,500 hours annually, This would save the participating municipality directly by lowering the dollar amount of normal cost, but the cities would not realize savings on the amortization payments of the unfunded liability and would likely see their required contribution rates increase in proportion to the decrease in payroll. 

HB 1820 would make certain employees (those working between 1,000 and 1,500 hours annually) ineligible to participate in TMRS, which would consequently reduce the TMRS member cities’ dollar amount of normal cost for each member who becomes ineligible. The plan’s actuary also projects that it is unlikely the TMRS member cities would realize savings on the amortization payments for the unfunded liability. If the payroll of the group decreased, the contribution rate to amortize the unfunded liability as a percentage of payroll would increase to come back to the same dollar amount as before.

The actuarial analysis also raises the potential issue of continued plan qualification under the Internal Revenue Code, including the issues of in service distributions and minimum hour requirements.      

SYNOPSIS OF PROVISIONS:

HB 1820 would amend Section 851.001(8) of the Texas Government Code by changing the definition of “employee” for purposes of participation in the TMRS for all current and future appointed employees. The proposed bill would change the eligibility requirement for certain employees of TMRS member cities to participate in the System by increasing the number of yearly working hour’s requirement from 1,000 to 1,500. The changes proposed by the bill are not optional and would apply to all employees of participating TMRS municipalities without regard to whether the employee was hired before, on, or after the effective date of this bill, September 1, 2011. Therefore, the proposed bill would make certain current members in TMRS who work between 1,000 and 1,500 hours annually ineligible to participate in the System unless their hours were increased from 1,000 or more to at least 1,500.     

FINDINGS AND CONCLUSIONS:

Currently, the minimum threshold is 1,000 hours per year of employment for certain employees to be eligible to participate in TMRS. HB 1820 would change the eligibility requirement for these employees by increasing the number of working hour’s requirement from 1,000 to 1,500 per year.  

According to the actuarial analysis, if the bill is enacted, municipalities would no longer contribute on the payroll of the members who work between 1,000 and 1,500 hours annually, which will save the participating municipality directly by lowering the dollar amount of normal cost. In a sample survey performed by the TMRS, it was determined that approximately 1% of the active population of the cities surveyed would be impacted. However, because these members are part time employees and are typically lower paid, the impact on the total liabilities and covered payroll would likely be close to 0.50%.  The actuarial analysis also states that the impact could be slightly more material to an individual TMRS city that has a disproportionate number of these part time positions or chooses to prospectively replace full time employees with employees in the 1,000 to 1,500 hour range. Consequently, the covered payroll for contributions will not grow at the assumed rate, which could lead to increasing contribution rates over time.    

Furthermore, the actuarial analysis states that in addition to a reduction in the normal cost, the payroll used to determine the contribution rate will also be lower and so the contribution rate will most likely either not be impacted or slightly increase if the average normal cost as a percentage of payroll for the excluded members is lower than the average for the rest of the group.

Additionally, the plan’s actuary projects that it is unlikely the TMRS member cities would realize savings on the amortization payments for unfunded liabilities. The total dollar amount of amortization payment would remain unchanged. However, if the payroll of the group decreases, the contribution rate as a percentage of payroll would increase to come back to the same dollar amount as before.

The actuarial review states that the economic effect of the bill will vary by participating municipal employer, depending on the number of positions requiring less than 1,500 hours. There would likely be a decrease in the dollar amount of employer contributions in the long run, but no significant decrease in the short run. The employer contribution as a percent of payroll could increase slightly or remain the same in the short run due to a decrease in covered payroll.

Furthermore, although not explicitly stated in the bill, it is the PRB’s understanding that this bill would not affect the accrued pension benefits of current employees; however, employees working in a position normally requiring less than 1,500 hours would not contribute or accrue additional pension benefits effective September 1, 2011. The bill only affects current and future employees; current retirees and vested terminated employees are not affected. 

The actuarial review also states that the conclusions of the actuarial analysis of: no material effect on the retirement plan funded status; and the likely effect of employer contributions for participating municipal employers, are reasonable.

METHODOLOGY AND STANDARDS:

The analysis rely on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the December 31, 2009 actuarial valuation of TMRS, 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 Mr. Mark R. Randall, Executive Vice President, and Mr. Joseph P. Newton, Senior Consultant, Gabriel, Roeder, Smith & Company, March 28, 2011.

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, March 28, 2011.

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.