In response to your request for an Actuarial Impact Statement on HB 2261 (relating to the computation of retirement benefits by a public retirement system) the Pension Review Board (PRB) has determined the following:

ACTUARIAL EFFECTS:

HB 2261 would disallow the use of any amount paid to a member of a public retirement system for hours of overtime in the calculation of the amount of the member’s compensation as applied towards the member’s retirement annuity or for any other factor used to compute the retirement benefit. By limiting the potential to use overtime pay in calculating a member’s retirement benefit, this provision could improve the actuarial soundness of some public retirement systems.  For systems that allow overtime pay in the computation of a member’s final average salary (FAS), the provision would likely reduce the FAS of those affected members, thereby reducing their calculated retirement benefits.

The proposal could have an impact on a retirement system’s deferred retirement option plan (DROP) members. As DROP members are not considered “retired” members, those DROP members whose retirement annuity calculations could be impacted by the proposal might choose to retire sooner than they otherwise would have retired. This would lead to higher than currently assumed retirement rates and could have a negative actuarial impact on a retirement system. Furthermore, active members who would be impacted by the proposal who are currently eligible to retire, but are not members of a DROP, might also retire sooner than expected so as to ensure their retirement benefits are unaffected. This could also produce a negative actuarial impact on a retirement system.

SYNOPSIS OF PROVISIONS:

HB 2261, to be effective September 1, 2011, would provide the following changes:

• Disallows the use of any amount paid to a member of a public retirement system for hours of overtime in the calculation of the amount of the member’s compensation as applied towards the member’s retirement annuity or for any other factor used to compute the retirement benefit.
• Provides that the provision prevails over any other law relating to the computation of a retirement benefit by a public retirement system to the extent of any conflict.
• Applies only to members of public retirement systems who retire on or after September 1, 2011.

FINDINGS AND CONCLUSIONS:

HB 2261 would eliminate the use of overtime pay in the calculation of retirement benefits. The proposal could reduce the value of retirement benefits of some public retirement systems that allow for the use of overtime pay in determining a member’s compensation base therefore producing a positive actuarial impact; however, affected members who are currently eligible to retire might choose to retire sooner than expected, which could produce a negative actuarial impact. 

The proposal does not address the issue of member and employer contributions already made on overtime hours previously worked. For any system impacted by the proposal, the system would have received member and employer contributions for the overtime pay. By disallowing the use of overtime pay in the calculation of retirement benefits, it is unclear if the contributions made would be refunded or not.

Finally, the proposal includes language stating that the changes prevail over any other law relating to the computation of a retirement benefit by a public retirement system; however, the Texas Constitution, Article 16, Section 66 protects against the impairment of a member’s accrued benefit. It is unclear if the proposal would violate this provision of the Constitution.

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.