ACTUARIAL EFFECTS:

Employees Retirement System (ERS): The actuarial analysis projects the impact of the proposal based on a closed 31-year funding period from August 31, 2011. Based on this assumption, the system’s actuary estimates the proposal would increase the 31-year funding rate from 17.81% of payroll to 25.71% of payroll, an increase of 7.90% of payroll. The analysis states that due to losses on assets that have occurred over the last several years, the estimated market value of assets of ERS is about $1.6 billion less than the estimated actuarial value of assets as of August 31, 2011. Based on the market value of assets, the 31-year funding rate for the proposal would be 28.73% of payroll (6.5% member rate and 22.23% employer rate).

Law Enforcement and Custodial Officers Supplemental Fund (LECOS): The actuarial analysis projects the impact of the proposal based on a closed 31-year funding period from August 31, 2011. Based on this assumption, the system’s actuary estimates the proposal would increase the 31-year funding rate from 2.82% of payroll to 3.82% of payroll, an increase of 1.00% of payroll. The analysis states that due to losses on assets that have occurred over the last several years, the estimated market value of assets of LECOS is about $53 million less than the estimated actuarial value of assets as of August 31, 2011. Based on the market value of assets, the 31-year funding rate for the proposal would be 4.19% of payroll (0.50% member rate and 3.69% employer rate).

Teacher Retirement System (TRS): In the TRS actuarial analysis, two scenarios are discussed relative to the proposal’s impact on TRS contribution rates. The first scenario involves pre-funding the existing defined benefit (DB) plan to achieve full funding in 30 years. Under this scenario, the required contribution rate would need to increase from 15.4% of payroll to 20.15% of payroll, an increase of 4.75% of payroll. The analysis states that the increased rate would have to remain in effect as long as there were active members in the DB plan as the system would need to have enough assets by the time the last member leaves active service, expected to occur around fiscal year 2070, to last until the last annuitant dies, expected to be around fiscal year 2110. In the second scenario, the analysis assumes contribution rates remain equal to the fiscal year 2011 level of 13.044% of payroll (6.4% member rate and 6.644% employer rate). Under this scenario, the closed DB plan would run out of assets in fiscal year 2042. At this point, the plan would become a pay-as-you-go plan and the total required contribution rate, averaged with the contributions to the new DC plan, would be 31.4% of payroll (6.4% member rate and 25% employer rate). As the DB plan membership declines, the total contribution rate will also decline. Once all the DB members have died, the total rate would return to 13.044% of payroll.

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

SYNOPSIS OF PROVISIONS:

HB 2506, to be effective September 1, 2011, would provide the following changes:

·         Establishes defined contribution (DC) plans for members of the Employees Retirement System of Texas (ERS) and Teachers Retirement System of Texas (TRS) hired on or after September 1, 2012.

·         Permits current members in ERS and TRS to elect to participate in their respective new DC plan by making an irrevocable election to transfer an amount equal to the actuarial present value of the member’s accrued service benefit.

·         Provides that both the members and the State will make contributions to the DC plan at the same rate as their counterparts in the DB plan.

FINDINGS AND CONCLUSIONS:

HB 2506 proposes to close the current defined benefit (DB) plans administered by the ERS and TRS. Members of either system hired on or after September 1, 2012 would participate in new defined contribution (DC) plans. Current members of the DB plans would be permitted to make an irrevocable election to transfer to the new DC plan. Transferring members would be able to roll over the actuarial present value of their accrued benefits as of the transfer date.

The closing of a defined benefit plan to new members reduces the plan’s future liabilities but also removes a percentage of the funding source by eliminating contributions of future members. The contribution rates for both ERS and TRS are greater than the normal cost of each plan. The difference between the normal cost rate, the average cost of benefits accrued in a given year, and the total contribution rate is the rate available to amortize the unfunded actuarial accrued liability (UAAL).  Currently, for both ERS and TRS, the rate available to amortize the UAAL is insufficient to ever fully amortize the UAAL, thus both plans have a funding period of infinite. By reducing the total available payroll contributions of the existing DB plans, the result is that a greater percentage of the remaining contributions will be required to fund the plans. This results in a significant increase in the contribution rates necessary to fund the DB plans of ERS and TRS. Another possibility would include both plans becoming pay-as-you-go plans, whereby annual contributions to each plan would equal benefit payments from each plan. This would occur when the trusts of each plan become depleted due to lower than required contributions. Typically, the contribution costs of a pay-as-you-go plan are higher than contributions based on pre-funding.

Under the proposal, near-term costs associated with the closed DB plans would be significant. Over the long-term, as the percentage of active and annuitant members of the DB plans decline and the majority of active members are in the new DC plans, costs will decline, eventually equaling the cost of the DC plans. Several other factors could influence the near-term and long-term costs of the proposal, including the actual rate of return for both ERS and TRS over time. Both systems assume a rate of return of 8%; therefore, actual returns above 8% could reduce costs and actual returns below 8% could increase costs.

METHODOLOGY AND STANDARDS:

The TRS analysis and calculations are based on the member data of TRS as of August 31, 2010, the actuarial value of assets updates as of February 28, 2011, and the actuarial assumptions and methods in use as of August 31, 2010 for valuing the actuarial condition of TRS. The ERS analysis and calculations are based on the February 28, 2011 update of the August 31, 2010 actuarial valuation of ERS. Finally, this analysis is based on all other provisions of TRS and ERS in effect as of August 31, 2010. 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 Lewis Ward, Consultant, and Joseph P. Newton, Actuary, Gabriel Roeder Smith & Company, April 24, 2011

Actuarial Analysis by Richard A. Mackesey & R. Ryan Falls, Actuaries, Buck Consultants, April 7, 2011.

Actuarial Review by Mr. Dan P. Moore, Staff Actuary, PRB, April 25, 2011.

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.