In response to your request for an Actuarial Impact Statement on HB 2731 (relating to contributions to, benefits from, and administration of certain public retirement systems; providing penalties) the Pension Review Board (PRB) has determined the following:

ACTUARIAL EFFECTS:

HB 2731 proposes the use of the corporate bond yield curve third segment rate as the discount rate used in a system's actuarial valuation for Texas public retirement plans. Currently, the third segment corporate bond yield curve rate is 6.44%. Over 95% of the state's public retirement systems use a discount rate that is higher than the proposed rate. The average rate used by these plans is 7.475%. For each .25% change in the discount rate, liabilities would change by approximately 6%. Based on the average rate used by plans, a 1.035% change in the discount rate would result in an approximate increase in plan liabilities of 24.84%. The actual impact on each affected system would depend on the current discount rate of the plan; however, any increase in liabilities would likely lead to a negative actuarial impact on the affected plan.

HB 2731 also includes a provision which would limit the amount of increase allowed in the calculation of a compensation base for a member of a public retirement system. This provision would potentially address what is known as pension spiking. Pension spiking, whereby a member of a system receives significant increases in their salary during the end of their working career, can have a negative impact on the actuarial soundness of a public retirement system. By limiting the potential for spiking, this provision could improve the actuarial soundness of some public retirement systems.  The provision; however, 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 this provision of the bill might choose to retire sooner than they otherwise would have, thus higher than currently assumed retirement rates could have a negative actuarial impact on a retirement system.

HB 2731 proposes certain requirements for a public retirement system to change the rate of member or employer contributions, provide a cost-of-living adjustment, or otherwise increase retiree benefits. The requirements include conducting an actuarial valuation including the proposed change, with the valuation indicating the system is at least 80% funded. This proposal would limit when systems could enact certain changes; however, it is unclear as to what the actuarial impact of this proposal would be. A plan could qualify under the requirements of the section and make plan changes, though if future assumptions are not met or contributions are insufficient over time, the funded status of the plan could still deteriorate. Furthermore, a retirement system may not have any control over the contribution rates, particularly the employer rate; therefore, it is still possible for a city to cut contributions to its plan and negatively impact the actuarial status of the plan even with passage of the proposed legislation.

SYNOPSIS OF PROVISIONS:

The bill would: 

• Prohibit a public retirement system from directly or indirectly employing or contracting with a former member of the governing body of the public retirement system for two years after the person ceases to be a member of the governing body.
• Provide that a person who commits a breach of the person's fiduciary duty, fraud, theft, embezzlement, fraudulent conversion, unlawful appropriation, or misapplication of property in relation to services provided to a public retirement system is liable to the state for a civil penalty in an amount not to exceed $250,000 for each violation.
• Provide that if the retirement benefit of a member of a public retirement system is based on an amount of compensation received during a specified period of service, the compensation amount with respect to that period of service may not exceed 125 percent of the amount of the member’s compensation for the same period occurring five years earlier. This would only apply to peolple who retire after the effective date of the bill. 

·         Require an actuary performing an actuarial valuation for a public retirement system use the corporate bond yield curve as the funding yield curve third segment rate applicable to the month in which the valuation is made.

·         Reduce the total asset threshold requirement for public retirement systems required to conduct an actuarial audit every five years from $100 million $10 million.

·         Provide that a public retirement system may not reduce the rate of member or employer contributions, provide a cost-of-living adjustment, or otherwise increase retiree benefits unless an actuarial valuation is conducted using the corporate bond yield curve as the funding yield curve third segment rate that also takes into account the proposed action and the results of the valuation indicate that the retirement system is at least 80 percent funded. Additionally, if a valuation is performed under this section for a cost-of-living adjustment, the valuation must assume the cost-of-living adjustment is recurring.

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.