In response to your request for an Actuarial Impact Statement on HB 3033 (relating to retirement under public retirement systems for employees of certain municipalities) the Pension Review Board has determined the following:

ACTUARIAL EFFECTS:

HB 3033, if enacted, would decrease the normal cost of the City of Austin Employees Retirement System (COASERS) by 5.14% of payroll, from 16.31% of payroll to 11.17% of payroll.   The proposal would change the amortization period of the COAERS, calculated as of December 31, 2010, from a period of infinity to 34 years. HB 3033 would increase the unfunded actuarial accrued liability (UAAL) by $149 million, from $748 million to $897 million. This increase in the UAAL would be offset by the decrease in the normal cost of the COAERS. Currently, total contributions to the COAERS are 22% of payroll (14% from the city and 8% from the employees). The current normal cost rate of 16.31% of payroll leaves a total of 5.69% of payroll available to amortize the UAAL. At this current rate and UAAL, the funding period is infinite. Under the proposal, the normal cost rate would be 11.17% of payroll, leaving 10.83% of payroll to amortize the new UAAL (which would be higher than under the current structure). The additional contributions available to pay off the UAAL would be sufficient enough to lower the amortization period from infinity to 34 years, thus improving the actuarial condition of the COAERS.

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

SYNOPSIS OF PROVISIONS:

HB 3033, to be effective immediately if receiving required votes or if not, October 1, 2011, would provide the following changes:

·         Establishes a new tier of benefits for employees in classification Group B, which would include members who join the COAERS on or after January 1, 2012 and members, who return to full-time employment on or after January 1, 2012, which have received a distribution for service earned prior to January 1, 2012, but have not re-established such credit service with the COAERS.

·         Makes several changes to state statute to bring statute into compliance with federal law and current practices of the COAERS.

FINDINGS AND CONCLUSIONS:

HB 3033 proposes to establish a new tier of benefits for the COAERS. Under the proposal, members who join the COAERS on or after January 1, 2012 and members, who return to full-time employment on or after January 1, 2012, which have received a distribution for service earned prior to January 1, 2012, but have not re-established such credit service with the COAERS, will be included in the Group B classification. The table below shows the benefits established in the new tier by comparing the benefits of Group A and Group B:

HB 3033, if enacted, would decrease the normal cost of the City of Austin Employees Retirement System (COASERS) by 5.14% of payroll, from 16.31% of payroll to 11.17% of payroll.   The proposal would change the amortization period of the COAERS, calculated as of December 31, 2010, from a period of infinity to 34 years. HB 3033 would increase the unfunded actuarial accrued liability (UAAL) by $149 million, from $748 million to $897 million. This increase in the UAAL would be offset by the decrease in the normal cost of the COAERS. Currently, total contributions to the COAERS are 22% of payroll (14% from the city and 8% from the employees). The current normal cost rate of 16.31% of payroll leaves a total of 5.69% of payroll available to amortize the UAAL. At this current rate and UAAL, the funding period is infinite. Under the proposal, the normal cost rate would be 11.17% of payroll, leaving 10.83% of payroll to amortize the new UAAL (which would be higher than under the current structure). The additional contributions available to pay off the UAAL would be sufficient enough to lower the amortization period from infinite to 34 years, thus improving the actuarial condition of the COAERS.

METHODOLOGY AND STANDARDS:

The actuarial analysis utilizes a methodology referred to in the analysis as “replacement life normal cost”, otherwise known as the “ultimate entry age normal cost” method. This methodology determines the normal cost for all current active employees under the benefit structure that applies to new hires. For active employees, the Present Value of Future Benefits (PVFB) will include a lower Present Value of Future Normal Costs (PVFNC), though the total PVFB is still the same. Since the PVFB is equal to the PVFNC plus the Actuarial Accrued Liability (AAL), a lowering of the PVFNC will require an increase in the AAL to keep the PVFB the same. The increase in the AAL leads to the overall increase in the UAAL as mentioned previously.

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the December 31, 2010 actuarial valuation of the COAERS. According to the actuarial analysis, the retirement rates for Group B employees at first eligibility for normal retirement are set equal to twice the current rates of retirement at those ages with the exception of age 65 where Group B employees rates are set to 50% if the member is eligible for normal retirement. For Group B employees eligible for early retirement but not normal retirement, a 2% retirement rate is used if the employee has less than 20 years of service and a 10% retirement rate is used for employees eligible for early retirement with 20 or more years of service. The analysis assumes no further changes are made 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 Actuarial Analysis by Lewis Ward, Consultant, and Joseph P. Newton, Actuary, Gabriel Roeder Smith & Company, March 29, 2011.

Actuarial Review by Dan Moore, Actuary, Pension Review Board, April 11, 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.