In response to your request for an Actuarial Impact Statement on Committee Substitute for HB 3100 (relating to employee contributions to the Employees Retirement System of Texas) the Pension Review Board (PRB) has determined the following:

ACTUARIAL EFFECTS:

According to the actuarial analysis, the changes proposed in the bill would have no impact on either the Employees Retirement System of Texas (ERS) or Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF) because the analysis assumes the current total contribution rates of 13.45% and 2.09% respectively, to continue in the future. However, the proposed bill, if enacted, could potentially have a positive actuarial impact on both ERS and LECOSRF as described below:

Potential actuarial effect on ERS: If the state were to lower the current state contribution rate of 6.95% to the minimum allowable rate of 6%, under the current law the member contribution rate will also equal the state contribution rate and reduce to 6% from the current rate of 6.5%. Such reduction would in turn increase the contribution shortfall for the system. However, since the proposed bill would fix the member contribution rate at 6.5% for the 2012-2013 biennium, the probable reduction of the state contribution rate in the said biennium will not impact the member contribution rate. Hence, CSHB 3100 in the aforementioned scenario will increase future funding for ERS with additional member contributions (as compared to the current law), and hence, will have a positive actuarial impact on the system. According to the actuarial analysis, the fixed member contribution rate of 6.5% when coupled with the minimum contribution rate from the State of 6.0% would still exceed the current normal cost rate of 12.30%. The estimated additional contribution to ERS for the 2012-2013 biennium would be $58.8 million.         

Potential actuarial effect on LECOSRF:  If the state were to lower the current state contribution rate of 1.59% to the minimum allowable rate of 0%, under the current law the member contribution rate will also equal the state contribution rate and reduce to 0% from the current rate of 0.50%. Such reduction would in turn increase the contribution shortfall for the system. However, since the proposed bill would fix the member contribution rate at 0.5% for the 2012-2013 biennium, the probable reduction of the state contribution rate in the said biennium will not impact the member contribution rate. Hence, CSHB 3100 in the aforementioned scenario will increase future funding for LECOSRF with additional member contributions (as compared to the current law), and hence, will have a positive actuarial impact on the system. According to the actuarial analysis, the fixed member contribution rate of 0.5% would cover 24.2% of the current normal cost rate regardless of the State contribution. The estimated additional contribution to LECOSRF for the 2012-2013 biennium would be $15.0 million.         

SYNOPSIS OF PROVISIONS:

CSHB 3100 would amend Section 815.402 of the Texas Government Code to fix member contribution rates beginning September 1, 2011 at 6.5% of payroll for ERS and 0.5% of payroll for LECOSRF regardless of the State contribution level for each of the systems. The proposed fixed member contribution rates for both the systems will expire on September 1, 2013. The current law provides that member contributions to these systems equal the State contributions within certain limits. So, if state contribution goes down the member contribution rate will go down as well. Member contributions to ERS are limited to between 6.0% and 6.5% of payroll and contributions to LECOSRF are limited to between 0 and 0.5% of payroll. Currently, the ERS member contribution rate is 6.5% of payroll and LECOSRF member contribution rate is 0.5% of payroll. The proposed bill     

The provisions of this bill are effective September 1. 2011.

FINDINGS AND CONCLUSIONS:

The current law under Section 815.402 provides that member contributions to ERS and LECOSRF equal the State contributions within certain limits. So, if state contribution goes down the member contribution rate will go down as well. Member contributions to ERS are limited to between 6.0% and 6.5% of payroll and contributions to LECOSRF are limited to between 0 and 0.5% of payroll. Currently, the ERS member contribution rate is 6.5% of payroll and LECOSRF member contribution rate is 0.5% of payroll (the maximum possible percentages of payroll allowable under the current law).

CSHB 3100 would amend Section 815.402 of the Texas Government Code to fix member contribution rates beginning September 1, 2011 at 6.5% of payroll for ERS and 0.5% of payroll for LECOSRF regardless of the State contribution level for each of the systems. The proposed fixed member contribution rates for both the systems will expire on September 1, 2013.   

According to the actuarial analysis, the proposed bill would mitigate contribution shortfall if the State were to lower the State contribution to less than the current member contribution rate for each of the systems. The bill would fix the member contribution rate at 6.5% for ERS that, when coupled with the minimum contribution rate from the State of 6.0%, would still exceed the current normal cost rate of 12.30%. For LECOSRF, the bill would fix the member contribution rate at 0.5%, which would cover 24.2% of the current normal cost rate regardless of the State contribution. 

The plan’s actuary assumes that the current member contribution rate for ERS and LECOSRF (6.5% and 0.5%, respectively) will continue in the future. Hence, the actuarial analysis shows that the proposed bill does not affect the projected valuation results for the future biennium.

The actuarial review states that the bill would impact all active members of ERS and LECOSRF in the event of a decrease in the present employer contribution rates below 6.5% and 0.5% respectively, as the member contribution rate would then be higher than the State’s contribution.

Furthermore, the actuarial analysis shows that the proposed bill does not improve benefits or increase the actuarial costs of the plans, so if the bill is enacted, the current state contributions for fiscal year 2011 will comply with the requirements of Texas Government Code Section 811.006.   

METHODOLOGY AND STANDARDS:

The analysis assumes no further changes are made to ERS and LECOSRF and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually.  The ERS and LECOSRF analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2011 update of the August 31, 2010 actuarial valuation of ERS and LECOSRF. According to the PRB actuary, the actuarial assumptions, methods and procedures used in both analyses 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 Richard A. Mackesey & R. Ryan Falls, Actuaries, Buck Consultants, March 29, 2011;

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, April 4, 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.