ACTUARIAL EFFECTS:

HB 3168 would eliminate the current longevity pay and replace it with a new type of merit pay, which would initially be substantially less overall than longevity payments. The Employees Retirement System (ERS) prepared an actuarial analysis which did not take into account the level of longevity payments, especially for employees near retirement, and the impact of a substantial reduction in retirement annuities in the short term.

Approximately 13,000 ERS members currently receive longevity pay and are eligible to retire or will be by the end of Fiscal Year 2011. Some would  retire by that time regardless of the proposal. If the proposal is enacted, those who did not retire before its effective date would no longer have longevity pay, even prior longevity pay, as part of the calculation of their annuities. In Fiscal Year 2010, ERS retirees on average had 23 years of service. The proposal would reduce their final average salary by approximately $2,500. Lower paid employees would face a significant reduction in their annuities, and could have to work up to 4 years longer to get back to the same annuity level. Many retirement eligible employees would choose to retire before the bill became effective in order to avoid a reduction in their annuities. Some employees not yet retirement eligible would purchase service and retire to avoid a reduction in their future annuities.

ERS would make additional retirement payments to anyone who retired earlier than they otherwise would have. The average benefit payment for employees retiring in 2010 was $24,000 per year. If an employee works longer, their benefit would increase- so not all of the benefit payment is a loss to the system. We estimate that half of the additional benefit payments represent a loss to the system.

If the proposal is enacted and 6,500 employees retire 2 years earlier than they otherwise would have due to reasons discussed above, ERS would have an experience loss of approximately $150 million. This would increase their unfunded liability by $150 million.

There would be long term gains to the system from reduced annuities for future retirees. These gains could be partially or fully offset by the newly proposed merit pay. The majority of future gains would not be realized for several years, probably until an experience study was performed after several years experience with the new system.

Actuarial effect on JRS-II: Longevity pay is excluded from the determination of contributions and benefits for members of JRS-II. The ERS analysis assumes that the merit pay will also be excluded from the determination of contributions and benefits and therefore states that the proposed bill would have no impact on the actuarial valuation of the JRS-II.

SYNOPSIS OF PROVISIONS:

HB 3168 would amend Section 659 of the Texas Government Code to eliminate longevity pay for state employees and judicial officers and authorize merit pay for certain state employees covered by ERS, LECOSRF and JRS II. Additionally, various sections of the Texas Education Code and Texas Government Code would be amended to eliminate references to longevity pay. In lieu of the longevity pay, the proposed bill would establish merit pay where each state agency would be required to establish a policy regarding how to distribute the merit pay appropriated by the State. Also, there would be certain dollar limitations on the merit pay disbursement that the state agencies may award in accordance with their adopted guidelines determining when an employee’s job performance warrants the distribution of merit pay.

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

FINDINGS AND CONCLUSIONS:

The current law under Section 659 provides for longevity pay in the amount of $20 per month for every two years of service in the system, up to a maximum of $420. Additionally, under Section 811.001 of the Texas Government Code, longevity pay is included in the definition of compensation for calculating pension benefits and contribution to the systems.

HB 3168 would eliminate longevity pay for state employees and judicial officers and authorize merit pay for certain state employees. The elimination of longevity pay for calculation of retirement annuities would have a signifcant impact on retirements prior to the effective date of the bill. ERS would have an estimated $150 million experience loss from these retirements, which would add $150 million to their unfunded liability. It would have gains from lower annuities in the future, but these would take some time to be realized, and could be offset by increases in merit pay as provided by the proposal. 

METHODOLOGY AND STANDARDS:

The analyses assume no further changes are made to ERS, LECOSRF and JRS-II and caution that the combined economic impact of several proposals can exceed the effect of each proposal considered individually.  The analyses rely 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.

SOURCES: 

Actuarial Analysis by Richard A. Mackesey & R. Ryan Falls, Actuaries, Buck Consultants, April 4, 2011;

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, April 5, 2011;

Analysis by LBB staff.

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.