ACTUARIAL EFFECTS:

According to the actuarial analysis, the bill, if enacted, would not have a material actuarial impact on the current actuarial valuation of the Teacher Retirement System (TRS). The current valuation does not value future service purchases until they occur; however, the system’s actuary notes that this does not mean that passage of the bill would not have a monetary impact on TRS.  In fiscal year 2010, TRS member service credit purchases increased the total liability of TRS by $282 million. To purchase the service credit, members made additional contributions of $82 million. Therefore, TRS experienced an estimated $200 million loss during FY 2010 due to non-actuarial service purchases.The bill would reduce some of these actuarial losses, but since other service credit purchases would still not be actuarial, would not eliminate them.

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

SYNOPSIS OF PROVISIONS:

HB 3355, to be effective September 1, 2011, would provide the following changes:

·         Requires a member establishing service credit for out-of-state public school service to have at least one year of service in TRS after the out-of-state service.

·         Establishes certain timing and administrative requirements for creditable service while on developmental leave. Also, modifies the costs for the member establishing this type of service credit by requiring that the actuarial present value of the additional service credit be paid.

·         Modifies the cost for establishing creditable service where member contributions were due but not paid by requiring that the actuarial present value of the additional service credit be paid and furthermore, the bill establishes a time period of five years to claim the unreported service, after which time, the unreported service can no longer be established as creditable service.  

·         Makes a small change to the rules for establishing service credit for active military service to comply with recent changes to the Uniformed Services Employment and Reemployment Rights Act of 1994 (USSERRA).

·         Increases the interest rate charge from 6% to 8% for members to re-establish their previous TRS service credit by repaying previously withdrawn member contributions.

The provisions of this bill will take effect immediately if it receives a vote of two-thirds of all the members elected to each house.  If this bill does not receive the vote necessary for immediate effect, it would take effect September 1, 2011.

FINDINGS AND CONCLUSIONS:

HB 3355 modifies the Government Code so that members who establish certain types of service credit in TRS by making additional deposits into the system will have to pay an amount equal to the actuarial present value of the additional service credit. Additionally, the bill makes small changes to the requirements for establishing service credit in the system for active military service to bring those requirements in compliance with federal law, and modifies the cost of re-establishing previous service credit forfeited due to withdrawal of member contributions.

According to the actuarial analysis, the bill would not cause the funding period of TRS to increase, nor would the bill have a material actuarial impact on the current actuarial valuation of TRS. The current valuation does not value future service purchases until they occur; however, the system’s actuary notes that this does not mean that passage of the bill would not have a monetary impact on TRS.  In fiscal year 2010, TRS member service credit purchases increased the total liability of TRS by $282 million. To purchase the service credit, members made additional contributions of $82 million. Therefore, TRS experienced an estimated $200 million loss during FY 2010 due to non-actuarial service purchases. The bill would reduce some of these actuarial losses, but since other service credit purchases would still not be actuarial, would not eliminate them. 

METHODOLOGY AND STANDARDS:

The 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. Finally, this analysis is based on all other provisions of TRS 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 and Joseph P. Newton, Actuaries, Gabriel Roeder Smith & Company, March 23, 2011.

Actuarial Review by Mr. Dan P. Moore, Staff Actuary, PRB, April 18, 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.