The Texas Municipal Retirement System (TMRS) is the statewide system, which administers retirement, disability, and death benefits for employees of those Texas cities which voluntarily elect to participate in the system. The plan of each of the 837 participating cities is separately funded; funding is provided by employee contributions at a percentage of compensation selected by the city, and by employer contributions actuarially determined as necessary to provide the level of benefits selected.

ACTUARIAL EFFECTS:

The provisions of SB 350- Engrossed would, if enacted, restructure the existing TMRS funds, including the Municipality Accumulation Fund (MAF), Employees Savings Fund (ESF) and Current Service Annuity Reserve Fund (CSARF); into a new Benefit Accumulation Fund (BAF). According to the actuarial analysis, the proposed fund restructuring would eliminate leveraging as it exists under the current fund structure, reduce investment volatility and thereby provide greater city contribution rate stabilization. Currently, benefits funded through the ESF and CSARF are discounted at a rate of 5% and the benefits funded through the MAF are discounted at a rate of 7.5%. Under the proposed restructuring, the rate applied to the BAF would be 7%.

The actuarial accrued liability at retirement is currently equal to the anticipated annuity values discounted by 5% interest, and this amount is placed into the CASRF when an employee retires. Under the restructuring of the funds, the actuarial accrued liability at retirement would be equal to the anticipated annuity values discounted by 7% interest. Hence the proposed fund restructuring would reduce the Present Value of Future Benefits (PVFB) and the Actuarial Accrued Liability (AAL) of TMRS as the interest rates applied to both the PVFB and the AAL would change. Overall, the actuarial effect of this proposed change would be a reduction in the PVFB of $2.3 billion and a reduction in the AAL of $1.2 billion. The impact of the interest rate changes on the Unfunded Actuarial Accrued Liability would be a reduction of $1.2 billion. The funded ratio of TMRS would be projected to increase by 4.6%, from 75.0% to 79.6%.

SYNOPSIS OF PROVISIONS:

SB 350 Engrossed, to be effective immediately if receiving required votes or if not, September 1, 2011, would provide the following changes:

 ·         Restructure the current three TMRS internal fund accounts into a new single trust fund account.

FINDINGS AND CONCLUSIONS:

The provisions of SB 350-Engrossed would, if enacted, restructure the existing TMRS funds, including the Municipality Accumulation Fund (MAF), Employees Savings Fund (ESF) and Current Service Annuity Reserve Fund (CSARF); into a new Benefit Accumulation Fund (BAF). The most significant impact of the proposed restructuring would be the stabilization of city contribution rates, as the single trust fund would eliminate the leveraging as it exists under the current three fund structure. Though rates may still vary somewhat from year to year under the proposed structure, the current structure creates significant leverage that could result in magnified losses to the MAF in a year when investment returns are low. By law, each year, the ESF and CSARF are credited with a minimum of 5% interest. The MAF receives a variable amount with an actuarial assumed annual interest credit rate of 7.5% (the amount credited to the MAF is annually determined by the TMRS Board). For example, under the current structure, an overall return of 2.0% in a given year would result in an approximate -3% return to the MAF after the ESF and CSARF are credited with 5% each. If the total overall return is -1%, the ESF and CSARF both receive a credit of 5% interest and the MAF would witness a crediting of approximately -11%. Conversely, if the overall return is 7%, after the ESF and CSARF receive the required 5% credit, the approximate credit to the MAF is 10%.

The proposed restructuring will have no impact on the benefits of active members, retirees, or beneficiaries. Because the benefit payment cash flows of the entire pension trust fund are identical under the current and proposed fund structures and because cities cannot access money held in the current MAF nor in the proposed BAF, retiree benefits are at least as secure under the proposed structure as the current structure. Additionally, the proposed fund restructuring will not affect TMRS’ current investment planning or the ongoing diversification of the TMRS investment portfolio. The actuarial review notes that an 8-year phase-in currently applies to certain unfunded accrued liabilities first measured at December 31, 2008. The proposed bill would soften some of the increases in contribution rates projected to occur toward the end of the 2009-2016 phase-in period.

The proposed fund restructuring would reduce the Present Value of Future Benefits (PVFB) and the Actuarial Accrued Liability (AAL) of TMRS as the interest rates applied to both the PVFB and the AAL would change. Currently, benefits funded through the ESF and CSARF are discounted at a rate of 5% and the benefits funded through the MAF are discounted at a rate of 7.5%. Under the proposed restructuring, the rate applied to the BAF would be 7%. Another way to view this is that the actuarial accrued liability at retirement is currently equal to the anticipated annuity values discounted by 5% interest, and this amount is placed into the CASRF when an employee retires. Under the restructuring of the funds, the actuarial accrued liability at retirement would be equal to the anticipated annuity values discounted by 7% interest. Overall, the actuarial effect of this proposed change would be a reduction in the PVFB of $2.3 billion and a reduction in the AAL of $1.2 billion. The impact of the interest rate changes on the Unfunded Actuarial Accrued Liability would be a reduction of $1.2 billion. The funded ratio of TMRS would be projected to increase by 4.6%, from 75.0% to 79.6%.

METHODOLOGY AND STANDARDS:

The analysis rely on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the December 31, 2009 actuarial valuation of TMRS. The analysis assumes no further changes are made to TMRS 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 Mr. Mark R. Randall, Executive Vice-President, and Mr. Joseph P. Newton, Senior Consultant, Gabriel, Roeder, Smith & Company, February 24, 2011.

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, March 7, 2011.

GLOSSARY OF ACTUARIAL TERMS:

Normal Cost--the current annual 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.