BACKGROUND:

Established in 1947, 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.  Each of the 837 participating cities chooses a plan of benefits from the various options available under TMRS.  The plan of benefits selected is then funded separately for each city through a combination of employee contributions as a set percentage of compensation and employer contributions determined annually utilizing generally accepted actuarial principles and practices within the parameters established by the TMRS Act. These funding requirements are the responsibility of the individual member cities of TMRS.

ACTUARIAL EFFECTS:

SB 642- Engrossed would provide additional flexibility in the design of a TMRS member city’s Cost of Living Adjustments (COLA) provision.  As a result, the proposed bill should provide additional flexibility in allowing TMRS member cities to manage the actuarial funding costs associated with the COLA provisions by allowing a participating municipality to adopt a non-retroactive flat rate COLA.

According to the actuarial analysis, the funding requirements and cost impact are the responsibility of the member cities of TMRS; therefore, the changes proposed under SB 642- Engrossed are not expected to have an actuarial impact on TMRS as a system.  In addition, the changes proposed by the bill are not expected to have any material effect on the actuarial status of TMRS; nor is there any immediate or long-term actuarial impact expected on any TMRS municipality or on TMRS in total.

Furthermore, TMRS uses a Projected Unit Credit cost method to provide advance funding of annually repeating COLAs. In 2009 the TMRS Board of Trustees adopted a revised ad hoc COLA funding policy that shortened the amortization period to a maximum of 15 years for financing future ad hoc benefit enhancements. According to the actuarial analysis, these important changes to advance fund annually repeating COLAs and rapidly fund ad hoc COLAs have increased the likelihood of sustainability in the contribution rate and benefit levels of TMRS cities that provide COLAs. If the prior financing arrangements had continued, contribution levels may have continued to increase until a point at which the current benefit structure was no longer affordable. However, these changes have put significant upward pressure on the immediate contribution requirements of many cities.

SYNOPSIS OF PROVISIONS:

SB 642- Engrossed would amend the Texas Government Code and provide changes relative to the TMRS. The provisions of the bill, if enacted, would provide more flexibility to member cities in granting COLAs by allowing cities to adopt COLAs without the “catch-up” feature of the current COLA under TMRS. The current methodology for providing COLAs under TMRS benefit provisions is to increase the retiree’s original benefit, by 30%, 50% or 70% of the Consumer Price Index (CPI) increase subject to a cap of 70%, measured from the date of retirement.

SB 642- Engrossed would allow a city the option to grant a COLA without the cumulative aspects of this current COLA methodology. As a result, a COLA granted for a specific year can be based upon a flat percentage increase, and not the cumulative increase in the CPI since retirement, or a percentage of the preceding year’s CPI. The bill also states that any increased payment to a retiree resulting from such a flat rate COLA adopted by a city would be limited to the cumulative increase the annuitant would have been entitled to receive if the 70% of CPI limit under TMRS’ existing law had always been applied to the retiree’s annuity.

SB 642- Engrossed would allow a city to decrease its future COLA expectations without eliminating the COLA for certain current retirees over the short term. In addition, if the city decided not to grant a COLA at all or grant a lesser COLA for a specific year, future COLAs will not automatically become increasingly more expensive. The bill also requires that if a TMRS city adopts an ordinance to either discontinue an annually repeating COLA or to change an annually repeating COLA, then the city must give written notice to members and annuitants at least 60 days prior to the effective date of the change adopted in the ordinance.

The following charts summarize the current and proposed options cities have with respect to COLAs. Both currently and under the proposed bill, a benefit ceiling based on a 70% of CPI COLA applies:

        Current COLA Options for Cities:

        Proposed COLA Options for Cities:

       *Other COLAs may not produce a benefit adjustment in excess of the 70% of CPI COLA.

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 will take effect September 1, 2011.

FINDINGS AND CONCLUSIONS:

COLAs are an optional benefit provision within the TMRS menu of available plan design options that member cities can adopt either on an annually repeating or ad hoc basis.  Cities have to advance fund their annually repeating COLAs and have to rapidly fund their ad hoc COLAs. The current methodology for providing COLAs under TMRS benefit provisions is to increase the retiree’s original benefit, by 30%, 50% or 70% of the CPI increase subject to a cap of 70%, measured from the date of retirement.

According to the plan’s actuary, the “catch-up “ provision under current methodology, may make it difficult for cities to either not grant a COLA in a specific year or to change the expectation to a lesser COLA going forward.  If the city does not grant a COLA for one year, and then attempts to grant a COLA the following year, the city would effectively have to grant two COLAs, “catching-up” the retirees based on the cumulative CPI since retirement.  Furthermore, if the city were to lower its COLA provision (for example from 70% to 50%), then current retirees who are furthest from retirement would not receive a COLA for subsequent years until the 50% of CPI calculation “caught-up” to the prior 70% of CPI levels.  This would result in the more recent retirees receiving COLA increases sooner than the longer term retirees.

SB 642- Engrossed would allow a city the option to grant a COLA without the cumulative aspects of this current COLA methodology.  As a result, a COLA granted for a specific year can be based upon a flat percentage increase, and not the cumulative increase in the CPI since retirement, or a percentage of the preceding year’s CPI. The bill retains the cumulative COLA cap of 70% of CPI. The bill also allows a city to decrease its future COLA expectations without eliminating the COLA for certain current retirees over the short term.  In addition, if the city decided not to grant a COLA at all or grant a lesser COLA for a specific year, future COLAs will not become increasingly more expensive.

SB 642- Engrossed would provide more flexibility to member cities in granting COLAs by allowing cities to adopt COLAs without the “catch-up” feature thereby permitting a COLA to not be granted for a specific year (or years) without reducing the ability to provide a future COLA increase, subject to limits under TMRS’ existing law. The changes proposed by the bill are not expected to have any material effect on the actuarial status of TMRS; nor is there any immediate or long-term actuarial impact expected on any TMRS municipality or on TMRS in total.

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, March 2, 2011.

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, March 17, 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.