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:

The provisions of the bill, if enacted, would allow an individual who has retired from a TMRS city, and who becomes re-employed by that same city after a bona fide termination of employment of at least twelve months to be eligible to receive in a lump-sum payment an amount equal to the sum of the suspended annuity payments that the individual would have received from the retirement system had payments not been suspended.  Current law requires that the annuity of a retiree be suspended if the retiree returns to work for the city from which he or she retired and that a new member account be created with TMRS for the period of re-employment. This is required regardless of the time period between the date the person retires and the date of their re-employment.  The proposal is typically referred to as “return to work”. Any additional benefit accruals due to contributions and interest into the new account established upon returning to work is separately accounted for as under current law.

The funding requirements and cost impact are the responsibility of the member cities of TMRS; therefore, the changes under SB 812- Engrossed are not expected to have an actuarial impact on TMRS as a system. In addition, the changes proposed by SB 812- Engrossed are not expected to have any material effect on the actuarial status of TMRS; nor is there any material long-term actuarial impact expected on any TMRS municipality or on TMRS in total.   

According to the actuarial analysis, there would be a slight cost impact to the individual re-employing city, but not the system as a whole. Because the annual actuarial valuation assumes retirees will continue to be paid monthly benefits until death, any suspended benefit payments produce an actuarial gain in the following year’s valuation. Therefore, the lump sum payment of monthly benefit payments forfeited after the effective date of the proposal will generate an actuarial loss equivalent to the cumulative value of the prior year’s actuarial gains. All future actuarial gains generated under current law would be lost or reversed for each affected re-employing municipality.

SYNOPSIS OF PROVISIONS:

SB 812- Engrossed, to be effective January 1, 2012, would provide the following changes:

·         An individual who has retired from a TMRS city, and who becomes re-employed by that same city after a bona fide termination of employment of at least twelve months is entitled to receive a lump-sum payment of an amount equal to the sum of the suspended annuity payments that the individual would have received from the retirement system had payments not been suspended. Provisions of the bill will only start forward from the effective date.

·         The lump sum payment is payable from the municipality accumulation fund and the current service annuity reserve fund as appropriate.

FINDINGS AND CONCLUSIONS:

The provisions of the bill, if enacted, would allow an individual who has retired from a TMRS city, and who becomes re-employed by that same city after a bona fide termination of employment of at least twelve months to be eligible to receive a lump-sum payment of an amount equal to the sum of the suspended annuity payments that the individual would have received from the retirement system had payments not been suspended.

According to the actuarial analysis, only 98 members in the entire system currently are working for the same TMRS city from which they retired and returned to work for that city twelve or more months after the effective date of retirement. For a point of comparison, there are over 100,000 active members in TMRS. The suspended annuities for the 98 members equal $90,998 per month. For these 98 members, beginning with the effective date of the proposal the value of the suspended annuities would continue to increase at a rate of $90,998 per month, or $1,091,976 annually, during the time they continue to be employed. The estimated present value of future gains forgone in perpetuity would be approximately $16 million, or 0.1% of the accrued liability of the system (based on $1.1 million divided by the 7.0% assumed rate of return).

The funding requirements and cost impact are the responsibility of the member cities of TMRS; therefore, the changes under SB 812- Engrossed are not expected to have an actuarial impact on TMRS as a system. In addition, the changes proposed by SB 812- Engrossed are not expected to have any material effect on the actuarial status of TMRS; nor is there any material long-term actuarial impact expected on any TMRS municipality or on TMRS in total.  

METHODOLOGY AND STANDARDS:

The analysis assumes no further changes are made to (fund) 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, April 21, 2011.

Actuarial Review by Mr. Daniel P. Moore, Actuary, Pension Review Board, April 14, 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.