In response to your request for an Actuarial Impact Statement on SB 1286 (relating to the administration and funding of Austin Firefighters Relief and Retirement Fund) the Pension Review Board (PRB) has determined the following:

ACTUARIAL EFFECTS:

SB 1286, if enacted, would increase both the city and member contribution rates to the Austin Firefighters Relief and Retirement Fund (the “Fund”). According to the actuarial analysis, the proposed changes will improve the long-term actuarial status of the Fund. The city contribution rate is scheduled to increase from 18.05% of pay to 19.05% effective October 1, 2010, to 20.05% effective October 1, 2011, to 21.05% for 24 pay dates effective October 1, 2012, and to 22.05% for all the pay dates thereafter.  The employee contribution rate is scheduled to increase from 15.70% of pay to 16.20% effective October 1, 2011, to 16.70% effective October 1, 2012, to 17.20% effective October 1, 2013, and to 17.70% effective October 1, 2014, to 18.20 effective October 1, 2015, and to 18.70% for all the pay dates effective October 1, 2016 and thereafter.   

According to the actuarial analysis and based on the results of the December 31, 2009 actuarial valuation of the Fund, which incorporated the impact of the city’s contribution rate increases, the funded ratio was 88.7%, the unfunded accrued liability (UAAL) was $74.9 million, and the funding period to amortize the UAAL was 20.5 years. The proposed bill would reduce the funding period of the Fund, calculated as of December 31, 2009, from 20.5 years to 15.9 years. SB 1286 would slightly increase the UAAL by 0.4% resulting from the projected member contribution rate increase because of refunds to be paid to nonvested members upon termination. However, the value of the increased contribution rates significantly outweighs the resulting slight increase in the UAAL. In the long-term, the increase in the negotiated city and member contribution rates will have a positive impact on the future asset values of the Fund and will improve the actuarial condition of the Fund.         

SYNOPSIS OF PROVISIONS:

SB 1286 to be effective, September 1, 2011, would provide the following changes:

·         Increase the city contribution rates to the Fund from the current rate of 18.05% of pay to 19.05% effective October 1, 2010, to 20.05% effective October 1, 2011, to 21.05% for 24 pay dates effective October 1, 2012, and to 22.05% for all the pay dates thereafter.

·         Increase the member contribution rates from the current rate of 15.70% of pay to 16.20% effective October 1, 2011, to 16.70% effective October 1, 2012, to 17.20% effective October 1, 2013, and to 17.70% effective October 1, 2014, to 18.20% effective October 1, 2015, and to 18.70% for all the pay dates effective October 1, 2016 and thereafter.  

·         Amend Section 2.03(b) of Article 6243e.1 of Vernon’s Texas Civil Statutes relating to election of members of the board of trustees by providing a mechanism to appoint instead of elect a trustee if there is only one nomination for the vacant position on the board. The board will adopt procedures for the appointment of a sole nominated candidate and the appointed board member will be considered elected under the statute.

FINDINGS AND CONCLUSIONS:

SB 1286, if enacted, would increase both the city and member contribution rates to the Fund in steps following September 30, 2010 through September 30, 2016. According to the actuarial analysis, the proposed changes will improve the long-term actuarial status of the Fund. The city contribution rate is scheduled to increase from 18.05% of pay to 19.05% effective October 1, 2010, to 20.05% effective October 1, 2011, to 21.05% for 24 pay dates effective October 1, 2012, and to 22.05% for all the pay dates thereafter.  The member contribution rate is scheduled to increase from 15.70% of pay to 16.20% effective October 1, 2011, to 16.70% effective October 1, 2012, to 17.20% effective October 1, 2013, and to 17.70% effective October 1, 2014, to 18.20% effective October 1, 2015, and to 18.70% for all the pay dates effective October 1, 2016 and thereafter.   

According to the actuarial analysis, the City agreed to schedule contribution rate increases to the Fund as a result of a recent collective bargaining agreement and the proposed bill only seeks to codify the actions taken by the City to improve the actuarial soundness of the Fund. In the long-term, the increased contribution rates will improve the actuarial condition of the Fund.   

The proposed bill would have a positive impact on the future asset value of the fund due to the increased city and member contribution rates, and would reduce the funding period from 20.5 years to 15.9 years. The actuarial review states that the changes in the bill would have no material impact to the actuarial liabilities of the Fund.  There is a (slight) 0.4% increase in the system’s actuarial accrued liability resulting from the projected member contribution increase (associated with nonvested terminations).

METHODOLOGY AND STANDARDS:

The analysis is based on the plan provisions, assumptions, methods and data used in the December 31, 2009 actuarial valuation of the Fund except for the proposed change in member contribution rates.  Additionally, the analysis assumes no further changes are made 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 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 11, 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.