LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
82ND LEGISLATIVE REGULAR SESSION
 
May 17, 2011

TO:
Honorable Vicki Truitt, Chair, House Committee on Pensions, Investments & Financial Services
 
FROM:
John S O'Brien, Director, Legislative Budget Board
 
IN RE:
SB1664 by Duncan (Relating to the powers and duties of and contributions to and benefits from the systems and programs administered by the Employees Retirement System of Texas.), Committee Report 2nd House, Substituted

In response to your request for an Actuarial Impact Statement on SB 1664, 2nd House Committee Substitute (relating to the powers and duties of and contributions to and benefits from the systems and programs administered by the Employees Retirement System of Texas) the Pension Review Board (PRB) has determined the following:

 

ACTUARIAL EFFECTS:

 

According to the actuarial analysis, the changes proposed in the bill would have no material actuarial impact on the Employees Retirement System of Texas (ERS), the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF), the Judicial Retirement System One (JRS-I), or the Judicial Retirement System Two (JRS-II).  For both ERS and LECOSRF, the analysis assumes the current total contribution rates of 13.45% and 2.09% respectively, to continue in the future. However, the proposed bill, if enacted, could potentially have a positive actuarial impact on both ERS and LECOSRF as described below:

 

Potential actuarial effect on ERS: If the state were to lower the current state contribution rate of 6.95% to the minimum allowable rate of 6%, under the current law the member contribution rate will also equal the state contribution rate and reduce to 6% from the current rate of 6.5%. Such reduction would in turn increase the contribution shortfall for the system. However, since the proposed bill would fix the member contribution rate at 6.5%, the probable reduction of the state contribution rate will not impact the member contribution rate. Hence, the proposal in the aforementioned scenario will increase future funding for ERS with additional member contributions (as compared to the current law), and hence, will have a positive actuarial impact on the system. According to the actuarial analysis, the fixed member contribution rate of 6.5% when coupled with the minimum contribution rate from the State of 6.0% would still exceed the current normal cost rate of 12.30%.        

 

Potential actuarial effect on LECOSRF:  If the state were to lower the current state contribution rate of 1.59% to the minimum allowable rate of 0%, under the current law the member contribution rate will also equal the state contribution rate and reduce to 0% from the current rate of 0.50%. Such reduction would in turn increase the contribution shortfall for the system. However, since the proposed bill would fix the member contribution rate at 0.5%, the probable reduction of the state contribution rate will not impact the member contribution rate. Hence, the proposal in the aforementioned scenario will increase future funding for LECOSRF with additional member contributions (as compared to the current law), and hence, will have a positive actuarial impact on the system. According to the actuarial analysis, the fixed member contribution rate of 0.5% would cover 24.2% of the current normal cost rate regardless of the State contribution.  

    

SYNOPSIS OF PROVISIONS:

 

CSSB 1664, to be effective September 1, 2011, would provide the following changes:

 

·         Require any benefits, funds, or account balances payable on the death of a member may not be paid to a person convicted of or adjudicated as having caused the death of the member. Expands the definition of conviction to include being found liable in civil proceedings.

·         Extends the service requirement for Rule-of-80 retirement from five years to ten years for members hired on or after September 1, 2009.

·         Clarifies the actuarial reductions for law enforcement or custodial officers hired on or after September 1, 2009 for each year prior to age 55 are in addition to any other actuarial reductions required by law.

·         Clarifies that member contributions for service not previously established in the employee elected class are paid at the same rate as current service contributions as provided by Section 815.402 of Texas Government Code.

·         Sets member contributions to 6.5% of payroll for ERS and 0.5% of payroll for LECOSRF for the fiscal year beginning September 1, 2011 if the State contribution rate is set lower than those levels.

FINDINGS AND CONCLUSIONS:

 

The proposal amends several sections of the Texas Government Code relative to the systems and programs administered by ERS, including changes to death benefit convictions. Additionally, the proposal would amend current law to set member contributions to 6.5% of payroll for ERS and 0.5% of payroll for LECOSRF for the fiscal year beginning September 1, 2011 if the State contribution rate is set lower than those levels.

 

The current law under Section 815.402 provides that member contributions to ERS and LECOSRF equal the State contributions within certain limits. Member contributions to ERS are limited to between 6.0% and 6.5% of payroll and contributions to LECOSRF are limited to between 0 and 0.5% of payroll. Currently, the ERS member contribution rate is 6.5% of payroll and LECOSRF member contribution rate is 0.5% of payroll (the maximum possible percentages of payroll allowable under the current law).

 

CSSB 1664 would amend Section 815.402 of the Texas Government Code to fix member contribution rates for the fiscal year beginning September 1, 2011 at 6.5% of payroll for ERS and 0.5% of payroll for LECOSRF if the State contribution rate is set lower than those levels for each of the systems.   

 

According to the actuarial analysis, the proposed bill would mitigate the contribution shortfall if the State were to lower the State contribution to less than the current member contribution rate for each of the systems. The bill would fix the member contribution rate at 6.5% for ERS that, when coupled with the minimum contribution rate from the State of 6.0%, would still exceed the current normal cost rate of 12.30%. For LECOSRF, the bill would fix the member contribution rate at 0.5%, which would cover 24.2% of the current normal cost rate regardless of the State contribution. 

 

The plan’s actuary assumes that the current member contribution rate for ERS and LECOSRF (6.5% and 0.5%, respectively) will continue in the future. Hence, the actuarial analysis shows that the proposed bill does not affect the projected valuation results for the future biennium.

 

The actuarial review states that the bill would impact all active members of ERS and LECOSRF in the event of a decrease in the present employer contribution rates below 6.5% and 0.5% respectively, as the member contribution rate would then be higher than the State’s contribution.

 

Furthermore, the actuarial analysis shows that the proposed bill does not improve benefits or increase the actuarial costs of the plans, so if the bill is enacted, the current state contributions for fiscal year 2011 will comply with the requirements of Texas Government Code Section 811.006.   

 

METHODOLOGY AND STANDARDS:

 

The analysis assumes no further changes are made to ERS, LECOSRF, JRS-I, and JRS-II; and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually.  The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2011 update of the August 31, 2010 actuarial valuation of ERS, LECOSRF, JRS-I, and JRS-II. According to the PRB actuary, the actuarial assumptions, methods and procedures used in both analyses 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 27, 2011;

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, May 9 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.



Source Agencies:
338 Pension Review Board
LBB Staff:
JOB, WM