ACTUARIAL EFFECTS:

The bill would change the effective date from September 1, 2006 to September 1, 2007 with regard to the strengthened eligibility requirements for retirement for members of the Teacher Retirement System. When the eligibility requirements were tightened in 2005, the legislation made the basic changes applicable to members starting after September 1, 2006. However, the associated  language used for determining reduction factors for early retirement used September 1, 2007 as a date.

According to TRS, the provisions in the law relating to September 1, 2006 were inconsistent with the other provision and legislative intent. A board rule was adopted effective in May, 2008 using the September 1, 2007 date, but TRS has administered the plan with the 2007 eligibility date since the original law passed.

However, the authority to improve benefits comes only from changes in statute. From that statutory perspective, the proposed change would be an improvement in benefits for members who started their service between September 1, 2006 and September 1, 2007. The estimated actuarial impact of the benefit improvement is $200 million.

This estimate is made as follows. The full changes in the 2005 legislation reduced the normal cost rate for TRS members by 1.31 percent of payroll. 90 percent of the normal cost reduction is estimated to be from the change to making retirement based on age of 60 rather than rule of 80. So the change in normal costs for this group attributable to the change would be a rate increase of 1.16 percent. The group of teachers and other members starting in this year long period is estimated to consist of 1/25 of the population of active TRS members. So they represent roughly 1/25 of the current TRS payroll, and given TRS salary increase assumptions their payroll will increase by at least 3 percent annually. Applying the 1.16 percent contribution rate to 1/25 of the TRS member payroll, and discounting the future 25 year stream of 1.16 percent contributions at an 8 percent discount rate gives a present value of $200 million. So the actuarial impact is estimated to be $200 million, though it could also be described as a 1.16 percent increase in the normal cost rate for the affected TRS members.

Section 821.006 of Government Code, limiting improvements to benefits likely prohibits this benefit change. It limits benefit changes of the proposed type if the action, as determined by an actuarial valuation, would increase the amortization period. 

The proposal also would permit the member contribution rate to be set at a rate higher than the State contribution rate for the fiscal year beginning September 1, 2011.  This provision of the proposed bill, if enacted, could have a positive actuarial impact. If the state lowers its contribution rate from the current 6.644% to the 6% proposed in the General Appropriations Act As Passed by the House, the member contributions would not decrease over this year, and the fund would receive additional contributions for that year.

SYNOPSIS OF PROVISIONS:

SB 1667 Engrossed, to be effective September 1, 2011, would provide the following changes:

·        Changes the effective date for tightened eligibility requirements from September 1, 2006 to Septemeber 1, 2007.

·         Allows a public retirement system to assess administrative fees on a party who is subject to a domestic relations order for the review of the order under this subchapter and, as applicable, for the administration of payments under an order that is determined to be qualified. In addition to other methods of collecting fees that a retirement system may establish, the retirement system may deduct fees from payments made under the order.

·         Amends the Government Code to add sections clarifying a member’s duty to notify the retirement system for service that has not been properly credited on an annual statement. The bill also clarifies a beneficiary’s entitlement to a member’s benefits upon death.

·         Amends the Government Code to authorize the amount of the State contribution to TRS for the state fiscal year end August 31, 2012 to be less than the amount contributed by members during that fiscal year.

FINDINGS AND CONCLUSIONS:

The proposal amends several sections of the Texas Government Code relative to TRS. Additionally, the proposal would amend current law to authorize the amount of the State contribution to TRS for the state fiscal year end August 31, 2012 to be less than the amount contributed by members during that fiscal year. Currently, the State contribution rate to TRS is 6.644% of payroll and the member contribution rate is 6.4% of payroll. Under the proposal, if the State contribution rate is set to the minimum allowable rate of 6.0% of payroll, the member rate could be set at a higher rate. The current law under Section 825.404(a) provides that member contributions to TRS equal the State contributions.

The proposal also would change the effective date from September 1, 2006 to September 1, 2007 with regard to eligibility requirements. A TRS board rule was adopted, effective May 2008, using the September 1, 2007 date; but TRS has administered the plan with the 2007 eligibility date since the original law passed. This statutory change would result in a $200 million actuarial impact to the fund. Section 821.006 of Government Code, limiting improvements to benefits likely prohibits this benefit change. It limits benefit changes of the proposed type if the action, as determined by an actuarial valuation, would increase the amortization period. 

SOURCES:  

Actuarial Valuation February 28, 2011 Update by Lewis Ward and Joseph P. Newton, Actuaries, Gabriel Roeder Smith & Company, March 7, 2011.

Fiscal Note from Legislative Budget Board, SB 1667 Committee Report 1^st House, Substituted, April 26, 2011. 

Email correspondence from Betsey Jones, TRS, March 22 and May 9, 2011.

Analysis by LBB Staff.

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.