LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
82ND LEGISLATIVE REGULAR SESSION
 
May 19, 2011

TO:
Honorable Vicki Truitt, Chair, House Committee on Pensions, Investments & Financial Services
 
FROM:
John S O'Brien, Director, Legislative Budget Board
 
IN RE:
SB1671 by Duncan (Relating to the Teacher Retirement System of Texas.), Committee Report 2nd House, Substituted

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 bill would also require that members who establish certain types of service credit (i.e., purchase service) in the TRS by making additional deposits into the system have to pay an amount equal to the actuarial present value of the additional service. The bill would also make small changes to the requirements for establishing service credit in the system for active military service to bring those requirements in compliance with federal law, and would modify the cost of reestablishing previous credited service forfeited due to a withdrawal of member contributions.

 

The service purchase provisions of the bill are identical to the provisions of SB 1668. According to the actuarial analysis of SB 1668, the provisions, if enacted, would not have a material actuarial impact on the current actuarial valuation of the TRS. The current valuation does not value future service purchases until they occur; however, the system’s actuary notes that this does not mean that passage of the bill would not have a monetary impact on TRS.  In fiscal year 2010, TRS member service credit purchases increased the total liability of TRS by $282 million. To purchase the service credit, members made additional contributions of $82 million. Therefore, TRS experienced an estimated $200 million loss during FY 2010 due to non-actuarial service purchases. The bill would remove some of these actuarial losses. 

 

 

 

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 ending August 31, 2012.  This provision of the proposed bill, if enacted, could have a positive actuarial impact on TRS. If the state lowers its Fiscal Year 2012 contribution rate from the current 6.644% to the minimum allowable rate of 6% proposed in the General Appropriations Act- Engrossed, the member contributions would not decrease over that year, and the fund would receive additional contributions for that year. 

 

The bill would also allow a service retiree who retired on or before January 1, 2011, to work full-time in a Texas public educational institution with no loss of monthly annuity payments. Service retirees who retired on or before January 1, 2011, resumed employment after retirement and whose benefit payments were suspended under Section 824.601 would be entitled to the resumption of the monthly benefit payments. Additionally, the bill would allow service retirees who retire after January 1, 2011, and have been separated from service with all Texas public educational institutions for at least 12 full consecutive months immediately after retiring, to resume full-time employment with no loss of monthly annuity payments. Currently, a return-to-work retiree will forfeit the annuity payment for any additional month the retiree works in excess of a period of six months, in a school year. 

 

The return-to-work provisions of the bill are identical to the provisions of SB 1669. According to the actuarial analysis of SB 1669, while passage of this bill does not currently impact the actuarial valuation of TRS, there would be a monetary cost to TRS if the bill was enacted.  TRS experiences an actuarial gain when retirees have their pensions suspended.  In fiscal year 2010, members who had returned to work forfeited approximately $52 million in retirement benefits.  Any bill or combination of bills that would make some or all of these benefits payable would have a corresponding cost over time.  For example, if all currently forfeited benefits were made payable, TRS could pay out as much as $260 million more in benefits over the next five years.

 

The PRB reviewing actuary estimates that the present value of an extra $52 million in annual benefits payable in perpetuity is about $600 million.  The bill does not provide for funding of the additional benefits. 

 

 

SYNOPSIS OF OTHER RELEVANT PROVISIONS:

 

CSSB 1671, to be effective either immediately upon passage or September 1, 2011, would, among other things, provides the following changes:

 

  • Amends the Government Code to allow TRS to obtain access to criminal history records relating to employees, applicants, and persons doing business with TRS, from law enforcement agencies.

  • Adds Government Code Section 551.130, stating that the Board is not prohibited from holding an open or closed meeting by telephone conference call, and that a conference call may only be held if a quorum of the board in physically present at a single location that is open to the public.

  • 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 Section 821.001 to provide for a uniform definition of “school year”.

  • Amends the Government Code Section 821.010 (a) relating to the frequency with which certain type of information is provided to the comptroller by the retirement system.    

  • 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.

 

FINDINGS AND CONCLUSIONS:

 

The proposal would have a positive actuarial impact by allowing for inceased member contributions, and by requiring purchases of service except for military service to be actuarially neutral.

 

However it would also have a significant negative impact, estimated to be a $600 million impact by the PRB actuary, by relaxing standards for return-to-work provisions for retirees.

 

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 negative 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 1st House, Substituted, April 26, 2011. 

Email correspondence from Betsey Jones, TRS, March 22, May 9 and May 13, 2011.

Actuarial Analysis by Lewis Ward and Joseph P. Newton, Actuaries, Gabriel Roeder Smith & Company, March 23, 2011.

Actuarial Review by Mr. Dan P. Moore, Staff Actuary, PRB, April 18, 2011

Actuarial Analysis by Lewis Ward and Joseph P. Newton, Actuaries, Gabriel Roeder Smith & Company, March 29, 2011.

Actuarial Review by Mr. Dan P. Moore, Staff Actuary, PRB, April 15, 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.

 

 



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