Based on the February 28, 2013 Update of the August 31, 2012 TRS Actuarial Valuation

* Assumes member contribution rate is unchanged at 6.40%. The current total contribution rate of 12.80% of payroll is insufficient to amortize the unfunded liabilities over a 30--year period and therefore the current amortization period is infinite. The bill does not propose an increase in the contribution rate to fund the benefit enhancement; hence the amortization period would remain at infinite. If the provisions of this bill are enacted, it is anticipated that state's actuarially required contributions for TRS would need to increase by 16.30% to 25.07% of payroll if the member's rate is to remain at 6.40% of pay. The increased state contribution rate of 25.07% of pay is above the constitutional maximum of 10%.

**Additionally, the actuarial analysis points out that the above figures are based on the plan's February 28, 2013 actuarial value of plan assets (AVA), which does not reflect the deferred asset losses of $4 billion; the recognition of these deferred losses over the next few years will tend to increase the actuarially sound contribution rate.

A Glossary of Actuarial Terms is provided at the end of this impact statement.

ACTUARIAL EFFECTS:

According to the actuarial analysis, HB 472 would increase the normal cost of the plan by 3.58% of payroll, from 10.60% to 14.18%. HB 472 would also increase the unfunded actuarial accrued liability (UAAL) by $76.4 billion, an increase from $27.4 billion to $103.9 billion and would raise the actuarially sound contribution rate required for the state from 8.77% to 25.07% (assuming the member contribution rate is unchanged at 6.40%), an increase of 16.30% of payroll. The funded ratio using the actuarial value of assets as of February 28, 2013 would decrease by 27.7%, from 81.4% to 53.7%.

Currently, the period required to amortize the System's UAAL is infinite. In order for TRS to meet the statutory bench mark of 30-year amortization period, the State's contribution rate would need to increase by 16.30%, from 8.77% to 25.07%, to amortize the System's UAAL at an actuarially sound rate. Note that the contribution of 25.07% of pay is above the constitutional maximum of 10%.

SYNOPSIS OF PROVISIONS:

HB 472 would provide the following increases in the benefit payments, but does not provide for an increase in plan funding to cover the costs:

?         Effective September 1, 2013, an across-the-board 10% increase in the benefits payable to service retirees, disabled retirees and survivors who would be eligible for a payment in September 2012.

?         A 4% annual cost-of-living adjustment (COLA) for current and future retirees. The proposed bill states that the COLAs would go into effect on or after September 1, 2013, but does not provide a specific effective date. The actuarial analysis has assumed that the first COLA would occur one year after the 10% benefit increase, or September 1, 2014 and future COLAs would be effective on each September 1^st.  

?         On January 1, 2014, a supplemental payment equal to the greater of a member's monthly pension or $2,000. To be eligible for the supplemental payment the member must have retired on or before September 1, 2012 and must still be receiving benefits in December 2013. The supplemental payment (but not the 10% benefit increase and 4% COLA) would be subject to Texas Government Code Section 821.006, requiring an amortization period of less than 31 years before the supplemental payment could be made.

FINDINGS AND CONCLUSIONS:

The actuarial review states that the TRS is currently actuarially unsound. The bill, if enacted, will make the system significantly more actuarially unsound. The funded ratio using the actuarial value of assets as of February 28, 2013 would drop from 81.4% to 53.7%. Additionally, HB 472 would approximately quadruple the plan's unfunded actuarial accrued liability, increasing it from $27.4 billion to $103.9 billion.

The actuarial review also states that this bill would impact TRS annuitants and future annuitants.  As of August 31, 2012, there were 33,747 TRS annuitants, including 311,170 retirees, 11,524 beneficiaries, and 9,053 disability retirees. Also, as of August 31, 2012, there are 815,155 active members, 72,419 inactive vested and 116,081 inactive non-vested members who may receive an annuity from the plan in the future.

Although not discussed in the actuarial analysis, the actuarial review states that the proposed bill would have the effect of increasing the TRS Net Pension Liability (NPL) as of August 31, 2015 (assuming the state follows the reporting standards required by GASB 68). The benefit provisions of the bill would increase the plan's Actuarial Accrued Liability (AAL), thus directly increasing the August 31, 2015 Total Pension Liability (TPL) and NPL. Also, a closer projected asset exhaustion date would require a lower discount rate for calculating the Total Pension Liability, and thus a higher NPL.

Additionally, it should be noted that Section 821.006 of the Government Code prohibits the adoption of any proposed benefit improvement, if the amortization period for the UAAL of the retirement system exceeds 30 years by one more years. According to the actuarial analysis, the TRS amortization period currently is infinite and thus passage of the proposal without additional funding would violate TRS statute.  

METHODOLOGY AND STANDARDS:

The analysis and calculations are based on the member data of TRS as of August 31, 2012, the actuarial value of assets as of February 28, 2013, and the actuarial assumptions and methods in use as of August 31, 2012 for valuing the actuarial condition of TRS. Note that the analysis does not reflect the deferred asset losses of $4 billion that have yet to be recognized in the actuarial value of assets as of August 31, 2013. The analysis assumes no further changes are made to TRS 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 Lewis Ward and Joseph P. Newton, Actuaries, Gabriel Roeder Smith & Company, March 18, 2013.

Actuarial Review by Dan P. Moore, Staff Actuary, Pension Review Board, April 19, 2013.

GLOSSARY OF ACTUARIAL TERMS:

Actuarial Accrued Liability (AAL):  the portion of the PVFB that is attributed to past service.

Actuarial Value of Assets (AVA):  the smoothed value of system's assets.

Amortization:  the payment on the Unfunded Actuarial Accrued Liability (UAAL).

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.

Cost Method : a method to divide the Present Value of Future Benefits (PVFB) into the Actuarial Accrued Liability (AAL), the Present Value of Future Normal Costs (PVFNC), and the Normal Cost (NC).

Funded Ratio (FR): the ratio of the assets to the liabilities.

GASB 68 and related terminology: a statement of the Governmental Accounting Standards Board (GASB) concerning accounting for pension by governmental employers effective 6/30/2015 and later:

• Net Pension Liability (NPL): The liability of employers and non-employer contributing entities for pension benefits shown on the entity's balance sheet for FYE 6/30/2015 and later. The NPL equals the TPL minus the market value of plan assets. (If plan assets exceed the TPL, there is a Net Pension Asset.)

• Total Pension Liability (TPL): the portion of the actuarial present value of projected benefit payments attributed to past periods of employee service under the Entry Age Normal valuation method. \

• Discount Rate: A single rate used to discount the calculate the TPL which is equivalent to discounting future payments reflected in the TPL at the long-term expected rate of return until plan assets are projected to be exhausted, and discounting at the municipal bond rate for subsequent payments reflected in the TPL.

Market Value of Assets (MVA): the fair market value of the system's assets

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.

Present Value of Future Benefits (PVFB): the present value of all benefits expected to be paid from the plan to current plan participants.

Present Value of Future Normal Costs (PVFNC): the portion of the PVFB that will be attributed to future years of service.

Unfunded Actuarial Accrued Liability (UAAL): 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.