BACKGROUND:

Established in 1947, the Texas Municipal Retirement System (TMRS or System) is the statewide system, which administers retirement, disability, and death benefits for employees of those Texas cities which voluntarily elect to participate in the system.  Each of the 849 participating cities chooses a plan of benefits from the various options available under TMRS.  Each city's plan of benefits is funded separately through a combination of employee contributions, as a set percentage of compensation, employer contributions,which are annually determined for each city utilizing generally accepted actuarial principles and practices within the parameters established by the TMRS Act, and investment earnings. These funding requirements are the responsibility of the individual member cities of TMRS.

ACTUARIAL EFFECTS:

HB 626 As Engrossed would give each participating TMRS municipality the option to change the definition for participation from a position that normally requires at least 1,000 hours to one that would require at least 1,500 hours for members hired after the effective date of the ordinance. HB 626 As Engrossed would exclude police department and fire department personnel from the new definition.   

The plan's actuary projects that it is unlikely the TMRS member cities will realize savings on the amortization payments for the unfunded liability, and may see the contribution rate as a percent of payroll increase depending on the impact on the projected covered payroll. If the payroll of the group decreases, the contribution rate to amortize the unfunded liability expressed as a percentage of payroll would increase to come back to the same dollar amount as before. Furthermore, the analysis states that the proposal could impact small, medium, and large municipalities differently. For example, if a municipality that has ten contributing members has one member impacted, then 10% of the municipality's workforce would be affected. The resulting decline in covered payroll and actuarial impact could be more severe than that of a large city with several hundred contributing members who have only 1% of their workforce affected by the proposal.

The actuarial analysis also raises an issue relating to TMRS return to work provision. Currently, retirees returning to work for their last TMRS employer (for more than 1,000 hours a year) will have their pension suspended in most cases. The actuarial analysis states that the bill would allow municipalities adopting the requirement for future hires to increase the annual hour threshold for part-time employees, potentially allowing return to work retirees working fewer than 1,500 hours per year to collect their pensions. It mentions that Section 3 of the bill appears to address the "double-dipping"issue by ensuring that a retiree returning to work at the municipality from which he or she retired, and that has adopted the alternate definition allowed under HB 626 As Engrossed, would have his or her annuity suspended if they worked at least 1,000 hours per year (not 1,500 hours.) Finally, the analysis states that Section 3 may need to be clarified and confirmed.

SYNOPSIS OF PROVISIONS:

HB 626 As Engrossed would amend the governing statute of TMRS by giving municipalities the option to change the definition for participation from a position that normally requires at least 1,000 hours to one that would require at least 1,500 hours for members hired after the effective date of the ordinance. HB 626 As Engrossed would exclude police department and fire department personnel from the new definition. The changes proposed by the bill would apply only to employees hired on or after the effective date of an ordinance adopted by a municipality.The proposed bill would not affect current TMRS plan participants, and the current law would remain in effect regarding return to work retirees.

Additionally, the proposal would allow TMRS board of trustees to adopt rules to limit the frequency with which a municipality may adopt alternative definitions of certain future employees.

The provisions of this bill would be effective September 1, 2013.

FINDINGS AND CONCLUSIONS:

Currently, the minimum threshold is 1,000 hours per year of employment for employees to be eligible to participate in TMRS. HB 626 As Engrossed would allow member municipalities to adopt an ordinance to change the requirement for TMRS plan participation for certain new employees by increasing the annual hour's requirement from 1,000 to 1,500.

According to the actuarial analysis, if the bill is enacted, municipalities adopting the ordinance to change the definition of future employees would no longer contribute on the payroll of the new members who work between 1,000 and 1,500 hours annually, which would save the participating municipality directly by lowering the dollar amount of future normal cost. In a sample survey performed by TMRS in March 2011, it was determined that approximately 1% of the active population of the cities surveyed would be impacted. However, because these members are part time employees and are typically lower paid, the impact on the total liabilities and covered payroll will likely be close to 0.50%. Moreover, since the proposal excludes police and fire the potential overall impact on the System would be very minor. The actuarial analysis also states that the impact could be slightly more material to an individual TMRS city that has a disproportionate number of these part time positions or chooses to prospectively replace full time employees with employees in the 1,000 to 1,500 hour range. Consequently, the covered payroll for contributions would not grow at the assumed rate, which could lead to increasing contribution rates over time. 

The actuarial review states that the economic effect of the bill would vary by participating municipal employer who adopted the requirement for future hires, depending on the number of positions requiring less than 1,500 hours. There would likely be a decrease in the dollar amount of employer contributions in the long run, but no significant decrease in the short run. The employer contribution as a percent of payroll could increase slightly or remain the same in the short run due to a decrease in covered payroll.  

Additionally, the actuarial review states that TMRS is currently actuarially sound per the PRB guidelines and will most likely remain actuarially sound if HB 626 Engrossed is enacted.

The actuarial review also states that the conclusions of the actuarial analysis of no material effect on the retirement plan funded status and the likely effect of employer contributions for participating municipal employers are reasonable.

METHODOLOGY AND STANDARDS:

The analysis rely on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the December 31, 2011 actuarial valuation of TMRS, The analysis assumes no further changes are made to TMRS 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 Mr.Mark R. Randall, Executive Vice President, and Mr. Joseph P. Newton, Senior Consultant, Gabriel, Roeder, Smith & Company, May 14, 2013.

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, May 14, 2013.

GLOSSARY OF ACTUARIAL TERMS:

Normal Cost--the current annual 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.