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 651 would give an option to the municipalities in TMRS to make certain future employees (those hired to work between 1,000 and 1,500 hours annually) ineligible to participate in TMRS, which would consequently reduce the TMRS member cities’ dollar amount of normal cost for each future employee who is ineligible.

The plan’s actuary also projects that it is unlikely the TMRS member cities would realize savings on the amortization payments for the unfunded liability, and in fact, 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.

The actuarial analysis raises the 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. This bill would allow municipalities adopting the requirement for future hires to increase the annual hour threshold, potentially allowing return to work retirees working fewer than 1,500 hours per year to collect their pensions.

SYNOPSIS OF PROVISIONS:

HB 651 would amend the Government Code by giving municipalities the option to change the definition of “employee” for purposes of participation in the TMRS for all future employees. The proposed bill would allow municipalities to adopt ordinances to change the eligibility requirement, for certain employees of TMRS member cities, to participate in the System by increasing the number of yearly working hour’s requirement from 1,000 to 1,500. The changes proposed by the bill are optional and would apply 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.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 certain employees to be eligible to participate in TMRS. HB 651 would allow member municipalities to adopt an ordinance to change the requirement for TMRS plan participation for 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 ‘employee’, would no longer contribute on the payroll of the members who work between 1,000 and 1,500 hours annually, which would save the participating municipality directly by lowering the dollar amount of 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% which would have a very minor impact to the System as a whole.  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. For these cities, 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 adopts 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 651 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, March 06, 2013.

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, March 07, 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.