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:

According to the actuarial analysis, if the bill is enacted, it would provide additional flexibility in the design of a TMRS member city’s COLA provision. The current methodology for providing COLAs under TMRS benefit provisions is to increase the retiree’s original benefit by a percentage of the increase in the Consumer Price Index measured from the date of retirement. HB 718 would allow a participating municipality the option to grant a COLA without the cumulative aspect of this current COLA methodology. Also contained in HB 718, to comply with federal law applicable to qualified plans, any increased payment to a retiree resulting from such a flat rate COLA adopted by a city would be limited to the cumulative increase the annuitant would have been entitled to receive had the CPI maximum (i.e. 70%) under TMRS’ existing law always been applied.

As a result of these changes, HB 718 would provide additional flexibility in allowing TMRS member cities to manage the actuarial funding costs associated with their COLA provisions. Additionally, since the funding requirements and cost impact are the responsibility of the member cities of TMRS, the changes proposed by HB 718 are not expected to have an actuarial impact on TMRS as a system. In addition, the proposed changes are not expected to have any material effect on the actuarial status of TMRS. Also, there is no immediate or long-term actuarial impact expected on any TMRS municipality or on TMRS in total. Therefore, there is no estimated actuarial change in the System’s present value of future benefits (i.e., the effect of the legislation).

SYNOPSIS OF PROVISIONS:

HB 718 would amend Section 853.404 of the Texas Government Code by requiring that if a TMRS city adopts an ordinance to either discontinue an annually repeating COLA or to change an annually repeating COLA, then the governing body of the participating municipality must give written notice to members and annuitants at least 60 days prior to the effective date of the change or discontinuation adopted in the ordinance.

HB 718 also amends Section 854.203 of the Texas Government Code by allowing a participating municipality the option to grant a COLA without requiring the municipality to retroactively apply the COLA from the participant’s retirement date to the date the COLA is granted. The cumulative COLA methodology is currently required.

The cumulative aspect of the current TMRS COLA provisions cause a ‘catch-up’ requirement in the case of a plan considering a restart of a previously discontinued COLA. Upon such a restart, benefits must immediately adjust to what the benefit levels would have been had that COLA provision always been in effect (except that retiree benefits are never decreased). Under the proposed bill, cities that decide to restart COLAs after a period of having no COLAs would have the flexibility to grant COLAs that are less than the amount available to grant under the current provisions (e.g., a flat 2% COLA), instead of a cumulative 30%, 50%, or 70% of CPI.

The following charts summarize the current and proposed options cities have with respect to COLAs. Both currently and under the proposed bill, a benefit ceiling based on a 70% of CPI COLA applies:

        Current COLA Options for Cities:

        Proposed COLA Options for Cities:

*Other COLAs may not produce a benefit adjustment in excess of the 70% of CPI COLA.

The provisions of this bill will take effect immediately if it receives a vote of two-thirds of all the members elected to each house.  If this bill does not receive the vote necessary for immediate effect, it will take effect September 1, 2013.

FINDINGS AND CONCLUSIONS:

Currently, the methodology for providing COLAs under TMRS benefit provisions is to cumulatively increase the retiree’s original benefit by a percentage of the increase in the Consumer Price Index measured from the date of retirement. HB 718 would allow a participating municipality the option to grant a COLA without the cumulative aspect of this current COLA methodology. According to the actuarial analysis, if the bill is enacted, it would provide additional flexibility in the design of a TMRS member city’s COLA provision.

The actuarial analysis states that HB 718 would allow a participating municipality to decrease its future COLAs without eliminating the COLA for certain current retirees over the short term. Also, if the city decided not to grant a COLA at all or grant a lesser COLA for a specific year, future COLAs would not become increasingly more expensive.

According to the actuarial analysis, if the bill is enacted, it would provide additional flexibility in the design of a TMRS member city’s COLA provision. As a result, HB 718 would provide additional flexibility in allowing TMRS member cities to manage the actuarial funding costs associated with their COLA provisions. The funding requirements and cost impact are the responsibility of the member cities of TMRS; therefore, the changes under HB 718 are not expected to have an actuarial impact on TMRS as a system. In addition, the changes proposed by HB 718 are not expected to have any material effect on the actuarial status of TMRS; nor is there any immediate or long-term actuarial impact expected on any TMRS municipality or on TMRS in total; therefore, there is no estimated actuarial change in the System’s present value of future benefits.

Currently, annually repeating COLAs are advance funded – i.e., included in the actuarial accrued liabilities and amortized as a level percent of payroll over a closed 30 year period. Unfunded liabilities attributable to ad-hoc COLAs granted after 2009 are currently being amortized on a closed 15-year level dollar basis, providing a faster amortization than mandated by the PRB to maintain actuarial soundness.

Additionally, the actuarial review states that TMRS is currently actuarially sound per the PRB guidelines and will most likely remain actuarially sound if HB 718 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 relies 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 08, 2013.

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