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

* The proposed state contribution for FY 2014 is 6.90%.

** The current total contribution rate of 12.80% is insufficient to amortize the unfunded liabilities in less than a 31-year period. Currently, the state contribution rate necessary to maintain a 30-year funding period is 8.77% of payroll. Member contribution rate is assumed to be unchanged at 6.40%.

*** Calculated based on 6.40% state contribution rate for the •current' column and 7.4% state contribution rate for the •proposed' column.

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

ACTUARIAL EFFECTS:

CSHB 1383 would increase the state contribution rate to Teacher Retirement System of Texas (TRS) from the current 6.40% to 6.90% in fiscal year 2014 and 7.40% in fiscal year 2015 and set the minimum statutory contribution rate at 7.40% thereafter.

According to the actuarial analysis, the bill would not impact the current normal cost, unfunded actuarial accrued liability (UAAL), or the funding period of the plan. The normal cost would remain unchanged at 10.60% of pay, the UAAL would remain unchanged at $27.4 billion and the funding period would remain at infinite.

The bill would not add any additional liabilities to TRS. The plan's actuary states that the bill would substantially increase the financial health of the system and create lower UAAL and higher funded ratios in the future.

TRS's February 28, 2013 update of the August 31, 2012 actuarial valuation shows that in order for TRS to meet the statutory bench mark of a 30-year amortization period, the state's contribution rate would need to increase by 2.37%, from 6.40% to 8.77% of pay if the member's rate remains at 6.40%. If the member rate and the state's rate are to increase so that the 30-year contribution requirements are shared equally, the state and member contribution rate would need to be increased to 7.69% each.

SYNOPSIS OF PROVISIONS:

CSHB 1383 would amend Section 825.404 of the Government Code to establish a minimum state contribution rate and increase the contribution rate for fiscal years 2014 and 2015 for TRS.

CSHB 1383 would increase the minimum statutory contribution rate for the state from the current 6% of pay to 7.4% of pay. The bill retains the current statutory maximum rate of 10% of pay.

Additionally, the bill would increase the state contribution rate to TRS from the current 6.40% to 6.90% in fiscal year 2014 and 7.40% in fiscal year 2015. This provision would expire on September 1, 2015. 

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

FINDINGS AND CONCLUSIONS:

According to the actuarial analysis the bill would substantially increase the financial health of the system and create lower UAAL and higher funded ratios in the future. The analysis provides an example showing that the projected UAAL 20 years from now (August 13, 2032) would be $18.8 billion smaller than the current projections, the funded ratio would be 6.5% higher, and the bill would extend the current exhaustion date by 20 years from 2069 to 2089. 

The actuarial review states that TRS is currently actuarially unsound.  The bill, if enacted, will make TRS less actuarially unsound, although the amortization period will still be infinite. The bill would bring TRS closer to being actuarially sound, as measured by the projected year the fund assets would be exhausted, given the current vs. proposed level of funding. Under the bill, the projected exhaustion of the plan assets would occur in 2089, 20 years later than the current projected exhaustion year (2069).

The actuarial review concludes that the actuarial analysis that shows the result of no change in the infinite amortization period, but a 20 year deferment of the projected asset exhaustion date from 2069 to 2089 is reasonable.

The actuarial review states that the bill would enhance the security of the pension for all TRS members.

The actuarial review further states that the proposed bill would have a positive impact on the future asset value of the fund due to the increased minimum state contribution rate. The bill would have no impact on the actuarial liabilities of TRS, but it would accelerate the state contribution level. 

Lastly, the actuarial review points out that although not discussed in the actuarial analysis, the proposed bill would have the effect of reducing the TRS Net Pension Liability (NPL) of the state of Texas as of August 31, 2015 (assuming the state follows the reporting standards required by GASB 68). The August 31, 2015 market value of plan assets would be increased by CSHB 1383 due to two years of state contributions above the current 6.4% rate. More significantly for the NPL calculation, the state may be able to project future state funding at the 7.4% minimum statutory rate for determining the plan's projected asset exhaustion date as of August 31, 2015, resulting in a higher discount rate for calculating the Total Pension Liability, and thus a lower NPL.

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. Finally, this analysis is based on all other provisions of TRS in effect as of August 31, 2012. 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 14, 2013.

Actuarial Review by Mr. Dan P. Moore, Staff Actuary, Pension Review Board, March 15, 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.