Projected for FY 2014

* The current contribution rate is insufficient to amortize the unfunded liability over a 31-year period. Currently, the total contribution rate necessary to maintain a 31-year funding period is 18.70% of payroll. Under the proposal, the required 31-year amortization rate would decrease by 2.28% of payroll to 16.42%. Additionally, the 18.70% and 16.42% actuarially sound state contribution rates are based on these contribution rates commencing for FY 2014, and continuing indefinitely.

Projected for FY 2014

* The current contribution rate is insufficient to amortize the unfunded liability over a 31-year period. Currently, the total contribution rate necessary to maintain a 31-year funding period is 3.06% of payroll. Under the proposal, the required 31-year amortization rate would decrease by 0.43% of payroll to 2.63%. Additionally, the 3.06% and 2.63% actuarially sound state contribution rates are based on these contribution rates commencing for FY 2014, and continuing indefinitely.

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

ACTUARIAL EFFECTS:

Employees Retirement System of Texas (ERS):  According to the actuarial analysis, the bill would decrease the actuarial costs of the plan. The effect of CSHB 1882 on the ERS would be a $989 million decrease (from $6.426 billion to $5.437 billion) in the projected August 31, 2013 unfunded actuarial accrued liability (UAAL) and an improvement in the funded percentage of the system from 79.3% to 82.0%. There would be a 1.29% reduction in the total normal cost rate (from 12.27% to 10.98%) and a reduction in the rate to amortize unfunded liability over 31 years (from 6.43% to 5.44%).

The current ERS total contribution rate is 13.00% of payroll. Based on the February 28, 2013 update of the August 31, 2012 valuation, the UAAL will never be amortized with a 13.00% contribution rate and therefore the current amortization period is infinite. Currently, the contribution rate necessary for ERS to fund the normal cost and achieve a 31-year amortization period is 18.70% of payroll.  CSHB 1882 would cause the projected actuarially sound total contribution rate to decrease by 2.28% (from 18.70% to 16.42%) of payroll.

Section 811.006 of the Texas Government Code requires that reductions in ERS contribution rates or improvements to benefit provisions may not be adopted if such changes would increase the time required to amortize the UAAL to equal or exceed 31 years. Under the bill, the expected funding period is projected to continue to remain at infinite. Hence, the actuarial analysis omits a cost analysis of the bill's one-time 3% COLA provision (as it is also contingent on attainment of an amortization period of 31 years or less).

Law Enforcement and Custodial Officer Supplemental Retirement Fund: According to the actuarial analysis, the effect of CSHB 1882 on the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF) would be an approximate $26 million reduction (from $249.5 million to $223.5 million) in the projected August 31, 2013 UAAL and an improvement in the funded percentage of the system from 77.2% to 79.1%.  The actuarial analysis projects that there would be a 0.32% reduction in the total normal cost rate (from 2.08% to 1.76%) and a reduction in the rate to amortize unfunded liability over 31 years (from 0.98% to 0.87%), which would cause the projected actuarially sound total contribution rate to decrease from 3.06% to 2.63% of payroll. The current LECOSRF total contribution rate is 1.00% of payroll. Based on the February 28, 2013 update of the August 31, 2012 valuation, the UAAL will never be amortized with a 1.00% contribution rate and therefore the current amortization period is infinite. The amortization period is projected to be infinite if the bill passes. The actuarial analysis does not take into account additional statutory funding for LECOSRF which is slated to begin in FY 2014; however even with the additional funding LECOSRF is not estimated by the LBB to have an amortization period under 31 years under the bill. 

SYNOPSIS OF PROVISIONS:

The bill would amend and repeal various sections of the Government Code applicable to ERS and to implement the following modifications:

?        The final average salary calculation period would be changed to 60 months for civilian and LECOSRF non-grandfathered participants, effective September 1, 2014.

?        The use of unused sick leave to determine retirement eligibility would be eliminated for non-grandfathered participants, effective September 1, 2014.

?        The use of accumulated annual leave for which a member has been compensated would no longer be used to compute benefit accruals for non-grandfathered participants, effective September 1, 2014.

?        Interest paid on retirement account balances on or after January 1, 2014 would be reduced to 2% for all active participants.

?         A reduction of 5% would be applied to retirement benefits for each year by which commencement precedes age 62 for non-grandfathered regular class members, effective September 1, 2014.

?        A reduction of 5% would be applied to retirement benefits for each year by which commencement precedes age 57 for non-grandfathered LECOSRF members, effective September 1, 2014.

?        A one-time Cost-of-living-adjustment of 3% would be granted to all ERS annuitants who had been retired for 20 years or more once the funding period including the additional COLA liability is less than 31 years. The benefit increase would not exceed $100 per month.

?        The criteria for grandfathering would exempt any regular or elected class member who had attained age 50, met the Rule of 70" or completed 20 years of service on or before August 31, 2014.

?        The criteria for grandfathering would exempt any LECOSRF member who had attained age 45 or completed 15 years of service on or before August 31, 2014.

?        If the state contribution rate is greater than 6.5%, member contributions would match the state contribution rate with a maximum of 7%.

FINDINGS AND CONCLUSIONS:

CSHB 1882 would lower the actuarial costs of both ERS and LECOSRF. Both the systems are currently actuarially unsound and the bill would make the affected retirement systems less actuarially unsound.

The bill would reduce the UAAL of ERS by $989 million, and reduce the plan's normal cost percentage from 12.27% to 10.98%, thus freeing up 1.29% of payroll to be used to amortize the UAAL. Although this bill would provide a significant move toward actuarial soundness, the amortization period is still projected to be infinite under the proposal.

The bill would reduce the UAAL of LECOSRF by $26 million, and reduce the plans' normal cost percentage from 2.08% to 1.76%, thus freeing up 0.32% of payroll to be used to amortize the UAAL. Although this bill would provide a significant move toward actuarial soundness, the amortization period is still projected by the actuarial analysis to be infinite under the proposal.

Although not discussed in the actuarial analysis, the actuarial review states that the proposed bill would have the effect of reducing the ERS and LECOSRF Net Pension Liability (NPL) of the state of Texas as of August 31, 2015 (assuming the state follows the reporting guidelines required by GASB 68). The benefit provisions of the bill reduce the plan's Actuarial Accrued Liability (AAL) for both plans, thus directly lowering the August 31, 2015 Total Pension Liability (TPL) and NPL.

The actuarial review states that the bill would impact active ERS and LECOSRF members not included in the grandfather groups (i.e., regular and elected class members attaining age 50 or having 20 years of service as of August 31, 2014 and LECOSRF members attaining age 45 or having 15 years of service as of August 31, 2014).

METHODOLOGY AND STANDARDS:

The analysis rely on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS and LECOSRF actuarial valuation for August 31, 2012 and mid-year valuation as of February 28, 2013. The actuarially sound contribution rate projected under the February 28, 2013 update of the August 31, 2012 valuation differs from the rate projected in the actuarial analysis dated April 23, 2013. The reason for the variance is the difference in methodologies used. In the February 28, 2013 update of the August 31, 2012 valuation, the actuarially sound contribution rate for ERS and LECOSRF is projected for FY 2016 and beyond and the contribution rate for FY 2014 and 2015 is assumed to remain at 6.5%. However, the actuarial analysis assumes the actuarially sound contribution rate to commence from FY 2014 and beyond. The analysis assumes no further changes are made to ERS and LECOSRF 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. David L. Driscoll, Principal, Consulting Actuary, Buck Consultants, April 23, 2013.

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, April 23, 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.