Projected for Fiscal Year 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 18.94% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.01% of payroll to 18.95%. If the provisions of this bill are enacted, it is anticipated that contributions for ERS will need to increase to 18.95% of payroll for fiscal year 2014 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006.

* 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 3.09% of payroll. Under the proposal, the required 31-year amortization rate would increase by 0.01% of payroll to 3.10%. If the provisions of this bill are enacted, it is anticipated that contributions for LECOSRF will need to increase to 3.10% of payroll for fiscal year 2014 for the fund to remain actuarially sound and comply with the requirements of Government Code Section 811.006.

ACTUARIAL EFFECTS:

Employees’ Retirement System of Texas: According to the actuarial analysis, the effect of HB 2253 on the Employees’ Retirement System of Texas (ERS) would be a $2 million increase (from $6,425.8 million to $6,427.8 million) in the projected August 31, 2013 unfunded actuarial accrued liability (UAAL) and a 0% change in the total normal cost rate (currently 12.27%). 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 unfunded liability will never be amortized with a 13.00% contribution rate and therefore the current amortization period is infinite. Section 811.006 of the Texas Government Code requires that changes in ERS contribution rates or benefit provisions may not be adopted if such changes would cause the time required to amortize the UAAL to equal or exceed 31 years. In 2014, the current rate necessary for ERS to achieve a 31-year amortization period will be 18.94% of payroll.  HB 2253 would cause that rate to increase by 0.01%, to 18.95% of payroll.

Law Enforcement and Custodial Officer Supplemental Retirement Fund: According to the actuarial analysis, the effect of HB 2253 on the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF) would be a $3.7 million increase (from $249.5 million to $253.2 million) in the projected August 31, 2013 unfunded actuarial accrued liability (UAAL) and a 0% change in the total normal cost rate (currently 2.08%). 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 unfunded liability will never be amortized with a 1.00% contribution rate and therefore the current amortization period is infinite. Section 811.006 of the Texas Government Code requires that changes in LECOSRF contribution rates or benefit provisions may not be adopted if such changes would cause the time required to amortize the UAAL to equal or exceed 31 years. In 2014, the current rate necessary for LECOSRF to achieve a 31-year amortization period is 3.09% of payroll.  HB 2253 would cause that rate to increase by 0.01% to 3.10% of payroll.

SYNOPSIS OF PROVISIONS:

This bill, to be effective September 1, 2013, would add employees who are commissioned as law enforcement officers by the attorney general to the list of those eligible to participate in LECOSRF.

FINDINGS AND CONCLUSIONS:

HB 2253 would reclassify attorney general employees commissioned as law enforcement officers as “law enforcement officers” as defined by Section 811.001(9)(A) of the Texas Government Code. As a result of this reclassification, funding and benefit provisions that apply to CPO/CO service would extend to service performed by law enforcement officers commissioned by the attorney general.

The actuarial analysis assumes that the bill would grant CPO/CO service status to the past service of attorney general law enforcement officers in ERS and LECOSRF, even though member and state contributions would not have been made to the LECOSRF for such prior service. According to Texas Government Code, Section 813.201(a), service is credited in the applicable membership class for each month in which a member holds a position and for which the required contributions are made by the member and the state. Also, the actuarial analysis assumes that retired and terminated law enforcement officers of the attorney general’s office would not be affected by the bill. The actuarial review states that the cost estimate associated with HB 2253 is reasonable.  

METHODOLOGY AND STANDARDS:

According to the actuarial analysis, the Office of the Attorney General (OAG) indicated there are currently 157 OAG law enforcement officers who would qualify for participation in LECOSRF under House Bill 2253. The bill would not increase the number of employees or the valuation payroll of the ERS plan, but it would increase the number of employees covered by LECOSRF by the size of the affected active workforce (157), and it would increase the projected fiscal year 2014 valuation payroll of LECOSRF by the projected payroll of these employees (approximately $6.3 million).

The analysis rely on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2013 actuarial valuation of ERS. The analysis assumes no further changes are made to ERS 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 1, 2013.

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, April 1, 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.