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

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

*      The actuarial analysis assumes the contribution rate for the state would be 6.8% for fiscal year 2014 and beyond. The analysis also assumes the contribution rate for the members increases from 6.4% to 7.7% over fiscal years 2015-2017 and beyond.

**     School districts not participating in Social Security would be required to start contributing 1.50% of payroll in FY 2015. The actuarial analysis estimates that 64% of total covered payroll would be subject to the additional contribution and that the effective contribution rate would be 0.96% of total payroll.

ACTUARIAL EFFECTS:

The current TRS total contribution rate is 12.80% of payroll. Based on the February 28, 2013 update of the August 31,2012 valuation, the UAAL will never be amortized with a 12.80% contribution rate and therefore the current amortization period is infinite. Currently, the total contribution rate necessary for TRS to fund the normal cost and achieve a 31-year amortization period is 15.17% of payroll. Assuming the state contributes 6.8% for fiscal year 2014 and thereafter, SB 1458, as engrossed would increase the total contribution rate to 15.46% by fiscal year 2017, and improve the funding period for System, as of the February 28, 2013, valuation to 28.9 years. The funding period calculation assumes the state contribution rate continues at 6.8%, and that when contributions and liabilities are projected 3 years forward to 2017, the funding period would then be 25.9 years based on the contribution rate in effect at that time. 

The normal cost would decrease by 0.51%, from 10.60% to 10.09%. This is based on the normal cost of non-vested and new employees who would have lower benefits. Since other employees would not have lower benefits, the actuarial liability for them must go up. This is because the actuarial liability is the present value of future benefits minus the present value of future normal costs- so if the benefits don't change, and the normal cost goes down, the accrued liability goes up.  There would be a small reduction in liabilities for current non-vested employees, however overall the unfunded actuarial accrued liability of TRS would go up. Additionally, there would be an increase in liabilities from the COLA.

Section 821.006 of the Texas Government Code requires that changes in TRS contribution rates or benefit provisions may not be adopted if such changes would cause the time required to amortize the UAL to equal or exceed 31 years. According to the analysis, under the proposal, the expected funding period is projected to be less than 30 years. Therefore, the analysis includes the cost related to granting a one-time COLA for retirees who have been retired since August 31, 1999.

SYNOPSIS OF PROVISIONS:

SB 1458, as Engrossed, would make the following changes:

•         Amends the current provision of Section 824.202, to require members hired on or after September 1, 2014, to achieve age 65 with five years of service credit or age 62 with five years of service credit if the sum of the member's age and service is 80 to retire with unreduced benefits. Otherwise their benefits would be reduced by 5% for each year they retire before age 62. Members who have earned 5 years of service on or before August 31, 2014 are exempt from the change in retirement eligibilities.

•         Adds Section 824.702, which provides for a one-time cost of living adjustment (COLA) to retirees who have been retired since August 31, 1999. The amount of the COLA is the lesser of 3% of the retiree's monthly benefit or $100 per month. The COLA may only be paid if the funding period of TRS does not increase above 30 years by one or more years.

•         Amends Section 825.307(b), to reduce the amount of interest credited to a member's contribution account from 5% per annum to 2% per annum, prospectively.

•          Adds Section 825.402(6), to increase the member's contribution rate to 7.7%. The increase would be accomplished insteps over fiscal years 2015-2017, with a rate of 6.7% in FY 2015, 7.2% in FY 2016, and 7.7% in FY 2017 and later.

•          Adds Section 825.4035 which requires employers whose member's do not participate in Social Security (the OASDI program) to contribute 1.5% of each member's minimum salary into the TRS Trust Fund. Applies to fiscal year 2015 and later. It has been estimated that approximately 64% of total covered payroll would be subject to this additional contribution.

  Except as identified in the listing of SB 1458 provisions above, this bill would be effective September 1, 2013.

FINDINGS AND CONCLUSIONS:

According to the actuarial analysis, if the contribution levels and benefits remain unchanged and the trust earns an average of 8.0% per annum from February 28th, 2013 forward, based on cash flow projections the trust would have enough assets to cover expected benefit payments through 2069. However, the analysis indicates that the proposed legislation would eliminate the exhaustion date and change the trajectory of the funded status from declining to a position of improving.

The actuarial review states that TRS is currently actuarially unsound. The bill, if enacted, will change the amortization period of TRS from infinite to a finite period under 30 years as of the February 28, 2013 valuation.

The actuarial analysis states that proposal relating to the school districts making contributions to TRS could result in a portion of TRS's unfunded liability having to be recognized on the balance sheets of these contributing school districts, as required under GASB 68. The actuarial review clarifies that this possibility would result from a determination that a special funding situation (as defined in GASB 68 paragraph 15) applies to TRS. A special funding situation may apply to TRS because a non-employer entity (the state) is legally required to contribute to TRS. However, the provision of the bill that directs the school district contributions only towards normal costs may prevent these contributions from requiring a liability be shown on their books. But the school districts may have to show some liability already due to local contributions above statutory minimum salaries and federal funding sources.

Although not discussed in the actuarial analysis, the proposed bill should have the effect of reducing the TRS Net Pension Liability (NPL) by August 31, 2020 (assuming the state follows the reporting standards required by GASB 68). The benefit provisions of the bill could temporarily increase the plan's Actuarial Accrued Liability (AAL), thus likely tending to increase the August 31, 2015 Total Pension Liability (TPL) and NPL. However, the state will be able to project future state, member and district funding at a higher most recent five year average rate (reflecting any contribution increases) for projecting whether the plan has a projected asset exhaustion date, and if so, when it is.  The bill's contribution rate increases will tend to result in a gradually higher TPL discount rate over 2015 • 2020 (but not greater than 8%, the plan's assumed rate of return). However, depending on how GASB implementation proceeds, the statutory requirements for higher member and school district contributions may even be taken into account for the calculation of the  August 31, 2015 Total Pension Liability, which would result in lower figures for AAL, TPL and NPL due to a higher discount rate.

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. The analysis is based on all other provisions of TRS in effect as of August 31, 2012. 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, May 7, 2013.

Actuarial Review by Mr. Dan P. Moore, Staff Actuary, Pension Review Board, May 10, 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.