Amends the current provision of Section 824.202, to require members 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.

Provides that all non-grandfathered members, who are vested on August 31, 2014, who have met the Rule of 80, but not age 62, would have an early retirement reduction of 2% per year from age 62.

Provides that non-grandfathered members, who are not vested on August 31, 2014, who have met the Rule of 80, but not age 62, would have an early retirement reduction of 5% per year from age 62; currently their reduction is 5% from age 60.

?       Adds Section 824.702, which provides for a one-time cost of living adjustment (COLA) to retirees who have been retired since August 31, 1994. The amount of the COLA is the lessor 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 set the member's contribution rate equal to the rate of state contributions established by the legislature, but not to exceed 6.9%.

?        Adds Section 825.4035 which requires employers whose member's do not participate in Social Security (the OASDI program) to contribute 1% 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, effective September 1, 2014.

Except as identified in the listing of CSSB 1458 provisions above, this bill is 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, and assuming enactment of a 6.7% member and state contribution rate beginning September 1, 2014, will change the amortization period of TRS from infinite to a finite period under 30 years as of February 28, 2013.

The actuarial analysis also projected the August 31, 2013 amortization period under three funding scenarios: 1) state and member contributions of maintaining the current 6.4%; 2) increasing to 6.6% for FY 2014 and beyond; and 3) increasing to 6.7% for FY 2015 and beyond. Under scenarios 1 and 2, , the projected August 31, 2013 amortization period exceeds 31 years. The projected August 31, 2013 amortization period is less than 31 years under scenario 3.  Additionally,the required contribution of 1% of payroll by school district employers who do not participate in Social Security produces an additional funding source of an estimated 0.64% of payroll.

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 bill proposes that the local contributions are to be paid towards normal cost, which the analysis suggests could prevent recognition of unfunded liabilities from the bill. School districts may have to show some liability already due to local contributions above statutory minimum salaries and federal funding sources. 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 anon-employer entity (the state) is legally required to contribute to TRS.   

Although not discussed in the actuarial analysis, the actuarial review states that the proposed bill would have the effect of reducing the TRS Net Pension Liability (NPL) as of August 31, 2015 (assuming the state follows the reporting standards required by GASB 68.) The benefit provisions of the bill reduce the plan's Actuarial Accrued Liability (AAL), thus directly lowering the August 31, 2015 Total Pension Liability (TPL) and NPL. Also, starting August 31, 2016, the state would be able to project future state and member funding at a higher most recent five year average rate(reflecting the school district payroll contributions) for projecting whether the plan has a projected asset exhaustion date, and if so, when it is. These changes result in a higher discount rate (but not greater than 8%, the plan's assumed rate of return) for calculating the Total Pension Liability, and thus a lower NPL.

Additionally, the actuarial review discusses the impact of the bill on TRS members. The bill would impact active TRS members not included in the grandfather group (i.e., those attaining age 50, meeting rule of 70, or having 25 years of service as of August 31, 2014), by applying a reduction percentage for Rule of 80 retirement under the age of 62. Currently, there is no reduction in the Rule of 80 retirement benefit for pre-9/1/2007 hires, and a 5% per year reduction in the Rule of 80 retirement benefit before age 60 for post-8/31/2007 hires. Under the bill, all non-grandfathered active members with at least five years of service credit as of August 31, 2014 would have a 2% per year reduction in the Rule of 80 retirement benefit before age 62. All active members with less than five years of service credit as of August 31, 2014 would have a 5% per year reduction in the Rule of 80 retirement benefit before age 62. Also, it appears that non-grandfathered members who attain 30 years of service before age 50 will have to wait until age 50 or later to retire under the bill.

Retired members in retirement status since August 31, 1994 would receive a COLA of 3% of the retiree's monthly benefit up to $100, if and when the plan's amortization period (reflecting the COLA payment) does not exceed 30 by one or more years.

Members who terminate and receive a return of employee contributions with interest would receive a smaller amount of interest under the bill.

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, April 23,2013.

Actuarial Review by Mr. Dan 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.