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 0.90% of payroll to 17.80%. Additionally, the 18.70% and 17.80% actuarially sound state contribution rates are based on these contribution rates commencing for FY 2014, and continuing indefinitely.

**The decrease in the normal cost and increase in the unfunded actuarial accrued liability is due to applying the benefit provisions of the post- August 13, 2013 hire tier to all members in calculating the Ultimate Entry Age normal cost.

Projected for FY 2014

* Summary does not reflect LECOS plan restructuring.

** 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 0.24% of payroll to 2.82%. Additionally, the 3.06% and 2.82% actuarially sound state contribution rates are based on these contribution rates commencing for FY 2014, and continuing indefinitely.

*** The decrease in the normal cost and increase in the unfunded actuarial accrued liability is due to applying the benefit provisions of the post- August 13, 2013 hire tier to all members in calculating the Ultimate Entry Age normal cost.

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, SB 1459, as engrossed, would decrease, by 1.31% of payroll, the total normal cost rate of ERS (from 12.27% to 10.96%). The proposal would increase, by $406 million, (from $6.426 billion to $6.832 billion) the projected August 31, 2013 unfunded actuarial accrued liability (UAAL) and decrease the funded percentage of the system from 79.3% to 78.3%. The funding period of the plan remains at infinite; however, due to increases in the total contribution rate, the actuarial health of the plan would improve under the proposal.

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.  SB 1459, as engrossed, would cause the projected actuarially sound total contribution rate to decrease by 0.90% (from 18.70% to 17.80%) of payroll.

Increasing member contributions by 1% over 4 years, combined with a 0.5% increase in contributions by state agencies will improve the funding of the plan to 14.5% in FY 2017 if the state maintains a contribution of 6.5%, or 15.5% if the state increases its contribution to 7.5%.

The actuarial analysis did not estimate the impact of separating LECOS assets and liabilities from ERS assets and liabilities for the 2014-15 biennium, and the bill does not explicitly lay out how the split should be accomplished. The LBB estimates that it is unlikely that the results of this split would be enough to make ERS actuarially sound in 2014 or 2015, even if the state increased its contribution rate to 7.5%, where the total contribution would be 14.6% in 2014 and 14.9% in 2015.

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. 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 SB 1459, as engrossed, on the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF) would be a reduction in the total normal cost rate of 0.35% of payroll (from 2.08% to 1.73%). The proposal would increase by approximately $29 million (from $249.5 million to $278.4 million) the projected August 31, 2013 UAAL and a decrease in the funded percentage of the system from 77.2% to 75.2%.  The actuarial analysis projects that there would be a decrease in the projected actuarially sound total contribution rate from 3.06% to 2.82% 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 at the current state contribution level of 0.5%.

SYNOPSIS OF PROVISIONS:

SB 1459, as engrossed, would amend or repeal various sections of the Government Code to implement the following modifications, effective for members hired on or after September 1, 2013:

The final average salary calculation period would be changed to 60 months for civilian and LECOSRF participants.

Limits the ability of members to use sick leave credit to only for the purpose of calculating the member's or beneficiary's annuity.  

Prohibits the use of accumulated annual leave for which a member has been compensated to be also used to compute benefit accruals.

A reduction of 5% would be applied for early commencement of retirement benefits for each year by which commencement precedes age 62 for regular class members and for each year by which commencement precedes age 57 for LECOSRF members.

SB 1459, as engrossed, would amend or repeal various sections of the Government Code to implement the following modifications for all members, effective September 1, 2013:

Interest paid on retirement account balances on or after January 1, 2014 would be reduced from 5% to 2% for all active participants.

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 member contribution rate for ERS and JRS II is increased in steps over fiscal years 2014-2017 and beyond, with a rate of 6.6% in FY 2014, 6.9% in FY 2015, 7.2% in FY 2016, and 7.5% in FY 2017, and provides that for every one-tenth of a percent that the state contribution is lower than the FY 2015 contribution as a percent, the member contribution is reduced by a corresponding one-tenth of a percent.

Each employer participating in ERS would be required to contribute 0.5% of its total payroll.

For the 2014-2015 biennium ERS benefits for LECOSRF members, supporting assets, and employee contribution account balances would be transferred to the LECOSRF and would have separate actuarial valuations from all other retirement plans. However, LECOSRF would still be subject to the provisions of Subtitle B, Title 8 of the Government Code, including Section 811.006 relating to actions increasing amortization period.    

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

FINDINGS AND CONCLUSIONS:

SB 1459, as engrossed, provides for several plan modifications for both ERS and LECOSRF, including changes for participants of both systems hired on or after September 1, 2013. The changes for new participants include extending the period for calculating final average salary and a reduction in benefits prior to the age of 62 for ERS and age 57 for LECOSRF. SB 1459, as engrossed, would improve the actuarial health 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 actuarial analysis does not address the actuarial impact of SB 1459, as engrossed, on the Judicial Retirement System Two (JRS II). The bill does provide for increases in the JRS II member contribution rates; however, the analysis is silent on the impact of these rate increases.

Although not discussed in the actuarial analysis, the proposed bill may have the effect of reducing, for ERS and LECOSRF, the 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 will gradually decrease each plan's Entry Age Normal Actuarial Accrued Liability (AAL), with respect to members hired in FY 2014 and later. Also, the state will be able to project future member and agency funding at a higher most recent five year average rate (reflecting any contribution increases) for projecting whether each 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). Depending on GASB implementation details, the statutory requirements for state agencies to contribute and employees to contribute more may be assumed immediately, with out the five year averaging.

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, May 14, 2013.

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