* 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 decrease by 0.09% of payroll to 18.85%.

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 SB 1578 on the ERS would be a $45 million decrease (from $6.426 billion to $6.381 billion) in the projected August 31, 2013 unfunded actuarial accrued liability (UAAL) and a decrease in the 31-year amortization period rate by 0.09% (from 18.94% to 18.85%) of payroll. 

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 total contribution rate necessary for ERS to fund the normal cost and achieve a 31-year amortization period is 18.94% of payroll. 

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. The provisions of the bill would decrease the actuarial costs of the plan; hence, the actuarial analysis projects that if the bill is enacted, the current state contributions for fiscal years 2014 and 2015 would comply with the requirements of the governing statute of ERS.

SYNOPSIS OF PROVISIONS:

The bill would amend Section 814.103 of the Government Code, applicable to ERS, such that certain elected class members (statewide elected officials not covered by JRS I & JRS II and members of the legislature), who retire on or after September 1, 2013, would receive a standard service retirement annuity based on a district judge's state salary that exists on August 31, 2013 and would exclude longevity pay.

FINDINGS AND CONCLUSIONS:

SB 1578 would freeze the pay used in calculating the service retirement annuities of elected class members of ERS at the district judge state salary that exists on August 31, 2013. The bill would freeze pensionable salary for statewide elected officials and members of the legislature, but not district and criminal district attorneys who receive a salary from the state general revenue

According to the actuarial analysis, the bill would lower the actuarial costs of ERS. The actuarial review states that ERS is currently actuarially unsound and the bill would make the retirement system less actuarially unsound. The actuarial review also states that the bill would reduce the UAAL of ERS by $45 million, which would provide a slight move toward actuarial soundness.

METHODOLOGY AND STANDARDS:

The analysis rely on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS mid-year actuarial valuation as of February 28, 2013. 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 11, 2013.

Actuarial Review by Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, April 12, 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.