TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB701 by Allen (Relating to certain benefits paid by the Employees Retirement System of Texas.), As Introduced

ACTUARIAL EFFECTS
Employees Retirement System of Texas (ERS): According to the actuarial analysis provided by ERS, the bill would increase the normal cost rate of ERS from 11.58 percent to 15.87 percent, and the unfunded actuarial accrued liability (UAAL) from $8,078.9 million to $25,486.2 million. The amortization period of ERS would remain infinite. The total contribution rate for ERS is currently 15.20 percent of payroll. The analysis estimates that the bill would increase the 31-year actuarially sound total contribution rate from 19.11 percent to 39.63 percent of payroll.

Law Enforcement and Custodial Officers Supplemental Retirement Fund (LECOSRF): According to the actuarial analysis provided by ERS, the bill would increase the normal cost rate of LECOSRF from 1.77 percent to 2.53 percent, and the UAAL from $349.4 million to $1,063.1 million. The amortization period of LECOSRF would remain infinite. The total contribution rate for LECOSRF is currently 2.20 percent of payroll. The analysis estimates that the bill would increase the 31-year actuarially sound total contribution rate from 3.10 percent to 6.56 percent of payroll.

According to the actuarial review, the bill would have a materially negative effect on the actuarial soundness (or actuarial unsoundness) of ERS and LECOSRF. As the amortization periods of both ERS and LECOSRF are infinite before and after the bill, passage of the bill would not be allowed under Government Code Section 811.006. 
 
Based on the February 28, 2015 Update of the August 31, 2014 Actuarial Valuation

Employees Retirement System of Texas (ERS)	Current (Projected 08/31/2015 Valuation)	Proposed	Difference
State and Agency Contribution	8.00%	8.00%	0.00%
Employee Contribution	7.20%	7.20%	0.00%
Total Contribution	15.20%	15.20%	0.00%
Normal Cost (% of payroll)	11.58%	15.87%	4.29%
Unfunded Actuarial Accrued Liability (millions)	$8,078.9	$25,486.2	$17,407.3
Amortization Period (years)	Infinite	Infinite	None

 

Law Enforcement and Custodial Officers Supplemental Retirement Fund (LECOSRF)	Current (Projected 08/31/2015 Valuation)	Proposed	Difference
State and Agency Contribution	1.70%	1.70%	0.00%
Employee Contribution	0.50%	0.50%	0.00%
Total Contribution	2.20%	2.20%	0.00%
Normal Cost (% of payroll)	1.77%	2.53%	0.76%
Unfunded Actuarial Accrued Liability (millions)	$349.40	$1,063.10	$713.70
Amortization Period (years)	Infinite	Infinite	None

The ERS analysis assumes a 10 percent cost-of-living-adjustment (COLA) on September 1, 2015 and a 4 percent COLA on September 1, 2016 and each September 1 thereafter. A one-time supplemental payment is assumed to be paid on January 1, 2016.
 
SYNOPSIS OF PROVISIONS
The bill would amend the Government Code by adding a provision for a 10 percent increase to the monthly service retirement, disability retirement, or death benefit to a retiree or beneficiary. The bill would also provide an annual four percent COLA to the monthly service retirement, disability retirement, or death benefit to a retiree or beneficiary.

Additionally, the bill would require ERS to make a one-time supplemental payment of a retirement or death benefit equal to the lesser of $2,000 or the gross amount of the regular annuity payment to which the eligible annuitant is otherwise entitled to for the month of December 2015.

All provisions in the bill are limited to service credited in the employee class. The provisions would take effect September 1, 2015.
 
FINDINGS AND CONCLUSIONS
The Pension Review Board  (PRB) actuarial review states that ERS and LECOSRF are currently actuarially unsound. The bill, if enacted, would make the retirement systems more actuarially unsound. Under the current PRB Guidelines for Actuarial Soundness, funding should be adequate to amortize the unfunded actuarial accrued liability over a period which should not exceed 40 years, with 15-25 years being a more preferable target. (ERS has a 31-year amortization limit set in its statute.) Additionally, the PRB Guidelines state that benefit increases should not be adopted if all plan changes being considered cause a material increase in the amortization period and if the resulting amortization period exceeds 25 years. The current amortization periods of ERS and LECOSRF are already infinite.
 
The bill would impact all current and future employee class retirees, disabled retirees, survivors, and alternate payees as of December 31, 2015. The ERS actuarial analysis illustrates how rapidly a monthly benefit increases with a four percent COLA. After 7 years, the monthly benefit increases by 39.2 percent over the original amount. The annual retirement benefits will be one-and-a-half times the fiscal year 2015 amount (50 percent increase) in 9 years and double (100 percent increase) in 17 years. 
 
METHODOLOGY AND STANDARDS
The ERS actuarial 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. The ERS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the in the ERS actuarial valuation for August 31, 2014 and mid-year valuation as of February 28, 2015. According to the PRB actuary, the actuarial assumptions, methods and procedures used in the analysis 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 R. Ryan Falls, FSA, EA, MAAA, Senior Consultant, Gabriel, Roeder, Smith & Company, April 20, 2015.
Actuarial Review by Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 30, 2015.
 
GLOSSARY
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 Payments - The yearly payments made to reduce the Unfunded Actuarial Accrued Liability (UAAL).
Amortization Period - The number of years required to pay off the unfunded actuarial accrued liability. The State Pension Review Board recommends that funding should be adequate to amortize the UAAL over a period which should not exceed 40 years, with 15-25 years being a more preferable target.
Actuarial Cost Method - A method used by actuaries 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 actuarial assets to the actuarial accrued liabilities.
Market Value of Assets (MVA) - The fair market value of the system's assets.
Normal Cost (NC) - The portion of the PVFB that is attributed to the current year of service. ERS uses the Ultimate Entry Age Normal Cost Method for funding.  
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 Actuarial Accrued Liability (AAL) less the Actuarial Value of Assets (AVA).