TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB1821 by Alonzo (Relating to eligibility for membership and funding of benefits for certain law enforcement, custodial, and other peace officers.), As Introduced

Based on the February 28, 2015 Update of the August 31, 2014 Actuarial Valuation

Teacher Retirement System of Texas (TRS)	Current	Proposed	Difference
State and Employers Contribution	7.76%	7.76%	0.00%
Employee Contribution	6.70%	6.70%	0.00%
Total Contribution*	14.46%	14.46%	0.00%
Normal Cost (% of payroll)	10.43%	10.43%	0.00%
Unfunded Actuarial Accrued Liability (millions)	$32,104	$31,984	($120)
Amortization Period (years)	29.3	29.4	0.1

*The current total contribution rate of 14.46% will amortize the unfunded liabilities over a 29.3-year period. If the bill is enacted, the TRS amortization limit remains under 31 years so the passage of the bill would be allowable for TRS under the Government Code Section 821.006.

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 plus 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%	11.69%	0.11%
Unfunded Actuarial Accrued Liability (millions)	$8,078.90	$8,087.00	$8.10
Amortization Period (years)	Infinite	Infinite	N/A

*The current total contribution rate of 15.20% is insufficient to amortize the unfunded liability over a 31-year period. Under Texas Government Code Section 811.006, the bill could not be enacted without first establishing a total contribution rate to ERS that brings its amortization period (years to amortize an unfunded liability) down to below 31 years.

Based on the projected August 31, 2015 actuarial valuation, the State plus agency contribution rate (not including employee contribution rate of 7.20%) necessary to maintain a less than 31-year amortization period to comply with the statutory requirement is 11.91% of payroll. If the provisions of this bill are enacted, it is anticipated that the required State plus agency contribution rate for a less than 31-year amortization period would decrease by 0.11% of payroll to 11.80% for FY 2016 and 11.50% for FY 2017. (If the less than 31-year amortization period is achieved using employee contribution increases, the total statutory required contribution rate may be higher.) These assumed State and agency contribution rates exceed the constitutional maximum of 10% for the State (Texas Constitution Article 16, Section 67).

Based on the February 28, 2015 Update of the August 31, 2014 Actuarial Valuation

Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF)	Current (Projected 08/31/2015 Valuation)	Proposed	Difference
State and other (court costs) 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%	1.88%	0.11%
Unfunded Actuarial Accrued Liability (millions)	$349.40	$363.50	$14.10
Amortization Period (years)	Infinite	Infinite	N/A

*The current total contribution rate of 2.20% is insufficient to amortize the unfunded liability over a 31-year period. Under Texas Government Code Section 811.006, the bill could not be enacted without first establishing a total contribution rate to LECOSRF that brings its amortization period (years to amortize an unfunded liability) down to below 31 years.

Based on the projected August 31, 2015 actuarial valuation, the State plus other contribution rate (not including employee contribution rate of 0.50%) necessary to maintain a less than 31-year amortization period to comply with the statutory requirement is 2.60% of payroll. If the provisions of this bill are enacted, it is anticipated that the required State plus other contribution rate for a 31-year amortization period would decrease by 0.06% of payroll to 2.54% for FY 2016 and FY 2017. (If the less than 31-year amortization period is achieved using employee contribution increases, the total statutory required contribution rate may be higher.)

ACTUARIAL EFFECTS
TRS:  According to the TRS actuarial analysis, the normal cost of the system would not change, the unfunded actuarial accrued liability (UAAL) would decrease by $120 million, and the amortization period would increase by 0.1 years, due to a loss of contributions associated with covered payroll. The TRS actuarial analysis assumes a $180 million payroll reduction for about 4,000 employees who would transfer to ERS. The TRS actuarial analysis assumes that under the bill future TRS "Peace Officers" will have the option to make the election to participate in ERS.

The actuarial review notes that TRS is currently actuarially sound and would remain actuarially sound, with a slight increase in the amortization period from 29.3 years to 29.4 years. 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. (TRS has a less than 31-year amortization limit set in its statute.)

ERS:  According to the ERS actuarial analysis, the effect of HB 1821 on the system would be an $8.1 million increase (from $8,078.9 million to $8,087 million) in the projected August 31, 2015 UAAL. The bill would increase the normal cost rate as a percent of pay by 0.11%, from 11.58% to 11.69%, and valuation payroll will increase by $201.4 million, from $6,341 million to 6,542.4 million. The current amortization period would remain infinite. The ERS actuarial analysis assumes that 4,500 employees transfer from TRS to ERS with a payroll of $201.4 million. The ERS actuarial analysis assumes that under the bill future TRS "Peace Officers" will automatically participate in ERS.  

The actuarial review notes that under Texas Government Code 811.006, the bill may not currently be enacted because both ERS and LECOSRF would have infinite amortization periods (actuarially unsound) before and after bill enactment. Under the current PRB Guidelines, 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 less than 31-year amortization limit set in its statute.)

LECOSRF: According to the actuarial analysis, the effect of HB 1821 on the LECOSRF would be a $14.1 million increase (from $378.1 million to $392.2 million) in the projected August 31, 2015 unfunded actuarial accrued liability (UAAL). HB 1821 would increase the normal cost rate as a percent of pay by 0.11%, from 1.77% to 1.88% and valuation payroll will increase by $303.5 million from 1,560.8 million to 1,864.3 million. The current amortization period would remain infinite.

The actuarial review notes that under Texas Government Code 811.006, the bill may not currently be enacted because both ERS and LECOSRF would have infinite amortization periods (actuarially unsound) before and after bill enactment. Under the current PRB Guidelines, 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.

SYNOPSIS OF PROVISIONS
HB 1821, to be effective September 1, 2015, would provide the following changes.

• Adds certain peace officers employed by the state (Attorney General) and correctional officers at the Texas Juvenile Justice Department to LECOSRF.

• Permits peace officers employed by institutions of higher education and public schools to move from TRS to ERS, effective 1/1/2016, and participate in LECOSRF.

• Each employee that is a member of ERS or TRS on December 31, 2015 and becomes eligible to participate in LECOSRF as a result of this proposal must make an affirmative election to begin membership in LECOSRF beginning September 1, 2016.

FINDINGS AND CONCLUSIONS
ERS & LECOSRF: The ERS actuarial analysis is based on the bill interpretation that employees who elect to participate in LECOSRF as of December 31, 2015 will be able to use all of their service as a law enforcement, juvenile justice, custodial, or peace officer in order to qualify for retirement eligibility in LECOSRF. However, only the service accrued on or after September 1, 2016 will be used to calculate the benefits payable benefit in Section 814.107 and other related sections. Additionally, the analysis assumes that current members of ERS who elect to participate in LECOSRF will be eligible for benefits applicable to their original hire date with ERS. However, all current TRS members who elect to participate in LECOSRF will only be eligible for the provisions applicable to members hired on or after September 1, 2013.

The actuarial review notes that transferring employees from TRS would have their service credit for non-occupational disability retirement and death benefits eligibility restricted in accordance with Chapter 803.201 unless they become eligible for a service credit transfer under Chapter 805.

The actuarial review also states that under Texas Government Code Section 811.006, the bill could not be enacted without first establishing total contribution rates to both ERS and LECOSRF that bring each of their amortization periods (years to amortize an unfunded liability) down to below 31 years (Texas Government Code Section 811.006). Additionally, if the bill is enacted, the ERS COLA under Texas Government Code 814.604 would have to be made payable. The ERS actuarial analysis assumes that the 31-year amortization limit requirement set in statute for ERS would be met by increasing the State plus agency contribution rate only (not the employee rate) from 8.00% to 11.80% (actually 11.85%, due to the Section 814.604 COLA) for FY 2016 and 11.50% (actually 11.55%, as the Section 814.604 COLA rate is permanent) for FY 2017. These assumed contribution rates exceed the constitutional maximum of 10% for the State (Texas Constitution Article 16, Section 67).

METHODOLOGY AND STANDARDS
The ERS and LECOSRF analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS and LECOSRF actuarial valuations for August 31, 2014 and their mid-year valuations as of February 28, 2015. The TRS analysis is based on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS actuarial valuation for August 31, 2014 and the mid-year valuation as of February 28, 2015.

According to the PRB actuaries, the actuarial assumptions, methods and procedures used in the analysis appears 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. This analysis is based on the assumption that no other legislative changes affecting the funding or benefits of ERS will be adopted. It should be noted that when several proposals are adopted, the effect of each may be compounded, resulting in a cost that is greater (or less) than the sum of each proposal considered independently.
 
SOURCES: 
TRS Actuarial Analysis by Lewis Ward, and Joseph P. Newton FSA, FSA, EA, MAAA, Gabriel Roeder Smith & Company, Consultants and Actuaries, March 26, 2015.
ERS Actuarial Analysis by Ryan Falls, FSA, EA, MAAA, Gabriel Roeder Smith & Company, Consultants and Actuaries, March 27, 2015.
PRB Actuarial Review by Robert M. May, FSA, EA, MAAA, Board Actuary; and Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, March 28, 2015.
 
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 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. 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).