Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:
Ursula Parks, Director, Legislative Budget Board
IN RE:
HB1937 by Darby (Relating to procedures and eligibility for terminating participation in the Teacher Retirement System of Texas deferred retirement option plan.), As Introduced
ACTUARIAL EFFECTS The bill relates to the Teacher Retirement System's (TRS) deferred retirement option plan (DROP). The bill would provide certain members of TRS a one-time election to revoke their DROP participation. The members revoking their election would have their annuities recalculated using all of their service as if those members had never participated in the DROP. By doing so, the members would be forfeiting their right to the lump sum DROP balance.
If the bill is enacted, the TRS amortization period would remain under 31 years, so the passage of the bill would be allowable in accordance with the Government Code Section 821.006.
According to the actuarial review, TRS is currently actuarially sound and the bill would not have a material impact on the actuarial soundness of the system. The bill, if enacted, would not measurably change the amortization period of TRS. Under the current Pension Review Board (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 31-year amortization limit set in its statute.)
SYNOPSIS OF PROVISIONS The bill would allow certain members of TRS, or their beneficiaries, to revoke their decision to participate in the DROP on or before December 31, 2015. The bill would take effect September 1, 2015.
FINDINGS AND CONCLUSIONS According to the actuarial analysis, TRS' DROP program has been closed to new elections for some time and thus the number of members participating in the program is decreasing. Currently there are 110 active employees participating in the DROP who could revoke their participation, if the bill is enacted. All of these members have utilized their maximum DROP participation timeframe of 5 years and are now accruing additional benefits.
According to the actuarial review, of the 110 members, some would benefit economically by revoking their DROP election (e.g., members with large salary increases since their DROP election), and some would not. If the bill passes and all members who would benefit economically do in fact revoke their DROP election, the actuarial analysis estimates that there would be a loss (i.e., an increase in the plan's Actuarial Accrued Liability) of $2.8 million. The actuarial analysis states that, based on the external actuary's experience, very few members would change their election, so that the resulting loss to the system, if the bill passes, may be approximately $1 million.
The actuarial analysis notes that while this proposal may not be material to the system, it could be very material to an individual member who previously made an irrevocable election.
The actuarial analysis estimated that the bill would have the effect of increasing the TRS Actuarial Accrued Liability (AAL) and Unfunded Actuarial Accrued Liability (UAAL) by no more than $2.8 million (and more likely about $1 million) as of the actuarial valuations on August 31, 2014 and February 28, 2015. The actuarial review states that the TRS analysis is a reasonable estimate of the changes proposed by the bill.
METHODOLOGY AND STANDARDS 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. The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the August 31, 2014 actuarial valuation, with actuarial value of assets from the February 28, 2015 update of TRS. 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 TRS Actuarial Analysis by Lewis Ward and Joseph P. Newton FSA, FSA, EA, MAAA, Gabriel Roeder Smith & Company, Consultants and Actuaries, April 2, 2015. Actuarial Review by Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 2, 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. An amortization period of 0-15 years is also 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).