Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:
Ursula Parks, Director, Legislative Budget Board
IN RE:
HB1967 by Keffer (Relating to a supplemental payment for retirees of the Teacher Retirement System of Texas and the unfunded actuarial liabilities allowed under that system.), As Introduced
ACTUARIAL EFFECTS According to the Teacher Retirement System of Texas (TRS) actuarial analysis, if the amortization requirements are met as of August 31, 2015 and August 31, 2016, the full supplemental payments described in the bill would be approximately $1,150 million. If the liabilities of both payments are included as of the February 28, 2015 valuation, the amortization period would be 31.3 years.
The Pension Review Board (PRB) actuarial review states that the bill would have a slight negative impact on the actuarial soundness of TRS. However, the bill would increase the amortization period as of February 28, 2015 to over 31 years, so passage of the bill is not allowed under Government Code Section 821.006. Furthermore, the amortization period before and after passage of the bill exceeds the PRB-recommended range of amortization periods within which a benefit increase should be considered.
SYNOPSIS OF PROVISIONS The bill would provide for supplemental payments to eligible annuitants in an amount equal to the lower of their monthly benefit or $2,400. The bill states that the supplemental payment can occur in any fiscal year as long as the amortization period for the UAAL does not exceed 30 years by one or more years after the payment. The bill allows for the payment to be made following the August 31, 2015 and August 31, 2016 valuations, independently. The provisions of the bill expire on January 1, 2017.
The following members would not be eligible for payment: - Disability retirees; - Members in the Deferred Retirement Option Program (DROP); - Retiree survivors and active member survivor beneficiaries receiving a survivor annuity in an amount fixed by statute.
The bill would take effect September 1, 2015.
FINDINGS AND CONCLUSIONS Under the bill, the first payment would be made on December 31, 2015 if the August 31, 2015 actuarial valuation showed that TRS' amortization period is less than 31 years (after reflecting the payment). Independently, a payment of the indicated amount would be made on December 31, 2016 if the August 31, 2016 actuarial valuation showed that TRS' amortization period is less than 31 years (after reflecting the payment). The bill does not provide for additional funding.
The actuarial analysis notes that the proposed bill would cause a misalignment of benefit payments and the associated funding, with the benefit payments made immediately, and no additional funding occurring over a 20-30 year period following the payments. The result is that the dollar amount of the supplemental payments represents an additional UAAL that grows at a rate of 8 percent annually. If this additional UAAL were paid off at the end of 30 years, it would require a contribution of about ten times the dollar amount of the supplemental payments themselves. The actuarial analysis demonstrates alternatives for more rapid funding of the bill's proposed UAAL increases.
According to the actuarial analysis, the total payments under the bill would be approximately $1,150 million through December 31, 2016, assuming the amortization requirements are met as of August 31, 2015 and August 31, 2016. Thus, the bill would increase the plan's expected UAAL as of August 31, 2016 by more than $1,150 million (taking into account the missed investment return on the December 31, 2015 payment). As measured as of February 28, 2015, the plan's amortization period would increase from 29.3 years to 31.3 years.
METHODOLOGY AND STANDARDS The TRS actuarial analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS actuarial valuation for August and their mid-year valuation as of February 28, 2015. 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. 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 conalysis to the extent actual future experience varies from the experience implied by the assumptions.
SOURCES Actuarial Analysis by Lewis Ward, Consultant, and Joseph P. Newton, FSA, EA, MAAA, Gabriel Roeder Smith & Company, April 21, 2015. Actuarial Review by Mr. Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, May 1, 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). COLA • Cost-of-Living Adjustment. 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).