TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB2572 by Turner, Sylvester (Relating to the firefighters' relief and retirement fund in certain municipalities.), Committee Report 1st House, Substituted

ACTUARIAL EFFECTS
The bill would increase Houston Firefighters' Relief and Retirement Fund (HFRRF) member contributions from 9 percent of pay to 12 percent beginning in fiscal year 2016 through fiscal year 2018. City contributions would decrease from 33.2 percent of payroll to 25.8 percent in fiscal year 2016 and to 24 percent for fiscal years 2017 and 2018. The Pension Review Board (PRB) actuaries estimate that to restore these three years of reduced total contributions over a prospective 30 year period would require an additional 1.4 percent of payroll per year of City contributions as of July 1, 2018, or 34.6 percent of payroll for 30 years (based on the July 1, 2013 actuarial valuation).

According to the PRB actuarial review, HFRRF is actuarially sound under the current law with an amortization period (years to amortize an unfunded liability) of a constant future period of 30 years. If the bill is enacted, HFRRF would remain actuarially sound with a higher amortization period determined by PRB to be 33 years as of July 1, 2015.  

The HFRRF actuarial analysis states that the provision for the City paying the member's unused leave pay into the member's DROP account at retirement (instead of paying the member) would not have a material effect on the plan.

Proposed Contribution Rate Changes

Houston Firefighters' Relief and Retirement Fund (HFRRF)	Current*	Proposed FY 2016	Difference FY 2016	Proposed FY 2017 & 2018	Difference FY 2017 & 2018	Proposed FY 2019**
City Contribution	33.20%	25.80%	-7.40%	24.00%	-9.20%	30-year actuarially determined contribution rate
Member Contribution	9.00%	12.00%	3.00%	12.00%	3.00%	9.00%
Total Contribution	42.20%	37.80%	-4.40%	36.00%	-6.20%

*Under the current law, the City contribution rate is scheduled to be reset in fiscal year 2018 based on the July 1, 2016 actuarial valuation. 
**Under the bill, the City contribution rate is scheduled to be reset in fiscal year 2019.  


SYNOPSIS OF PROVISIONS
The bill would provide the following changes:
•        Decrease City contributions from 33.2 percent of payroll to 25.8 percent in fiscal year 2016 and then to 24 percent for fiscal years 2017 and 2018.
•        Increase member contributions from 9.0 percent of pay to 12.0 percent from fiscal year 2016 through fiscal year 2018.
•        DROP members would have their unused leave pay paid into their DROP accounts upon retirement.

The bill would take effect immediately upon receiving a two-thirds majority vote in each house. Otherwise the bill would take effect September 1, 2015.
 
FINDINGS AND CONCLUSIONS
Under current law, the City is required to make a contribution of 33.2 percent of pay and the members are required to make a contribution of 9.0 percent of pay for the fiscal years 2015, 2016, and 2017. The total required contribution rate for 30 years is 42.2 percent of pay. These contribution rates were determined based on the results of the July 1, 2013 valuation (most recent valuation). The City's contribution rate is currently scheduled to be reset for fiscal year 2018, based on the results of the July 1, 2016, valuation.

The proposed bill would change the City's contribution rate to a lower fixed rate of 25.8 percent for fiscal year 2016, 24.0 percent for fiscal year 2017, and 24.0 percent for fiscal year 2018. In addition, the member's fixed contribution rate would be increased from 9 percent to 12.0 percent for these three years. These fixed contribution rates would end July 1, 2018 and HFRRF would revert to the funding policy under the current law for fiscal year 2019 and later (with a 9 percent member contribution rate). Additionally, under the bill, a DROP member's unused leave pay at retirement would be paid into his DROP account, instead of being paid in cash.

According to the PRB actuarial review, HFRRF is currently actuarially sound and would remain actuarially sound if the bill is passed. Under the 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. Following the existing HFRRF method of calculating the system's amortization period, the PRB actuaries calculated an amortization period of 33 years as of July 1, 2015 if the bill is passed (representing the 3 years from July 1, 2015 to July 1, 2018, plus 30 years as of July 1, 2018, when the funding policy under the current law is resumed).
 
The current contribution rates of 33.2 percent City and 9 percent member are in effect for the three-year period of fiscal years 2015, 2016, and 2017, and the current plan is to set the City contribution rate for fiscal years 2018, 2019, and 2020 based on the July 1, 2016 actuarial valuation report.
 
The bill would reduce total contributions for three years and require higher contributions for the next 30 years in order to keep the plan actuarially sound in the future. Based on the most recent actuarial valuation (July 1, 2013), the 30 year actuarially determined City contribution rate is 33.2 percent of payroll. The HFRRF actuarial analysis notes that under the bill, the City's contributions would be lower by about $77 million for the three-year period of fiscal years 2016 through 2018 than projected in the July 1, 2013 actuarial valuation report. However, member contributions would be increased during this same period by a PRB-estimated $25 million. Thus, HFRRF total contributions to the fund for the three years ending July 1, 2018 are projected to be lower by $52 million.
 
The PRB estimates that the $52 million shortfall over fiscal years 2016 through 2018, with 8.5 percent investment return, would increase the July 1, 2018 Unfunded Actuarial Accrued Liability (UAAL) by $59 million. The PRB actuaries estimate that to restore these three years of reduced total contributions over a prospective 30 year period would require an additional 1.4 percent of payroll per year of City contributions as of July 1, 2018, or 34.6 percent of payroll for 30 years.
 
METHODOLOGY AND STANDARDS
The HFRRF actuarial analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the system's actuarial valuation as of July 1, 2013. According to the PRB actuaries, 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. This analysis is based on the assumption that no other legislative changes affecting the funding or benefits of HFRRF 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
Actuarial Analysis by Actuary David Kent, FSA, EA, MAAA, Buck Consultants, LLC, April 16, 2015.
Actuarial Review by Robert M. May, FSA, EA, MAAA, Board Actuary; and Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 17, 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. 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).
DROP - The HFRRF Deferred Retirement Option Plan.
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).