Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:
Ursula Parks, Director, Legislative Budget Board
IN RE:
HB2859 by Márquez (Relating to the establishment of membership service credit by a member of the Employees Retirement System of Texas for employment with a tribal government.), As Introduced
ACTUARIAL EFFECTS According to the actuarial analysis provided by the Employees Retirement System of Texas (ERS), the proposed changes would have no impact on the unfunded actuarial accrued liability of $8,078.9 million; the system's funded percentage of 76.4 percent, or the 31-year actuarially sound contribution rate of 19.11 percent of payroll.
The Pension Review Board (PRB) actuarial review states that ERS is currently actuarially unsound. The bill, if enacted, would not change the amortization period of ERS from infinite. 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.)
The bill would make a new type of service creditable in the retirement system but the amortization period of ERS would remain infinite. Hence, under Government Code Section 811.006, the bill could not be enacted without first establishing a 31-year actuarially sound contribution rate of 19.11 percent of payroll.
SYNOPSIS OF PROVISIONS The bill would amend the Government Code to allow regular class and elected class members to establish service credit with ERS for service rendered with a tribal government. The bill would take effect on September 1, 2015.
FINDINGS AND CONCLUSIONS According to the ERS actuarial analysis, allowing tribal government service to count towards membership service credit for regular class and elected class members of ERS, as well as the associated contributions from the member and the State, is very similar to existing procedures for purchasing military service credit.
The actuarial analysis states that based on the input from the system, it is expected that under the bill, approximately 10 active members per year would purchase an average of 30 months of service credit. Under the procedure already established for purchasing military service credit, there could either be a net gain or loss resulting from such service purchases. The financial position of ERS would experience a gain when the cost of establishing service credit is more than the actuarial equivalent cost and a loss if the cost of establishing service credit is less than the actuarial equivalent cost.
Since it is undetermined whether more members seeking to establish service credit would cause a net gain or a loss, and because of the low number of requests to establish service credit under this proposal, the bill does not have a measurable impact on the funded status of the plan.
METHODOLOGY AND STANDARDS The ERS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS actuarial valuation for August 31, 2014 and the 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. 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 ERS Actuarial Analysis by Actuary, R. Ryan Falls, FSA, EA, MAAA; Gabriel, Roeder, Smith & Company, April 22, 2015. PRB Actuarial Review by Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 23, 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). 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).