TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB2877 by Stephenson (Relating to peace officers who are members of the Teacher Retirement System of Texas.), As Introduced

ACTUARIAL EFFECTS
According to the Teacher Retirement System of Texas (TRS) actuarial analysis, the bill would increase the amortization period to fund the Unfunded Actuarial Accrued Liability (UAAL) of TRS from 29.3 years to 29.4 years, and would increase the UAAL from $32,104 million to $32,106 million.

If the bill is enacted, the TRS amortization limit remains under 31 years so the passage of the bill would be allowable under the Government Code Section 821.006.

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

Teachers Retirement System	Current	Proposed	Difference
State and School Districts 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%	10.44%	0.01%
Unfunded Actuarial Accrued Liability (millions)	$32,104	$32,106	$2
Amortization Period (years)	29.3	29.4	0.1

SYNOPSIS OF PROVISIONS
The bill would amend Government Code Section 824.202 to provide certain members who are employed and commissioned as a peace officers at the time of the member's retirement an unreduced retirement eligibility at the Rule of 80 with a minimum age of 60 rather than age 62. The bill would take effect on September 1, 2015.

FINDINGS AND CONCLUSIONS
The TRS actuarial analysis estimates approximately 4,000 members would qualify as a Peace Officer. The bill would only impact those Peace Officers that are non-vested as of August 31, 2014 and future Peace Officers. 

The actuarial analysis states that to keep the fund at 29.3 years, the State would need to increase its contribution rate by 0.01 percent of payroll for the next 30 years. 

The PRB actuarial review states that TRS is currently actuarially sound. Under the bill, TRS would remain actuarially sound, with a slight increase in the amortization period by 0.1 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 31-year amortization limit set in its statute.)

METHODOLOGY AND STANDARDS
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 actuarial review, 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 TRS 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 Lewis Ward, Consultant, Joseph P. Newton, FSA, Senior Consultant, Gabriel Roeder Smith & Company, April 16, 2015.
Actuarial Review by 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).
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).