TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB2933 by Anderson, Rodney (Relating to retirement benefits for certain peace officers who are members of the Teacher Retirement System of Texas, including the creation of a peace officer supplemental retirement fund.), As Introduced

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

Teacher Retirement System of Texas	Current	Proposed	Difference
State and School Districts Contribution	7.76%	7.76%	0.00%
Employee Contribution	6.70%	6.70%	0.00%
Total Contribution Rate effective FY 2015	14.46%	14.46%	0.00%
Normal Cost (% of payroll)	10.43%	10.44%	0.01%
Unfunded Actuarial Accrued Liability (millions)	$31,638	$31,675	$37
Amortization Period (years) as of 2/28/2015	29.3	29.4	0.1

*The current combined State and school district contribution rate of 7.76% is sufficient to amortize the current unfunded liability over a 29.3-year period. If the bill is enacted, the current contribution would result in a slight funding period increase to 29.4 years, which is under the 31-year amortization period required by Government Code Section 821.006 for any benefits changes.

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

Peace Officer Supplemental Retirement Fund (POSRF) (proposed new system)	Current	Proposed	Difference
State Contribution	0.00%	2.13%	2.13%
Employee Contribution	0.0%	0.5%	0.5%
Total Contribution	0.00%	2.63%	2.63%
Under 31-year Funding Contribution Required*	0.0%	3.77%	3.77%
Normal Cost (% of payroll)	0.0%	2.84%	2.84%
Unfunded Actuarial Accrued Liability (millions)	$0	$43.0	$43.0
Projected Amortization Period (years)	0	Infinite	N/A

*The provisions of the bill propose a State contribution rate of 2.13% and an additional member contribution of 0.5% to fund POSRF. According to the actuarial analysis provided by TRS, the total state contribution rate required to achieve a 30-year funding period is 3.77% of payroll. The new pension fund, POSRF, is similar to LECOS within the Employees Retirement System (ERS). POSRF is actuarially unsound at creation.

Teacher Retirement System of Texas (TRS):  According to the TRS actuary, HB 2933 would increase the normal cost by one basis point (.01%) due to the reduced eligibility requirements for each member defined as a "peace officer." The bill would increase the estimated unfunded actuarial accrued liability (UAAL) by $37 million, from $31,638 million to $31,675 million, based on the February 28, 2015 actuarial valuation update. The current total contribution rate is 14.46%, which is comprised of a 6.70% member contribution rate (scheduled by statute to increase to 7.2% in 2016 and to 7.7% in 2017), with a combined 7.76% State and school district contribution rate. If the bill is enacted, the funding period would increase by 0.1 year but would remain under 31 years pursuant to Government Code Section 821.006.

Peace Officer Supplemental Retirement Fund (POSRF):  HB 2933 would create the new supplemental fund for peace officers called the POSRF. Under the proposal, the fund at creation would have a UAAL of $43 million. The normal cost of POSRF would be 2.84% of payroll. The proposed contribution rate for the State would be 2.13% and 0.50% for members; however, the contribution rate needed to stay under a 30- year amortization period is 3.77%. Therefore, the proposed rate of 2.13% would result in an infinite amortization period for the POSRF and would be unsustainable.

The Pension Review Board (PRB) actuarial review indicates that the bill would have a slight impact on TRS.  However, it would also create the POSRF, a new statewide supplemental plan for peace officers that would be actuarially unsound.   

SYNOPSIS OF PROVISIONS
HB 2933, effective September 1, 2015 or immediately if receiving the required votes, would provide the following changes.

 • Enhance benefits through TRS and a supplemental program for members of TRS classified as "peace officers." The bill defines a "peace officer" as a member of the retirement system who has been commissioned by a public school district as a law enforcement officer under Section 37.081 or 51.203, Education Code.

 • The bill would enhance the benefits payable to peace officers through new retirement eligibility requirements, and an increase in the benefit multiplier by 0.5% from 2.3% to 2.8% for members who attain 20 years of service as a peace officer.

 • The impacted members would become eligible for an unreduced retirement benefit at age 57, age 55 with 10 years of service, or rule of 80.

 • The bill would require the state to contribute 2.13% of aggregate peace officer compensation to the POSRF. The impacted members would be required to contribute an additional 0.5% of pay above what other TRS members contribute.

FINDINGS AND CONCLUSIONS
HB 2933 would provide enhanced benefits through TRS and a supplemental program for peace officers.  The provisions of the bill would enhance the benefits payable to peace officers through new retirement eligibility requirements and a 2.8% benefit multiplier for members who attain 20 years of service as a peace officer.

The additional 0.50% multiplier for peace officers with at least 20 years of service would be paid from the POSRF. Therefore, part of the cost of this program is borne by the POSRF and some by TRS. The cost for TRS increases because the peace officers can retire and receive TRS benefits sooner (unreduced at age 55 with 10 years of peace officer service).

POSRF will have its own contribution requirements and will begin with an asset value of zero. The actuarial review notes that TRS is currently actuarially sound. Under the bill, TRS will remain actuarially sound, with a slight 0.1 year increase in the amortization period. However, the bill would also create a new statewide plan (POSRF) that is actuarially unsound, with an initial infinite funding period to amortize unfunded liabilities. 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 statute disallows the passage of benefit changes that increase the amortization period beyond 31 years.) The TRS amortization period would increase by 0.1 years from 29.3 years to 29.4 years if the bill is enacted. Therefore, the TRS amortization period remains under 31 years, so the passage of the bill would be allowable under the TRS statute. However, without the full funding of the necessary 3.77% state contribution rate, POSRF would not be sustainable and could not pay the benefits as proposed.

The number of TRS members defined as peace officers is estimated to be about 4,000. The actuarial review notes that the external actuary's determination of the cost to TRS and the supplemental plan is reasonable.

METHODOLOGY AND STANDARDS
The analysis assumes no further changes are made to TRS, and PRB 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 the 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, March 26, 2015.

Actuarial Review by Mr. Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, March 27, 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).