Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:
Ursula Parks, Director, Legislative Budget Board
IN RE:
HB2974 by Flynn (Relating to contributions to, benefits from, and the administration of systems and programs administered by the Teacher Retirement System of Texas.), As Introduced
ACTUARIAL EFFECTS The bill would allow the Teacher Retirement System of Texas (TRS) board to include new categories of service, through rule making, that would be counted toward the five year vesting requirement (but not as credited service for benefits).
According to the actuarial review, TRS is currently actuarially sound. The bill would not in itself make the system actuarially unsound. 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. The bill would keep TRS's amortization period under 30 years, thus the passage of the bill would be allowed under Government Code Section 821.006.
SYNOPSIS OF PROVISIONS The bill would amend the Government Code to make certain technical and administrative changes relating to the Internal Revenue Code, board of trustee appointments, and employer contribution remittances and other provisions applicable to TRS. The bill would also allow the TRS board to include new categories of service that would be counted toward the five-year vesting requirement. The bill would take effect on September 1, 2015.
FINDINGS AND CONCLUSIONS The actuarial analysis states that the bill text does not define what other sources of service could be allowed by the TRS board, or suggest that any new categories of vesting service will be added. It only provides the TRS board the authority to make those decisions.
METHODOLOGY AND STANDARDS The TRS actuarial 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 actuaries, the actuarial assumptions, methods and procedures used in the analysis appears 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 and Joseph P. Newton, FSA, EA, MAAA, Gabriel Roeder Smith & Company, April 8, 2015. Actuarial Review by Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 9, 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 0-15years 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).