Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:
Ursula Parks, Director, Legislative Budget Board
IN RE:
HB3182 by Fallon (Relating to the maximum service retirement annuity for members of public retirement systems.), Committee Report 1st House, Substituted
ACTUARIAL EFFECTS The bill would not have a current actuarial effect on Texas public retirement systems because it does not affect the benefits of any existing members. Because the bill restricts benefits, it could eventually result in a small cost savings decades from now. To be impacted, a future member would need to have a sufficiently high salary and sufficiently long service.
According to the actuarial analysis prepared by the Employees Retirement System of Texas (ERS), based on the actuarial valuation result as of February 28, 2015, projected to August 31, 2015, the bill would not have an actuarial impact on the ERS, LECOSRF, JRS I, or JRS II unfunded actuarial accrued liability (UAAL), funded ratio, or normal cost rate. The actuarial review states that ERS is currently actuarially unsound. The bill, if enacted, would not change the amortization period of ERS from infinite.
The actuarial analysis from the Teacher Retirement System of Texas (TRS) also states that this proposal would have no impact on the results of the February 28, 2015 actuarial valuation. The actuarial review states that TRS is currently actuarially sound. The bill, if enacted, would not change the amortization period of TRS.
For ERS and TRS, the passage of the bill would be allowed under Government Code Sections 811.006 and 821.006.
SYNOPSIS OF PROVISIONS The bill would amend the Government Code to limit the annual service retirement annuity for persons who become members of Texas public retirement systems on or after September 1, 2015 to not exceed the lesser of:
• the annual basic pay of a member of the United States armed forces on active duty at the highest salary for pay grade O-10 as defined by 37 U.S.C. Section 201(a); or • the annual rate of basic pay for a position under Level II of the Executive Schedule as defined by 5 U.S.C. Section 5313.
The bill would take effect September 1, 2015.
FINDINGS AND CONCLUSIONS According to the ERS actuarial analysis, for calendar year 2015, the pay grade O-10 gross monthly basic pay ranges from $16,072.20 to $19,762.50, depending on years of service. However, basic pay for pay grade O-10 is limited by Level II of the Executive Schedule, which is $15,125.10 per month (approximately $181,500 annually for 2015).
The actuarial review of ERS analysis states that pension benefits payable from public retirement systems are currently subject to the Internal Revenue Code Section 415(b)(1)(A) limit ($210,000 per year at age 65 for 2015). This limit (expressed as an annual benefit) represents a limit on all benefits paid to a member from a public retirement system in any form. Based on this information the bill would impose a second annual limit of approximately $181,500 (projected with inflation) applying to the service retirement annuity.
Because the bill restricts benefits, it may eventually result in a small cost savings. For example, the ERS analysis states that if the provisions of the bill had been in effect for current ERS members, the projected August 31, 2015 AAL would have been lower by $3.4 million. To be impacted, a future member would need to have a sufficiently high salary and sufficiently long service.
The actuarial review of TRS analysis concludes that the bill would eventually impact a very small group of future employees who become members of TRS on or after September 1, 2015. The TRS analysis also estimates that if the proposal were in effect for current members, less than 100 out of 1.4 million members would be affected.
METHODOLOGY AND STANDARDS The ERS, LECOSRF and JRS II analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS, LECOSRF and JRS II actuarial valuations for August 31, 2014 and their mid-year valuations as of February 28, 2015. 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 Pension Review Board (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 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 R. Ryan Falls, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, April 1, 2015. TRS Actuarial Analysis by Lewis Ward, and Joseph P. Newton, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, April 21, 2015. Actuarial Review by Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 2, 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. JRS I - Judicial Retirement System of Texas, Plan 1 JRS II - Judicial Retirement System of Texas, Plan 2 LECOSRF- Law Enforcement and Custodial Officer Supplemental Retirement Fund 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 see. 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).