TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB3259 by Herrero (Relating to a cost-of-living adjustment applicable to certain benefits paid by 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 31.4 years, and would increase the UAAL by $1.12 billion from $32,104 million to $33,221 million. The funded ratio would decrease from 80.4 percent to 79.9 percent. 

According to the Pension Review Board (PRB) actuarial review, the bill would have a slight negative effect on the actuarial soundness of TRS. However, if the bill is enacted, the amortization period for TRS would exceed 30 years by one or more years so the passage of the bill would not be allowable under the Government Code Section 821.006. 

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

Teacher Retirement System	Current	Proposed	Difference
Unfunded Actuarial Accrued Liability (millions)	$32,104	$33,221	$1,117
Amortization Period (years)	29.3	31.4	2.1
Funded Ratio	80.4%	79.9%	-0.5%

 
SYNOPSIS OF PROVISIONS
The bill would provide a one-time cost of living increase in the amount of the lesser of 3 percent of the current monthly annuity or $100 to retirees of the TRS who retired on or after August 31, 2004 and on or before August 31, 2013. This increase would also apply to beneficiaries and alternate payee annuitants.

The bill would take effect immediately upon receiving two-thirds majority vote in each house. Otherwise, the bill would take effect September 1, 2015.

FINDINGS AND CONCLUSIONS
The PRB actuarial review states that TRS is currently actuarially sound. Under the bill, TRS will remain actuarially sound, with an increase in the amortization period from 29.3 years to 31.4 years. Under the current PRB Guidelines for Actuarial Soundness, funding should be adequate to amortize the unfunded actuarial accrued liability over a period that 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.) Additionally, the PRB Guidelines state that benefit increases should not be adopted if all plan changes being considered cause a material increase in the amortization period and if the resulting amortization period exceeds 25 years. The current TRS amortization period is already above 25 years.

The actuarial analysis states that to finance the COLA and keep the retirement system at the statutory benchmark of 30 years, the State would need to increase its contribution rate by 0.18 percent from 6.80 percent to 6.98 percent of payroll for the next 30 years.

METHODOLOGY AND STANDARDS
The TRS actuarial analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS actuarial valuation for August 31, 2014 and their 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 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
TRS Actuarial Analysis by Lewis Ward and Joseph P. Newton, FSA, EA, MAAA, Gabriel Roeder Smith & Company, April 21, 2015.
PRB Actuarial Review by Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 28, 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 neview 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).
COLA • Cost-of-Living Adjustment.
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).