TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB3349 by Rodriguez, Justin (Relating to the retirement system in certain municipalities for firefighters and police officers.), As Introduced

SAN ANTONIO FIRE AND POLICE PENSION FUND (SAFPPF)	Current	Proposed	Difference
City of San Antonio Contribution	24.64%	23.25%	-1.39%
Employee Contribution	12.32%	12.32%	0.00%
Total Contribution	36.96%	35.57%	-1.39%
Normal Cost (% of payroll)	24.71%	25.56%	0.85%
Unfunded Actuarial Accrued Liability (millions)	$210.00	$284.70	$74.70
Amortization Period (years)	6.15	11.17	5.02
Funded Ratio	92.91%	90.62%	-2.29%

ACTUARIAL EFFECTS
HB 3349 would reduce the City of San Antonio's contribution rate by 1.39% (from 24.64% to 23.25%) and make certain benefit changes to the retirement system. The actuarial analysis prepared by San Antonio Fire and Police Pension Fund's (SAFPPF) actuaries is based on the results of the October 1, 2014 actuarial valuation. According to the actuarial analysis, HB 3349 would increase, by 0.85%, the normal cost of the SAFPPF from 24.71% to 25.56%. The proposal would increase the unfunded actuarial accrued liability from $210.0 million to $284.7 million, a total increase of $74.7 million and extend the expected period to amortize the unfunded actuarial accrued liability, as of October 1, 2014, by 5.02 years from 6.15 years to 11.17 years.

The actuarial review, prepared by the Pension Review Board (PRB) actuaries, states that SAFPPF is currently actuarially sound. The bill, if enacted, is projected to keep the retirement system actuarially sound. 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. (An amortization period of 0-15 years is also a more preferable target.) If the bill is enacted, the October 1, 2014 amortization period would increase from 6.15 years to 11.17 years; however, the retirement system would continue to remain in the preferable target range of the PRB Guidelines.

SYNOPSIS OF PROVISIONS
HB 3349 would become effective October 1, 2015 and provide the following changes.
•           Decreases the City's contribution rate from 24.64% to 23.25%.

•           Changes benefit formulas for members retiring after September 30, 2015 by increasing the benefit to 2.375% of the average total salary for each of the first twenty years of service, plus 5% of average total salary for each of the next seven years of service, plus 2.5% of average total salary for a member's 28th year of service, plus 0.5% of average total salary for each of the next 5 years of service.

•           Extends the 100% of CPI cost-of-living adjustment (COLA) to all members who retired between October 1, 1999 and September 30, 2003 (currently the COLA is 75% of the CPI).

•           Gives the board of trustees the discretion to expand the group entitled to a 100% of CPI COLA in the future provided that the action will not cause the funded ratio of the system to be less than 90%. 

•           Decreases disability retirement annuity for members retiring after September 30, 2015 from 50% to 47.5% of average salary.

•           Changes from 2.25% to 2.375% the amount multiplied by years of service for the disability retirement annuity for members who retired on or after August 30, 1971.

•           Changes the maximum allowable service for BackDROP from 34 years to 33 years.

•           Makes other administrative and clarifying changes relating to federal law provisions, such as rollovers, compensation limit requirements, and maximum benefit limits.

FINDINGS AND CONCLUSIONS
The actuarial analysis includes a 10-year projection showing that the new contribution rate is projected to be sufficient to keep the system actuarially sound through 2024. In 2024, the projected funded ratio of the system would be 96.33% with an amortization period of 4.57 years. 

The actuarial analysis also notes that the bill gives the SAFPPF board discretion to expand the group entitled to a 100% of CPI COLA in the future provided that the action will not cause the funded ratio of the system to be less than 90%. This administrative change will impact valuation results in the years when action is taken, but no cost is reflected in the actuarial analysis. The magnitude of the impact will depend on the year to which the COLA is extended.

The actuarial review states that the bill has an economic cost to the SAFPPF. The actuarial analysis, prepared by the system's actuaries, is reasonable. The actuarial analysis shows the effect of the changes of this bill on the system's amortization period.   

METHODOLOGY AND STANDARDS
The analysis assumes no further changes are made to SAFPPF and 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 October 1, 2014 actuarial valuation of SAFPPF. According to the PRB actuaries, the actuarial assumptions, methods, procedures, and conclusions 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
Actuarial Analysis by Leon F. Joyner Jr., ASA, MAAA, EA; and Deborah K. Brigham, ASA, MAAA, EA, Vice Presidents and Actuaries, Segal Consulting, March 25, 2015.

Actuarial Review by Robert M. May, FSA, EA,MAAA, Board Actuary; and Mr. Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, March 27, 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 accruedliability. 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 amore 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).