TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB3377 by Hughes (Relating to the service retirement annuity for certain members of the Judicial Retirement System of Texas Plan Two who resume service.), As Introduced

ACTUARIAL EFFECTS
Under the bill, the amortization period (years to amortize an unfunded actuarial accrued liability (UAAL)) of the Judicial Retirement System Plan Two (JRS II) would remain infinite. The bill would increase the UAAL from $37.6 million to $38.1 million. Government Code Section 840.106 prohibits the enactment of legislation that would increase the retirement system's amortization period to 31 years or more. Therefore, the bill cannot be enacted unless the total contribution rate is increased from 22.81 percent to 23.79 percent of payroll in order for the system to meet the statutory 31-year amortization limit.

Judicial Retirement System II	Projected 08/31/2015 Valuation	Proposed	Difference
Employer Contribution	15.66%	15.66%	0%
Employee Contribution	7.15%	7.15%	0%
Total Contribution	22.81%	22.81%	0%
Normal Cost (% of payroll)	21.03%	21.05%	0.02%
Unfunded Actuarial Accrued Liability (millions)	$37.60	$38.10	$0.50
Amortization Period (years)	Infinite	Infinite	N/A
Funded Ratio	91.00%	90.80%	-0.20%

SYNOPSIS OF PROVISIONS
The bill would amend Section 837.102 of the Government Code to allow a retired judge to elect to rejoin and receive service credit in JRS II if the retiree has been separated from judicial service for at least 12 consecutive months. Under the bill, when the judge subsequently retires again, the retirement system would calculate the monthly annuity to include the additional service credit as if the judge were retiring for the first time. The bill would not prohibit current return-to-work judges (as of September 1, 2015) from making such an election. This bill would take effect September 1, 2015.
 
FINDINGS AND CONCLUSIONS
The bill would impact JRS II members who wish to return to work after retirement. The bill would allow return-to-work judges to effectively cancel or mitigate an early retirement reduction (if applicable), earn additional credited service, and increase their benefit further by contributing beyond 20 years of service (if applicable).

Currently, the JRS II pension of a retired judge who returns to judicial service is suspended. Also, a return-to-work judge does not make employee contributions; does not earn service credit in JRS II for any subsequent service; and upon subsequent retirement, the resumed pension is not recalculated.

The Pension Review Board (PRB) actuarial review states that JRS II is currently actuarially unsound. The bill, if enacted, would not change the amortization period of JRS II from infinite and would make it slightly more 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. Additionally, under Texas Government Code 840.106, the bill may not currently be enacted because JRS II would have an infinite amortization period (actuarially unsound) before and after bill enactment.
 
The actuarial analysis states that if the bill is enacted, the total contributions for fiscal year 2016 would need to increase to a total of 23.79 percent of payroll in order for the system to become actuarially sound and comply with the requirements of Government Code Section 840.106. The actuarial analysis assumes that previously retired judges who have returned to judicial service would be eligible to make an election to rejoin and receive service credit in JRS II.

The actuarial analysis also states that under this proposal, the potential increase in pension benefits would provide additional incentive for the retired judges to return to work and take advantage of the potential increase in pension benefits; however, based on current plan experience, this is an infrequent occurrence.
 
METHODOLOGY AND STANDARDS
The JRS II analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the JRS II 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 JRS II 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 R. Ryan Falls, FSA, EA, MAAA, Gabriel Roeder Smith & Company, April 16, 2015.
Actuarial Review by Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 16, 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).