TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB3461 by Fallon (Relating to the standard service retirement annuity for certain members of the elected class of the Employees Retirement System of Texas.), As Introduced

ACTUARIAL EFFECTS
The bill would not change the amortization period of Employees Retirement System of Texas (ERS) from infinite. It would not have a large impact on ERS as a whole since the elected class represents a small portion of all members in ERS. Because the bill reduces benefits, it would result in a small cost savings.

According to the ERS actuarial analysis, the bill would decrease the normal cost rate by 0.03 percent of payroll, from 11.58 percent to 11.55 percent, and increase the Actuarial Accrued Liability (AAL) and the Unfunded Actuarial Accrued Liability (UAAL) by $13.1 million. The analysis also states that the modest increase in the AAL is far outweighed by the decrease in the normal cost rate for future elected class members.

The bill does not attempt to modify any of the benefit or contribution provisions that are identified in Section 811.006, Government Code. As a result, the bill could be enacted while the State contributions to ERS remain less than the contribution amounts outlined in Section 811.006.

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

Employees Retirement System of Texas (ERS)	Current (Projected August 31, 2015 Valuation)	Proposed	Difference
State and Agency Contribution	8.00%	8.00%	0.00%
Employee Contribution	7.20%	7.20%	0.00%
Total Contribution	15.20%	15.20%	0.00%
Normal Cost (% of payroll)	11.58%	11.55%	-0.03%
Unfunded Actuarial Accrued Liability (millions)	$8,078.90	$8,092.00	$13.10
Amortization Period (years)	Infinite	Infinite	N/A
Funded Ratio	76.40%	76.30%	-0.10%

SYNOPSIS OF PROVISIONS
The bill would amend Government Code, affecting the elected class of ERS by adding the provision that the standard annuity for service in the elected class, all of which was earned as a member of the legislature, would be an amount equal to the number of years of service times 2 percent of $140,000. The change made by this bill applies only to a person who is first eligible to become a member of the elected class on or after September 1, 2015. This Act would take effect on September 1, 2015.
 
FINDINGS AND CONCLUSIONS
The bill would reduce service retirement benefits for certain elected class members who first enter the elected class on or after September 1, 2015. Under the bill, the salary figure used for computing benefits is frozen at $140,000, and there would not be post-retirement adjustments to the benefit level, as there are now. The multiplier is also reduced from 2.3 percent to 2.0 percent. Currently, the standard service retirement annuity for members of the elected class is an amount equal to the number of years of service times 2.3 percent of the state salary of a district judge (currently $140,000).

The actuarial review states that ERS is currently actuarially unsound. The bill, if enacted, would not change the amortization period of ERS from infinite. Under the current Pension Review Board (PRB) Guidelines for Actuarial Soundness, 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. (ERS has a 31-year amortization limit set in its statute.)

The bill, if enacted, would decrease the cost of benefits provided by ERS to certain future members of the elected class. Because the bill would reduce benefits, it results in a small cost savings. The actuarial analysis states that the bill would have a material impact on future elected class member benefits. The bill would not affect benefits promised to current members.

The ERS actuarial analysis also estimates that the bill would reduce the actuarially sound contribution rate from 19.11 percent to 19.10 percent of payroll.

METHODOLOGY AND STANDARDS
The ERS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS actuarial valuation for August 31, 2014 and the 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 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 13, 2015.
PRB Actuarial Review by Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 23, 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.
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).