BACKGROUND
Established in 1947, the Texas Municipal Retirement System (TMRS or System) is the statewide system that provides retirement, disability, and survivor benefits for employees of those Texas cities which voluntarily elect to participate in the system. Each of the 844 participating cities chooses a plan of benefits from the various options available under TMRS. (TMRS has an additional six inactive cities with no active members or employee contributions.) Each participating city's plan of benefits is funded separately through a combination of employee contributions, as a set percentage of compensation, employer contributions, which are annually determined for each city utilizing generally accepted actuarial principles and practices within the parameters established by the TMRS Act, and investment earnings. These funding requirements are the responsibility of the individual member cities of TMRS. TMRS does not receive funding from the State of Texas.
ACTUARIAL EFFECTS
According to the actuarial analysis, the bill would provide additional flexibility in the design of a TMRS member city's Cost of Living Adjustment (COLA) provision. The current methodology for providing COLAs under TMRS benefit provisions is to increase the retiree's original benefit by a percentage of the increase in the Consumer Price Index (CPI) measured from the date of retirement. The bill would allow a participating city the option to grant a COLA without the cumulative aspect of this current COLA methodology. Any increased payment to a retiree resulting from such a flat rate COLA adopted by a city would be limited to the cumulative increase the annuitant would have been entitled to receive had the CPI maximum (i.e. 70 percent) under TMRS' existing law always been applied.
The bill would provide additional flexibility in allowing TMRS member cities to manage the actuarial funding costs associated with their COLA provisions. The proposed changes under the bill are not expected to have an actuarial impact on TMRS as a system, since funding requirements and cost impact are the responsibility of the member cities. Additionally, if the bill is enacted, it would not have any material effect on the actuarial status of TMRS and there is no immediate or long-term actuarial impact expected on any TMRS municipality or on TMRS in total.
The Pension Review Board (PRB) actuarial review states that TMRS is currently actuarially sound. The bill, if enacted, would not make the system 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. The bill, if enacted, would keep TMRS' amortization period near 22 years.
SYNOPSIS OF PROVISIONS
The bill would amend Section 853.404 of Texas Government Code to require a TMRS city that adopts an ordinance discontinuing or changing an annually repeating COLA to provide written notice to members and annuitants at least 60 days in advance of the effective date of the ordinance.
The bill would also amend Section 854.203 of Texas Government Code to allow a TMRS city the option to grant a COLA without requiring the municipality to retroactively apply the COLA from the participant's retirement date to the date the COLA is granted.
The cumulative aspect of the current TMRS COLA provisions cause a 'catch-up' requirement in the case of a plan considering a restart of a previously discontinued COLA. Upon such a restart, benefits must immediately adjust to what the benefit levels would have been had that COLA provision always been in effect (except that retiree benefits are never decreased). Under the proposed bill, cities that decide to restart COLAs after a period of having no COLAs would have the flexibility to grant COLAs with less of a financial impact than currently possible (e.g., a flat 2 percent COLA), instead of a cumulative 30 percent, 50 percent, or 70 percent of CPI.
The bill would allow prospective repeating or ad-hoc COLAs to be specified in an ordinance adopted by the city, which may differ from the current menu of 30 percent, 50 percent and 70 percent of CPI. There is a potential budget impact for individual cities who grant a COLA that is not allowed under current provisions.
The following charts summarize the current and proposed options cities have with respect to COLAs. Both currently and under the proposed bill, a benefit ceiling based on a 70 percent of CPI COLA applies.
Current COLA Options for Cities:
| Type of COLA |
COLA 'Catch-Up' Provision Applies |
| 30% of CPI |
50% of CPI |
70% of CPI |
| Annually Repeating |
x |
x |
x |
| Ad hoc |
x |
x |
x |
Proposed COLA Options for Cities:
| Type of COLA |
COLA 'Catch-Up' Provision Applies |
COLA 'Catch-Up' Provision Does Not Apply |
| 30% of CPI |
50% of CPI |
70% of CPI |
Other* |
30% of CPI |
50% of CPI |
70% of CPI |
Other* |
| Annually Repeating |
x |
x |
x |
x |
x |
x |
x |
x |
| Ad hoc |
x |
x |
x |
x |
x |
x |
x |
x |
*Other COLAs may not produce a benefit adjustment in excess of the 70% of CPI COLA.
The provisions of this bill would take effect immediately if it receives a vote of two-thirds of all the members elected to each house. If this bill does not receive the vote necessary for immediate effect, it would take effect September 1, 2015.
FINDINGS AND CONCLUSIONS
The current methodology for providing COLAs under TMRS benefit provisions is to cumulatively increase the retiree's original benefit by a percentage of the increase in the CPI measured from the date of retirement. The bill would allow a participating municipality the option to grant a COLA without the cumulative aspect.
The TMRS actuarial analysis states that the bill would allow a participating municipality to decrease its future COLAs without eliminating the COLA for certain current retirees over the short term. Also, if the city decided not to grant a COLA at all or grant a lesser COLA for a specific year, future COLAs would not become increasingly more expensive.
The actuarial analysis also states that if enacted, this bill would provide additional flexibility in the design of a TMRS member city's COLA provision. As a result, TMRS member cities would have more flexibility in managing the actuarial funding costs associated with their COLA provisions. The funding requirements and cost impact are the responsibility of the member cities of TMRS; therefore, the changes under the bill are not expected to have an actuarial impact on TMRS as a system. In addition, the changes proposed by the bill are not expected to have any material effect on the actuarial status of TMRS, nor is there any immediate or long-term actuarial impact on any TMRS municipality or on TMRS in total; therefore, there is no estimated change in the system's present value of future benefits.
Currently, annually repeating COLAs are advance funded - i.e., included in the actuarial accrued liabilities and amortized as a level percentage of payroll over a closed 30-year period. Unfunded liabilities attributable to ad-hoc COLAs granted after 2009 are currently being amortized on a closed 15-year level dollar basis, providing a faster amortization than mandated by the PRB to maintain actuarial soundness. According to the PRB actuarial review, the cost attributable to benefit improvements made under this bill could be material for an individual city that elects to grant a COLA that would not otherwise have been available; in that case, the system would require a city contribution increase sufficient to preserve actuarial soundness.
The actuarial review also states that the conclusions of the actuarial analysis of a) no material effect on the retirement plan funded status and b) the likely effect of employer contributions for participating municipal employers are reasonable.
METHODOLOGY AND STANDARDS
The analysis relies on the participant data, financial information, benefit structure, and actuarial assumptions and methods used in the December 31, 2013 actuarial valuation of TMRS. According to the PRB actuaries, the actuarial assumptions, methods and procedures used in the analysis appears 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 TMRS 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 Mark R. Randall, MAAA, FCA, EA, and Joseph P. Newton, MAAA, FSA, EA, Gabriel Roeder Smith & Company, April 8, 2015.
Actuarial Review by Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 10, 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).