BACKGROUND

The Texas County & District Retirement System (TCDRS) is the statewide system that administers retirement, disability, and survivor benefits for employees of those Texas counties and districts which voluntarily elect to participate in the system. The plan for each of the 656 participating counties and districts is separately funded; funding is provided by employee contributions at a percentage of compensation selected by the county or district and by employer contributions actuarially determined as necessary to provide the level of benefits selected.

ACTUARIAL EFFECTS

The provisions of SB 463 would, if enacted, restructure the existing three main TCDRS fund accounts, including the Employees Saving Fund (ESF), Subdivision Accumulation Fund (SAF) and Current Service Annuity Reserve Fund (CSARF). Under the current fund account structure, the ESF and CSARF are credited by statute with 7% interest, and the SAF investment return reflects the total actual return net of these interest credits. (The SAF asset value is then smoothed, i.e., averaged.) Most of the retirement and beneficiary annuity payments are paid out of the CSARF and any supplemental annuity payments are paid out of the SAF.

The proposed restructuring would eliminate the CSARF, so that pension benefits of current and future retirees would be paid entirely out of the SAF. At retirement, employee's account balance from the ESF would be transferred to the SAF, instead of the CSARF, as is done currently. Additionally, the bill would create a new fund, the Closed Subdivision Annuity Fund (CSAF), from which future benefit payments to members of subdivisions that have terminated participation in the retirement system would be made.

According to the actuarial analysis, the proposed fund restructuring would not impact any member benefit amounts, eligibility, or participation requirements. Therefore, the proposed changes would not impact the overall liabilities of the retirement system and would have no cost to the system as a whole. But there would be an effect on the allocation of costs to the individual counties and districts (i.e., subdivisions) participating in TCDRS.

TCDRS, as a whole, and each of its individual employer plans are currently funded on an actuarially sound basis, as defined by the Texas Pension Review Board. Adoption of this legislation will not affect that status. The actuarial review notes that TCDRS is actuarially sound under current provisions, and will remain actuarially sound if the bill is enacted.

SYNOPSIS OF PROVISIONS

SB 463, to be effective January 1, 2016 (or immediately if it receives the required votes), would provide the following changes:
• Restructure the current three TCDRS internal fund accounts by eliminating CSARF, so that benefit payments to participants of active subdivisions would be made entirely from the SAF. A one-time allocation and transfer of the CSARF funds would be made, with active subdivision assets being transferred to the SAF, effective January 1, 2017.
• A new fund, the CSAF, would be created from which future benefit payments to participants of closed subdivisions would be made.

FINDINGS AND CONCLUSIONS 

The provisions of SB 463, if enacted, would streamline and simplify TCDRS's fund accounting structure. The proposed structure would reduce the burden of complying with GASB 68 by eliminating a cost sharing aspect of the current fund structure. The result would be a significant simplification of TCDRS's required process of reporting the GASB 68 Net Pension Liability to each of the participating employers.

The actuarial review notes that the employee and retiree benefits would not be affected by the bill, so the bill would have no cost to the retirement system as a whole. Also, the bill would not affect the retirement system's overall funded status. However, there would be an impact on the allocation of the total system cost to the individual employers (i.e., subdivisions) within TCDRS. The cost reallocation results from the elimination of the current pooling of retiree longevity within the CSARF among all employers, and the redistribution of investment risk/reward among employers due to the asset transfer from the CSARF to the SAF. The transfer of the CSARF assets to the SAF would also make the future SAF investment return less volatile.

The actuarial review also notes that TCDRS is currently actuarially sound, as participating county and district employers are required to amortize their unfunded actuarial accrued liability (UAAL) over a closed 15 or 20 year period. The bill, if enacted, is projected to keep the retirement system sound, as participating employers will still be required to amortize their UAAL over a closed 15 or 20 year period. Under the current PRB Guidelines for Actuarial Soundness, funding should be adequate to amortize the UAAL over a period which should never exceed 40 years, with 15-25 years being a more preferable target. If the bill is enacted, PRB projects that the TCDRS's amortization period would continue to meet PRB Guidelines. 

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 TCDRS. The actuarial analysis did not anticipate any changes in member behavior in the assumptions used in the analysis, as the member behavior is not expected to be impacted by the proposed change.

According to the PRB actuary, the actuarial assumptions, methods and procedures 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 Mr. Mark C. Olleman, Consulting Actuary and Mr. Nick J. Collier, Consulting Actuary, Milliman, Inc., February 19, 2015.

Actuarial Review by Robert M. May, FSA, EA, MAAA, Board Actuary and Mr. Daniel P. Moore, Staff Actuary, Pension Review Board, February 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 - The payment on the Unfunded Actuarial Accrued Liability (UAAL).
Amortization Period - The number of years required to pay-off the unfunded liability.  Public retirement systems have found that amortization periods ranging from 20 to 40 years are acceptable. 
Cost Method - A method 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 the assets to the liabilities.
GASB 68 and related terminology - A statement of the Governmental Accounting Standards Board (GASB) concerning accounting for pension by governmental employers effective for FYE 6/30/2015 and later:
     Net Pension Liability (NPL): The liability of employers and non-employer contributing entities for pension benefits shown on the entity's balance sheet for FYE 6/30/2015 and later. The NPL equals the TPL minus the market value of plan assets. (If plan assets exceed the TPL, there is a Net Pension Asset.)
     Total Pension Liability (TPL): The portion of the actuarial present value of projected benefit payments attributed to past periods of employee service under the Entry Age Normal valuation method.
     Discount Rate: A single rate used to discount the calculate the TPL which is equivalent to discounting future payments reflected in the TPL at the long-term expected rate of return until plan assets are projected to be exhausted, and discounting at the municipal bond rate for subsequent payments reflected in the TPL.
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).