TO:	Honorable Joan Huffman, Chair, Senate Committee on State Affairs
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB80 by Darby (Relating to a cost-of-living adjustment applicable to certain benefits paid by the Teacher Retirement System of Texas, including a related study.), As Engrossed

ACTUARIAL EFFECTS
The bill would provide a one-time cost-of-living adjustment (COLA) for current retirees who retired after August 31, 2004 and on or before August 31, 2015, equal to the lesser of 3% of the current monthly annuity or $100. The COLA would be added as soon as practicable after the board of trustees finds that the COLA would not violate Texas Government Code Section 821.006.

According to the Teacher Retirement System of Texas (TRS) actuarial analysis, the bill would increase the amortization period to fund the unfunded actuarial accrued liability (UAAL) of TRS from 34.3 years to 38.1 years as of February 28, 2017, and would increase the UAAL by $1.28 billion from $36.6 billion to $37.88 billion. The funded ratio would decrease from 79.5% to 78.9%.

Under the current PRB Pension Funding Guidelines, effective June 30, 2017, funding should be adequate to amortize the UAAL over a period which should not exceed 30 years, with 10 - 25 years being a more preferable target. The actuarial review states that TRS is currently actuarially unsound. Under the bill, TRS would remain actuarially unsound, with a 38.1 year amortization period so the bill would have a significant negative impact on the actuarial soundness of TRS.
 
Based on the February 28, 2017 Update of the August 31, 2016 Actuarial Valuation

Teacher Retirement System of Texas (TRS)	Current	Proposed	Difference
Funded Ratio	79.50%	78.90%	0.60%
Unfunded Actuarial Accrued Liability (millions)	$36,600	$37,880	$1,280
Amortization Period (years)	34.3	38.1	3.8

SYNOPSIS OF PROVISIONS
The bill would provide a one-time cost of living increase, as long as the increase does not put TRS at a funding period that would exceed 30 years, in the amount of the lesser of 3% of the current monthly annuity or $100 a month to retirees of the TRS who retired on or after August 31, 2004 and on or before August 31, 2015. This increase would also apply to a beneficiary or alternate payee annuitant.
 
The bill also tasks TRS with conducting a study on future cost-of-living adjustments payable to annuitants receiving a monthly death or retirement annuity, including projections on future COLAs and a review of structural changes affecting COLAs; including the feasibility of offering an alternative annuity payment option to retirees. TRS shall only consider alternative annuity payment options that are projected by the TRS actuary to have no fiscal impact to the state. TRS would be required to submit their report to the legislature no later than September 1, 2018.
 
The bill would take effect immediately upon receiving two-thirds majority vote in each house. Otherwise, the bill would take effect December 1, 2017.
 
FINDINGS AND CONCLUSIONS
The actuarial analysis stated the legislature could finance the full amount of the COLA without impacting the amortization period via an estimated $1.36 billion contribution in FY 2018, or $1.47 billion over the biennium ($736 million paid in each of FYs 2018 and 2019). Alternatively, the State's annual contribution would need to increase from 7.70% to 8.18% (0.29% to reduce the funding period to the statuary 30 year benchmark and 0.19% to fund the changes in the bill).
 
METHODOLOGY AND STANDARDS
The TRS analysis relies on the actuarial value of assets as of the mid-year February 28, 2017 actuarial valuation, and the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS actuarial valuation as of August 31, 2016. 
 
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 TRS 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 Lewis Ward, Consultant, and Joseph P. Newton, FSA, EA, MAAA Gabriel Roeder Smith & Company, July 24, 2017.

Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, July 24, 2017.
 
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 30 years, with 10-25 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).