Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:
Ursula Parks, Director, Legislative Budget Board
IN RE:
HB213 by Fallon (Relating to the maximum service retirement annuity for members of public retirement systems.), As Introduced
ACTUARIAL EFFECTS The bill, if enacted, would not have a current actuarial effect on Texas public retirement systems because it does not affect the benefits of any existing members. Because the bill would limit annuity amounts, it may eventually result in a small cost savings in the future. To be impacted, a future member would need to have a sufficiently high salary and sufficiently long service.
According to the actuarial analysis prepared by the Employees Retirement System of Texas (ERS), based on the actuarial valuation result as of August 31, 2016, projected to August 31, 2017, the bill would not have an actuarial impact on the ERS, LECOSRF, or JRSII unfunded actuarial accrued liability (UAAL), funded ratio, or normal cost rate.
According to the Teacher Retirement System (TRS), under the current benefit structure and retirement eligibility requirements for TRS members, exceeding the annuity limit described in the bill would require a member to have a combination of a large average salary and a large amount of credited service. TRS estimates that if the bill were in effect for current members, less than 100 members would be impacted.
For ERS and TRS, the passage of the bill would be allowed under Government Code Sections 811.006 and 821.006.
SYNOPSIS OF PROVISIONS The bill would amend the Texas Government Code so that the maximum annuity payable to persons who become members of Texas public retirement systems on or after December 1, 2017 may not exceed the lesser of 1) the basic pay of a member of the United States armed forces on active duty at the highest salary for pay grade O-10 as defined by 37 U.S.C. Section 201(a) or 2) the annual rate of basic pay for a position under level II of the Executive Schedule as defined by 5 U.S.C. Section 5323.
The provisions of this bill would be effective December 1, 2017. FINDINGS AND CONCLUSIONS According to the ERS actuarial analysis, for calendar year 2017, the pay grade O-10 gross monthly basic pay ranges from $16,707.09 to $20,543.59 depending on years of service. However, basic pay for pay grade O-10 is limited by Level II of the Executive Schedule, which is $15,583.20 per month ($186,998.40 annually). Additionally, the actuarial review states that the pension benefits payable from public retirement systems are currently subject to the Federal IRS Code Section 415(b)(1)(A) limit ($215,000 per year at age 65 for 2017). This limit (expressed as an annual benefit) represents a limit on all benefits paid to a member from a public retirement system in any form.
Because the bill would restrict benefits, it may eventually result in a small cost savings. For example, the ERS analysis states that if the provisions of the bill had been in effect for current ERS members, the projected August 31, 2017 AAL would have been lower by $3.3 million. For LECOSRF, the projected August 31, 2017 AAL would have been lower by approximately $550,000. For JRS II, this proposal would have no impact on the August 31, 2017 projected AAL. However, the actuarial review states that the bill, if enacted, would not change the situation of the affected public retirement systems being actuarially sound or unsound.
METHODOLOGY AND STANDARDS The ERS, LECOSRF and JRS II analysis relies on the participant data, financial information, benefit structure, and actuarial assumptions and methods used in the ERS, LECOSRF and JRS II actuarial valuations for August 31, 2016 and their projections to August 31, 2017.
According to the Pension Review Board actuarial review, the actuarial assumptions, methods, and procedures used in the analysis provided by ERS 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, March 6, 2016. TRS email with a statement from Merita Zoga, Director of Governmental Relations, July 28, 2017. Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA Staff Actuary, Pension Review Board, August 2, 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).