TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB43 by Flynn (Relating to the public retirement systems of certain municipalities.), As Introduced

The following new information was supplied by Agency 338 338 - Pension Review Board:

HB 43, as introduced, would require that the City of Houston (the “City”) contribution to Houston Firefighter's Relief and Retirement Fund (HFRRF), Houston Municipal Employees Pension System (HMEPS), and Houston Police Officers' Pension System (HPOPS), must be no less than the normal cost plus the level percentage of salary payment necessary to amortize the unfunded actuarial accrued liability (UAAL) over a period that does not exceed 30 years. In addition, the bill would prevent changes to certain plan provisions that would result in an increase in the amortization period in excess of 30 years.

 

ACTUARIAL EFFECTS

The HFRRF actuarial analysis predicts the bill would have no impact on contribution requirements or funded status of the plan. The HMEPS actuarial analysis indicates the immediate impact is to increase the FY 2018 contribution from an estimated $197 million (or 31.36% of payroll) to $203 million (or 32.26% of payroll). The HPOPS actuarial analysis indicates the immediate impact is to decrease the FY 2018 contribution from an estimated $316.7 million to $174.6 million. Both HMEPS and HPOPS actuarial analyses note the bill does not provide guidance regarding the City's contribution if the amortization period is determined to be less than 30. Also, the bill would make no explicit changes to current benefit provisions so there would be no impact to the UAAL or funded ratio of the three retirement systems.

There are at least two potential interpretations regarding the extent to which the bill impacts the City's contributions to HMEPS and HPOPS relating to the current Meet & Confer agreements:

• The actuarial analyses provided for both HPOPS and HMEPS have interpreted the bill to completely negate all aspects of the contribution requirements under the existing Meet & Confer agreements and therefore require an immediate change to all future required contributions.
• The PRB interpretation is that while the minimum required amount is impacted, the commitment to contributions in excess of the minimum as outlined under the most recent Meet & Confer agreements for HPOPS and HMEPS is not negated by these changes and would therefore continue.

 

The analysis for HFRRF states the bill has no impact on the actuarial soundness of the plan. Under the interpretation presented by the actuarial analyses for HPOPS and HMEPS, the impact to the actuarial soundness of the plans is unclear because the impact to contributions after FY 2018 is unclear.

 

Under the PRB interpretation, this bill would potentially increase the required contribution in the short-term, but would not significantly impact the contributions over the long-term and would not be expected to change the actuarial soundness of the plan.

 

SYNOPSIS OF PROVISIONS

HB 43 would amend Article 6243e.2(1), Article 6243g-4, and Article 6243h, of Vernon's Texas Civil Statutes by setting a minimum required contribution from the City equal to the normal cost plus the level percentage of salary payment necessary to amortize the UAAL over a period that does not exceed 30 years, for all three plans. The bill would not allow the systems to make certain provision changes that would result in the amortization period increasing above 30 years, or raise their amortization period at all if their amortization period is already above 30 years.  

 

The changes would be effective September 1, 2017.

 

FINDINGS AND CONCLUSIONS

According to the PRB interpretation, this bill would potentially increase the required contribution in the short-term, but would not significantly impact the contributions over the long-term and would not be expected to change the actuarial soundness of the plan. The reason for this conclusion is as follows.

 

For HMEPS, the existing Meet & Confer agreement outlines a minimum required contribution equal to the contribution necessary to amortize the UAAL over a 30 year period, but not greater than 31.36% of payroll for FY 2018, with the maximum allowable contribution increasing by approximately 2% per year. Once the maximum stated contribution percentage meets or exceeds the contribution necessary to amortize the UAAL over a 30 year period, all future required contributions would be based on the contribution necessary to amortize the UAAL over a closed 30 year period. Based on prior projections prepared by HMEPS, the expected contribution necessary to amortize the UAAL over a 30 year period is relatively constant, as a percentage of payroll, from one year to the next. Under this assumption, the required contribution for FYE 2019 would be the anticipated 30 year contribution, 32.26% of payroll, which is less than the 33.36% maximum contribution outlined in the Meet & Confer agreement for FY 2019. That in turn would require all future contributions to be determined using a 30 year closed period amortization beginning with the FY 2019 contribution. Under a 30 year closed period amortization, the annual required contribution should always be greater than or equal to the minimum required by the bill. Therefore, only the FYE 2018 contribution would be impacted by the bill.

 

For HPOPS, the contributions under the current Meet & Confer agreement consist of 2 pieces, 1) a contribution of $143 million for FY 2018, increasing by $10 million per year until the plan is 100% funded and 2) the contribution necessary to increase the funded ratio to 80% any time the funded ratio falls below 80% in a given year. For FY 2018, the total contribution under the current Meet & Confer agreement is $316.7 million. This is well in excess of the minimum required contribution of $174.6 million that would be required under the bill; therefore the FY 2018 contribution would not be impacted by the change in legislation. Future contributions could potentially be impacted where the minimum contribution required by the bill would be larger than what might otherwise be required under the existing Meet & Confer agreement; however, based on recent projections prepared by the system, the expected amortization period is 20 years, which implies most contributions over the next 20 years are already in excess of the minimum required contributions outlined in the bill.

 

METHODOLOGY AND STANDARDS

The HFRRF analysis relies on assumptions and methods outlined in the July 1, 2016 actuarial valuation report. The PRB has not received a copy of this report. The actuarial analyses prepared for HMEPS and HPOPS did not identify the actuarial assumptions and methods of computation used in the respective analyses.

 

According to the PRB actuaries, to the best of their knowledge, no material biases exist with respect to the data, methods or assumptions used to develop the analyses other than those specifically identified above and in the actuarial review. The PRB did not audit the information provided but has reviewed the information for reasonableness and consistency with other information provided by or for the affected retirement systems. The PRB is not responsible for the accuracy or completeness of the information provided to the agency. 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 HFRRF, HPOPS, or HMEPS 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

HFRRF Actuarial Analysis by David L. Driscoll, FSA, EA, MAAA, FCA; and Janie Shaw, ASA, MAAA, Conduent Business Services, LLC, March 24, 2017

HPOPS and HMEPS Actuarial Analyses by Mark R. Randall, FCA, MAAA, EA, and Joseph P. Newton, FSA, EA, MAAA, Gabriel Roeder Smith & Company, March 17, 2017.

Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, March 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 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).