| TO: | Honorable Dan Flynn, Chair, House Committee on Pensions |
| FROM: | Ursula Parks, Director, Legislative Budget Board |
| IN RE: | HB397 by Allen (Relating to benefits paid by the Teacher Retirement System of Texas.), As Introduced |
ACTUARIAL EFFECTS
Based on current plan provisions and the 2018 fiscal year total contribution rate of 15.4%, the amortization period (years to amortize an unfunded actuarial accrued liability (UAAL)) exceeds 31 years for TRS. The bill would make several benefit enhancements that would increase the UAAL of TRS by $98.4 billion, from $36.6 billion to $135.0 billion, decrease the actuarial funding ratio from 79.5 percent to 51.2 percent, and significantly increase the amortization period from 34.3 years to an infinite amortization period.
According to the PRB actuarial review, the bill would have a significant negative effect on the actuarial soundness of TRS. Under the current PRB Guidelines for Actuarial Soundness, 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. (TRS has a 31-year amortization limit set in its statute). TRS is currently actuarially sound. Under the bill, TRS would be actuarially unsound, with an infinite amortization period.
Additionally, the passage of this bill would not be allowed under Texas Government Code Section 821.006, since the amortization period of TRS would exceed 30 years by one or more years.
Based on the February 28, 2017 Update of the August 31, 2016 Actuarial Valuation
Current
Proposed
Difference
Funded Ratio
79.50%
51.20%
-28.30%
Unfunded Actuarial Accrued Liability (millions)
$36,600
$135,000
$98,400
Amortization Period (years)
34.3
Infinite
N/A
SYNOPSIS OF PROVISIONS
The bill would amend the Government Code by adding a provision for a one-time, 10 percent increase to the monthly service retirement, disability retirement, or death benefit to a retiree or beneficiary. The bill would also provide an annual four percent COLA to the monthly service retirement, disability retirement, or death benefit to a retiree or beneficiary.
Additionally, the bill would require TRS to make a one-time supplemental payment of a retirement or death benefit equal to the lesser of $2,000 or the gross amount of the regular annuity payment to which the eligible annuitant is otherwise entitled to for the month of December 2017.
All provisions in the bill are limited to service credited in the employee class. The bill would take effect September 1, 2017.
FINDINGS AND CONCLUSIONS
The bill would impact all current and future employee class retirees, disabled retirees, survivors, and alternate payees. The actuarial review notes that the bill does not specify when the COLA goes into effect. The actuarial analysis assumed the first COLA benefit increase would be on September 1, 2018 and future COLAs would be effective on each September 1st.
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 actuaries, 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, Gabriel Roeder Smith & Company, 4/26/2017.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, 4/27/2017.
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).
| Source Agencies: | 338 Pension Review Board
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| LBB Staff: | UP, AM, TSI
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