ACTUARIAL EFFECTS
Based on the current plan provisions and the 2018 fiscal year total contribution rate of 19.50% for the Employees Retirement System of Texas (ERS) plan and 1.00% plus $19.2 million for the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF), the amortization periods (years to amortize an unfunded actuarial accrued liability (UAAL)) exceed 31 years for ERS and LECOSRF. Under the bill provisions, the normal cost would increase by 4.30% for ERS and increase by 0.78% for LECOSRF. The amortization period for ERS would increase from 38 years to an infinite amortization period and the UAAL would increase by $18,993.4 million (from $9,481.9 million to $28,475.3 million). The amortization period for LECOSRF would remain at infinite and the UAAL would increase by $790.2 million.

The actuarial analysis states that benefit improvements as proposed in the bill would not be allowed under Texas Government Code Section 811.006, unless the total contributions for fiscal year 2018 is increased for both plans - from 19.50% to 40.26% of payroll for the ERS plan, and from 1.00% to a total of 5.78% of payroll in addition to expected annual court fees of $19.2 million for LECOSRF.

Based on the August 31, 2016 and projected to August 31, 2017 Actuarial Valuation

Employees Retirement System of Texas (ERS)	Current	Proposed	Difference
Normal Cost (% of payroll)	12.28%	16.58%	4.30%
Funded Ratio	74.00%	48.70%	-25.30%
Actuarial Accrued Liability (AAL) (in millions)	$36,471.80	$55,465.20	$18,993.40
Actuarial Value of Assets (AVA) (in millions)	$26,989.90	$26,989.90	$0.00
Unfunded Actuarial Accrued Liability (UAAL) (in millions)	$9,481.90	$28,475.30	$18,993.40
Amortization Period (years)	38	Infinite	N/A
Covered Payroll (in millions)	$7,111.50	$7,111.50	$0.00

Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF)	Current	Proposed	Difference
Normal Cost (% of payroll)	1.81%	2.59%	0.78%
Funded Ratio	69.30%	44.00%	-25.30%
Actuarial Accrued Liability (AAL) (in millions)	$1,375.00	$2,165.20	$790.20
Actuarial Value of Assets (AVA) (in millions)	$953.10	$953.10	$0.00
Unfunded Actuarial Accrued Liability (UAAL) (in millions)	$421.90	$1,212.10	$790.20
Amortization Period (years)	Infinite	Infinite	N/A
Covered Payroll (in millions)	$1,823.60	$1,823.60	$0.00

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 4 percent COLA to the monthly service retirement, disability retirement, or death benefit to a retiree or beneficiary.

Additionally, the bill would require ERS 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 ERS actuarial analysis states that the one-time supplemental payment would apply to approximately 98,000 individuals receiving an annuity as of August 31, 2016. The actuarial analysis also notes that under this proposal the annuity will continue to increase over time. Regardless of the amount of the current annuity, the annual retirement benefits will be one-and-a-half times the fiscal year 2017 amount (50% increase) in nine years and double the amount (100% increase) in 17 years.

The PRB actuarial review states that under the Texas Government Code section 811.006, the bill cannot be enacted because ERS and LECOSRF would have infinite amortization periods (actuarially unsound) after bill enactment. The actuarial review also states that the actuarial analysis illustrates how rapidly a monthly benefit increases with an annual COLA, increasing by 39.2 percent over the original amount in 7 years and doubling in 17 years. The actuarial analysis assumes the one-time 10 percent COLA occurs on September 1, 2017, the annual 4 percent COLA begins September 1, 2018 and is made each September 1 thereafter, and the one-time supplemental payment is paid on January 1, 2018. The review states that the analysis prepared by GRS is a reasonable estimate of the changes due to the bill.

METHODOLOGY AND STANDARDS
The ERS and LECOSRF analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the respective actuarial valuations as of August 31, 2016 and projected to August 31, 2017.

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 ERS or LECOSRF 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 R. Ryan Falls, FSA, EA, MAAA, Senior Consultant, Gabriel, Roeder, Smith & Company, February 6, 2017.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 26, 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).