The actuarial review states that TRS is currently actuarially sound. Under the bill, TRS would be actuarially unsound, with an infinite amortization period so 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).

The actuarial analysis further states that because the bill does not provide for decreases in the benefits but only provides for potential increases it is not possible to define the bill as cost neutral. Therefore, the COLA provisions must have some value and any reasonable COLA assumption would increase the funding period above 30 by one or more years and passage of the bill would not be allowed under TRS funding statute, Texas Government Code Section 821.006.

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%	63.1%	-16.40%
Unfunded Actuarial Accrued Liability (millions)	$36,600	$83,000	$46,400
Amortization Period (years)	34.3	Infinite	N/A

SYNOPSIS OF PROVISIONS

The bill provides for an annual COLA for current and future retirees equal to the automatic COLA made by the U.S. Social Security Administration. The first COLA increase would be granted on January 1, 2018, and subsequent COLAs could be granted each year on January 1.  Additionally, the bill specifies that a COLA for a specific year would only be paid if the TRS Board finds the retirement system to be actuarially sound and that it has enough money to increase benefits that year. The bill provides for a partial COLA if the full COLA is unavailable.

The bill would be effective September 1, 2017.

FINDINGS AND CONCLUSIONS

The actuarial analysis states that the bill attempts to provide COLAs without having to advance fund them. This approach would basically keep the liability for future increases "off-sheet" and not recognized in the liabilities of the system because they are not "guaranteed" to be paid, even though there is an automatic trigger to pay them. GRS emphasizes that this type of provision is one of the largest contributing factors towards the poor funding status of many public funds across the country.

In addition, the actuaries note that an attempt to value this benefit using traditional actuarial methodologies can lead to circular logic where assuming the COLA is paid results in an amortization period that would not allow the COLA to be paid, while assuming the COLA is not paid results in triggering the provision requiring the COLmeasure.

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 appears 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 gislative 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, April 26, 2017.

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