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 0.03% for ERS and would not change for LECOSRF. The amortization period for ERS would decrease by 2 years (from 38 years to 36 years) and the UAAL would increase by $7.9 million (from $9,481.9 million to $9,489.8 million). The amortization period for LECOSRF would remain at infinite and the UAAL would increase by $49.3 million. According to the Teacher Retirement System's (TRS) actuarial analysis, the normal cost for TRS would not change and its UAAL would decrease by $130 million.

The actuarial review 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 a total of 20.01% of payroll (or rather 20.05%, due to the Section 814.604 COLA) for the ERS plan, and from 1.00% to a total of 2.49% of payroll, in addition to expected annual court fees of $19.2 million, for LECOSRF in order for the systems to meet the statutory under 31-year amortization requirement.

Assuming the under 31-year amortization limit set in the governing statute was achieved for ERS and LECOSRF, the changes to key financial measures are summarized below:

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

Employees Retirement System of Texas (ERS)	Current	Proposed	Difference
Actuarial Accrued Liability (AAL) (in millions)	$36,471.80	$36,479.70	$7.90
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	$9,489.80	$7.90
Amortization Period (years)	38	36	-2
Covered Payroll (in millions)	$7,111.50	$7,298.00	$186.50
Normal Cost (% of payroll)	12.28%	12.31%	0.03%
Contribution Rate Needed to Fund Normal Cost Plus Amortize the UAAL Over 31 years (% of payroll)	20.17%	20.01%	-0.16%

Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF)	Current	Proposed	Difference
Actuarial Accrued Liability (AAL) (in millions)	$1,375.00	$1,424.30	$49.30
Actuarial Value of Assets (AVA) (in millions)	$953.10	$953.10	$0.00
Unfunded Actuarial Accrued Liability (UAAL) (in millions)	$421.90	$471.20	$49.30
Amortization Period (years)	Infinite	Infinite	N/A
Covered Payroll (in millions)	$1,823.60	$2,131.70	$308.10
Normal Cost (% of payroll)	1.81%	1.81%	0.00%
Contribution Rate (In Addition to Expected Court Fees) Needed to Fund Normal Cost Plus Amortize the UAAL Over 31 years (% of payroll)	2.44%	2.49%	0.05%

SYNOPSIS OF PROVISIONS
The bill would amend Texas Government Code to expand the definition of employees that are eligible to participate in LECOSRF. This expanded definition would include approximately 2,600 State employees that are currently participating in ERS and primarily consists of certain employees of the Texas Juvenile Justice Department. The expanded definition would also include certain employees currently participating in the TRS. The bill would require each employee that is currently a member of ERS or TRS on December 31, 2017 and becomes eligible to participate in LECOSRF as a result of this proposal to make an affirmative election to begin membership in LECOSRF beginning January 1, 2018. All future members would be automatically enrolled.

If passed, this Act would take effect September 1, 2017.

FINDINGS AND CONCLUSIONS
The ERS actuarial analysis assumes that 4,000 employees would transfer from TRS to ERS with a payroll of $186.5 million. Under Texas Government Code Section 811.006, the bill could not be enacted without first establishing total contribution rates to both ERS and LECOSRF that bring each of their amortization periods down to below 31 years.

The PRB actuarial review states that based on the assumptions made under the bill, the actuarial analyses, prepared by GRS, are reasonable estimates of the change due to the bill. PRB's actuarial review was based on the systems' interpretations of the bill effects. Under ERS's interpretation, affected members already in ERS would retain the salary averaging, retirement eligibility, and all other aspects of the LECOSRF tier associated with their ERS hire date. Transferring members from TRS would receive ERS and LECOSRF Tier 3 benefits (i.e., for hire date after August 31, 2013). Also, it appears that transferring employees from TRS would have their service credit for non-occupational disability retirement and death benefits eligibility restricted in accordance with Chapter 803.201 unless they become eligible for a service credit transfer under Chapter 805.

METHODOLOGY AND STANDARDS
The ERS, LECOSRF, and TRS analyses rely on the participation 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
ERS, LECOSRF Actuarial Analysis by R. Ryan Falls, FSA, EA, MAAA, Gabriel Roeder Smith & Company, March 9, 2017.
TRS Actuarial Analysis by Lewis Ward, Consultant, and Joseph P. Newton, FSA, Gabriel Roeder Smith & Company, April 12, 2017.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA Staff Actuary, Pension Review Board, April 15, 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).