TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB1906 by Anderson, Rodney (Relating to retirement benefits for certain peace officers who are members of the Teacher Retirement System of Texas, including the creation of a peace officer supplemental retirement fund.), As Introduced

The bill would amend the Government Code related to retirement benefits to create a Peace Officers Supplemental Retirement Fund (POSRF) within the Teacher Retirement System (TRS).  The bill would provide enhanced retirement benefits for certain peace officers who are members of TRS, including earlier retirement eligibility and a larger benefit multiplier (increased by 0.5 percent) for eligible members.

ACTUARIAL EFFECTS

The bill would provide enhanced benefits for peace officers through two different funds administered by the Teacher Retirement System of Texas (TRS).
 
For the TRS Pension Trust Fund, the bill would increase the normal cost by less than one basis point. While the enhanced benefits would be payable from the new supplemental fund, the standard 2.3% of pay annuity would still be payable from the TRS Pension Trust Fund. The actuarial analysis states that it is expected that the impacted members would retire earlier with the enhanced options than they otherwise would which would impact the costs of TRS. The bill would increase the unfunded actuarial accrued liability (UAAL) of TRS by $47 million, from $36,794 million to $36,841 million. The amortization period would increase by 0.1 years, from 33.4 years to 33.5 years. 

The passage of the 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. 
 
The bill would create a new supplemental fund for peace officers called the Peace Officers Supplemental Retirement Fund (POSRF).  The fund would be created with an UAAL of $39.5 million due to enhanced benefits provided for existing members on whose previous service time no additional contributions were made. The actuarial analysis states that the average normal cost of a TRS member is 9.93% of pay. The average normal cost for a member with the proposed enhanced benefits would be 13.18% of pay. Therefore, the enhanced benefits have an approximate normal cost of 3.25% of pay. Also, under the bill, the proposed contribution rate by the state of 2.13% of pay would not be sufficient to ever amortize the initial UAAL. A state contribution of 4.05% would be necessary to amortize the initial UAAL within 31 years.
 
The PRB actuarial review states that the bill would have a slight impact on the actuarial soundness of TRS.  However, the bill would also create the POSRF, a new statewide supplemental plan for peace officers that would be actuarially unsound.   
 
Based on the February 28, 2017 Actuarial Valuation:

Teacher Retirement System of Texas	Current	Proposed	Difference
Total FY 2017 Effective Contribution Rate*	15.40%	15.40%	0.00%
Unfunded Actuarial Accrued Liability (millions)	$36,794	$36,841	$47
Amortization Period (years)	33.4	33.5	0.1

*Employee contribution is 7.70% of pay. Employer contribution includes State contribution of 6.80% of pay and contributions from covered employers whose employees are not participating in Social Security of 1.50% of minimum salary schedule.
 
Based on the February 28, 2017 Actuarial Valuation:

Peace Officer Supplemental Retirement Fund (POSRF)	Current	Proposed	Difference
Total Contribution Rate	N/A	3.25%	3.25%
Normal Cost (% of payroll)	N/A	3.25%	3.25%
Unfunded Actuarial Accrued Liability (millions)	N/A	$39.5	$39.5
Projected Amortization Period (years)	N/A	Infinite	N/A

*The provisions of the bill propose a State contribution rate of 2.13% to fund POSRF.  According to the actuarial analysis provided by TRS, the required less than 31-year funding contribution rate would be 4.05% of payroll. 
 
SYNOPSIS OF PROVISIONS
 
The bill would provide enhanced benefits through TRS and a supplemental program for members of TRS classified as "peace officers." The bill defines a "peace officer" as a member of the retirement system who has been commissioned by a public school district as a law enforcement officer under Section 37.081 or 51.203, Education Code.  The bill would enhance the benefits payable to peace officers through new retirement eligibility requirements, a five year averaging period for the calculation of the final average earnings, and an increase of the benefit multiplier by 0.5% from 2.3% to 2.8% for members who attain 20 years of service as a peace officer.  Peace officers would become eligible for reduced retirement benefit at age 57, age 55 with 10 years of service, or rule of 80.  The bill wouequire the state to contribute 2.13% of aggregate compensation of the peace officers to the POSRF.  The impacted members would be required to contribute an additional 0.5% of pay above what other members of TRS contribute.
 
The bill would be effective immediately if receiving required votes; otherwise, would take effect September 1, 2017.
 
FINDINGS AND CONCLUSIONS

The bill would impact all TRS members who met the definition of "peace officer". The additional 0.50% multiplier for peace officers with at least 20 years of service will be paid from the POSRF. Therefore, part of the cost of this program is borne by the POSRF and some by TRS. The cost for TRS increases because the peace officers will now be eligible to commence their TRS benefits sooner (reduced at age 55 with 10 years of peace officer service).

The POSRF would have its own contribution requirements and would begin with an asset value of zero. The bill specifies a contribution requirement from the state equal to 2.13% of compensation for all members defined as "peace officers" plus the costs to administer the fund. Also, the member contribution rate for peace officers would increase by 0.5% (which would go to POSRF).

The actuarial analysis states that the average normal cost of a TRS member is 9.93% of pay. The average normal cost for a member with the proposed enhanced benefits is 13.18% of pay. Therefore, the enhanced benefits have an approximate normal cost of 3.25% of pay. The members would contribute 0.50% of pay and therefore, in order to pay for the remaining normal cost of the enhanced benefits, the state would need to contribute 2.75% of pay which is 0.62% more than the 2.13% of pay proposed in the legislation.

In addition, because the enhanced benefits will be paid to members who already have service as peace officers on which no contributions were made, the POSRF will start off with an unfunded liability of approximately $39.5 million. If this unfunded liability is paid for over 30 years, then the amortization cost would be approximately 1.30% of the impacted members' aggregate pay. This brings the necessary state contribution to the POSRF to a total of 4.05% of pay. Without this level of funding, the POSRF is not sustainable and will not be able to pay the benefits as proposed.

The actuarial review notes that The GRS determination of the costs to TRS and POSRF are reasonable.

The actuarial review also notes that TRS is currently actuarially sound.  Under the bill, TRS will remain actuarially sound, with a slight 0.1 year increase in the amortization period.  However, the bill would also create a new statewide plan (POSRF) that is actuarially unsound. Under the current PRB Guidelines for Actuarial Soundness, funding should be adequate to amortize the unfunded actuarial accrued liability 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.) 
 
METHODOLOGY AND STANDARDS

The actuarial assumptions and methods are the same as used by GRS for the August 31, 2016 actuarial valuation and for the February 28, 2017 mid-year update, but with adjusted retirement assumptions applying to the peace officers with enhanced benefits and/or earlier retirement possible.
 
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, and Joseph P. Newton, FSA, EA, MAAA, Gabriel Roeder Smith & Company, Consultants and Actuaries, April 13, 2017.

Actuarial Review by Mr. Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 13, 2017.
 
GLOSSARY OF ACTUARIAL TERMS

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).