LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
85TH LEGISLATIVE REGULAR SESSION
 
April 17, 2017

TO:
Honorable Dan Flynn, Chair, House Committee on Pensions
 
FROM:
Ursula Parks, Director, Legislative Budget Board
 
IN RE:
HB1907 by Anderson, Rodney (Relating to retirement benefits for certain peace officers who are members of the Teacher Retirement System of Texas.), As Introduced

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

ACTUARIAL EFFECTS

If adopted, the bill would create a separate tier with enhanced benefits for certain members of Teacher Retirement System of Texas (TRS) classified as "peace officers." These enhanced benefits would include a higher multiplier and new retirement eligibilities if certain criteria for service are met for peace officers within TRS.

If the bill is enacted, the normal cost of TRS would be increased by less than one basis point. The unfunded actuarial accrued liability (UAAL) would be increased by $87.0 million, from an UAAL of $36,794 million to $36,881 million. The amortization period would also increase by 0.4 years, from 33.4 years to 33.8 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.


TRS       
Current  Proposed  Difference
Normal Cost (% of payroll) 10.05% 10.05% 0.00%
Total FY 2017 Effective Contribution Rate 15.40% 15.40% 0.00%
Unfunded Actuarial Accrued Liability (millions) $36,794 $36,881 $87
Amortization Period (years) 33.4 33.8 0.4

Based on the February 28, 2017 projected to August 31, 2017 Actuarial Valuation

SYNOPSIS OF PROVISIONS

The bill would create a separate tier for "peace officers" within TRS.  The bill defines a peace officer as a member of the retirement systemho has been commissioned by a public school district as a law enforcement officer under Section 37.081 or 51.203, Education Code, or other law.

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 unreduced retirement benefits from TRS at age 55 with 10 years of peace officer service or with 20 years of service regardless of age. Members with 20 years of peace officer service under age 57 who do not meet Rule of 80 are eligible to retire with combined benefits reduced by 5% per year from age 57.

Member contributions for peace officers would increase to 9.5% of annual compensation for service rendered after September 1, 2018. Employer contributions for service rendered after September 1, 2018 for peace officers would be 1.00% of members' compensation. 

FINDINGS AND CONCLUSIONS

The actuarial analysis states that under the proposal the impacted members would become eligible for unreduced retirement under the plan at age 57 or Rule of 80. In addition, the impacted members would have subsidized reduced retirement and earn the 0.5% increase in their benefit multiplier with twenty years of service. These provisions do not currently exist in TRS so there is no experience on which to base the assumed rates of retirement for these members. Therefore, the actuarial analysis used the assumed rates of retirement that Employees Retirement System of Texas (ERS) uses for members of the Law Enforcement and Custodial Officers Supplemental (LECOS) Retirement Fund. 

The actuarial analysis also notes that the benefits are designed to mimic the benefits available to members of the ERS who are eligible for benefits under the LECOS Retirement Fund. Impacted members would be required to contribute an additional 1.8% of pay above what other members of TRS contribute.

The actuarial review notes that the GRS determination of the cost to TRS is reasonable. 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 31-year amortization limits set in their statutes.) TRS is currently actuarially sound. The TRS amortization period would increase by 0.4 years from 33.4 years to 33.8 years, calculated as of August 31, 2017 if the bill is enacted. However, since the amortization period of TRS would exceed 30 years by one or more years, passage of this bill would not be allowable under the TRS funding statutes without a change to the contribution.

METHODOLOGY AND STANDARDS

The actuarial assumptions and methods are the same as used by GRS for the February 28, 2017 mid-year update, except for the retirement rates for members classified as Peace Officers are the same rates of retirement used in the August 31, 2016 actuarial valuation for the Law Enforcement and Custodial Officer Supplemental Retirement Fund. 

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, EA, MAAA, Senior Consultant, Gabriel Roeder Smith & Company, 4/13/2017.

Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, 4/13/2017.

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 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
LBB Staff:
UP, AM, TSI