ACTUARIAL EFFECTS
Based on the current plan provisions and the 2018 fiscal year total contribution rate of 19.50% for the ERS plan and 1.00% plus $19.2 million for LECOSRF, the amortization periods (years to amortize an unfunded actuarial accrued liability (UAAL)) exceed 31 years. Under the bill provisions, the normal cost would increase by 0.02% for ERS and would not change for LECOSRF. The amortization period for ERS would increase by 1 year (from 38 years to 39 years) and the UAAL would increase by $4.9 million (from $9,481.9 million to $9,486.8 million). The amortization period for LECOSRF would remain at infinite and the UAAL would increase by $41.2 million.

The 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 - to a total of 20.20% of payroll for the ERS plan, and to a total of 2.54% 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.

Based on the August 31, 2016, projected to August 31, 2017 actuarial valuations of ERS and LECOSRF

Employees Retirement System	Current	Proposed	Difference
(Dollar Amounts in Millions)
Employer Contribution	10.00%	10.00%	0.00%
Employee Contribution	9.50%	9.50%	0.00%
Total Contribution	19.50%	19.50%	0.00%
Normal Cost (% of payroll)	12.28%	12.30%	0.02%
Unfunded Actuarial Accrued Liability (millions)	$9,481.90	$9,486.80	$4.90
Amortization Period (years)	38	39	1

Law Enforcement and Custodial Officer Supplemental Retirement Fund	Current	Proposed	Difference
(Dollar Amounts in Millions)
Employer Contribution(including court fees)	1.55%	1.50%	-0.05%
Employee Contribution	0.50%	0.50%	0.00%
Total Contribution	2.05%	2.00%	-0.05%
Normal Cost (% of payroll)	1.81%	1.81%	0.00%
Unfunded Actuarial Accrued Liability (millions)	$421.90	$463.10	$41.20
Amortization Period (years)	Infinite	Infinite	N/A

 

SYNOPSIS OF PROVISIONS
The bill would add Section 811.0011 to the Government Code that would allow for an optional alternative definition for employees that are eligible to participate in the law enforcement and custodial supplemental retirement fund the board of trustees to adopt this alternative definition of custodial officer to allow participation of juvenile justice officers in LECOSRF, subject to the eligibility standards adopted by the ERS Board of Trustees (Board). A juvenile justice officer is defined as a member employed by the Texas Juvenile Justice Department, and holds a position as a juvenile correctional officer, caseworker, or other duties that include the custodial supervision of youth in the custody of that department.

The Board may only allow this alternate definition to be used if the Board determines that the amortization period for the unfunded actuarial liabilities of both ERS and LECOSRF does not exceed 31 years, and that participation would not negatively impact current benefits paid to members of either system. If the alternative definition goes into effect, the service credit established by an eligible juvenile justice officer before the rule's adoption is considered service credit established as a custodial officer for purposes of determining the officer's eligibility for benefits under LECOSRF. This Act would take effect on September 1, 2017.   

FINDINGS AND CONCLUSIONS
The actuarial analysis notes that the bill could impact approximately 2,200 juvenile justice officers by making them eligible for LECOSRF benefits.

The actuarial analysis also states that 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 brings each of their amortization periods down to below 31 years. Additionally, if the bill is enacted, the ERS COLA under Texas Government Code 814.604 would have to be made payable. The ERS actuarial analysis assumes that the 31-year amortization limit requirement set in statute for ERS would be met by increasing the total contributions for fiscal year 2018 for both plans - to a total of 20.24% of payroll for the ERS plan, and to a total of 2.54% of payroll, in addition to expected annual court fees of $19.2 million, for LECOSRF - in order to become actuarially sound.   

Alternatively, a one-time lump sum contribution could be used to meet actuarial soundness requirement. Assuming the bill is enacted, for the ERS plan, a one-time lump sum contribution as of August 31, 2017 of $850 million is projected to make the plan actuarially sound on an Actuarial Value of Assets basis, and the resulting ASC is 19.50% of payroll (which is the current statutory contribution rate). Assuming the bill is enacted, for the LECOSRF plan, a one-time lump sum contribution as of August 31, 2017 of $500 million is projected to make the plan actuarially sound on an Actuarial Value of Assets Basis, and the resulting ASC in addition to the annual court fee contribution of $19.2 million is 1.00% of payroll (which is the current staibution rate).

METHODOLOGY AND STANDARDS
The ERS analysis relies on the participant data; financial information, benefit structure and actuarial assumptions and methods used in the ERS actuarial valuations for August 31, 2016 and projected to August 31, 2017. According to the PRB staff actuary, 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 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, Senior Consultant, FSA, EA, eder Smith & Company, April 4, 2017.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 7, 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) s of service.
Unfunded Actuarial Accrued Liability (UAAL) - The Actuarial Accrued Liability (AAL) less the Actuarial Value of Assets (AVA).