ACTUARIAL EFFECTS
The bill would expand the definition of compensation for employees that are eligible to participate in ERS and LECOSRF to include overtime pay.  The expanded definition would increase the actuarial cost of ERS and LECOSRF.

Employees Retirement System of Texas (ERS): The bill would increase the unfunded actuarial accrued liability (UAAL) by $472.0 million, from $9,481.9 million to $9,953.9 million, and the amortization period (years to amortize an unfunded liability) from 38 years to 40 years. The 31-year amortization limit requirement set in statute for ERS would be met by increasing the total contribution rate from 19.50 percent to 20.33 percent without regard to the cost of living adjustment (COLA) outlined in Texas Government Code Section 814.604 (20.37 percent when factoring in the Section 814.604 COLA) for FY 2018.

Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF): The bill would increase the UAAL by $41.7 million, from $421.9 million to $463.6 million. The amortization period would not change from infinite. The 31-year amortization limit requirement set in Texas Government Code Section 811.006 for LECOSRF would be met by increasing the total contribution rate from 1.00 percent to 2.54 percent in addition to expected annual court fees of $19.2 million for FY 2018.

The actuarial analysis 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 to the actuarially sound rates.

Summary of Changes to ERS (dollar amounts in millions) 

Projected Actuarial Valuation as of 08/31/2017	Current	If Bill Enacted	Change
Valuation Payroll for FY 2018	$7,111.50	$7,317.10	$205.6
Normal Cost Rate	12.28%	12.28%	0.00%
Actuarial Accrued Liability (AAL)	$36,471.80	$36,943.80	$472.0
Actuarial Value of Assets (AVA)	$26,989.90	$26,989.90	$0.0
Unfunded Actuarial Accrued Liability (UAAL)	$9,481.90	$9,953.90	$472.0
Funded Ratio (FR)	74.00%	73.10%	(0.9%)
Amortization Period	38	40	2

Summary of Changes to LECOSRF (dollar amounts in millions)
Normal Cost Rate

Projected Actuarial Valuation as of 08/31/2017	Current	If Bill Enacted	Change
Valuation Payroll for FY 2018	$1,823.60	$1,923.90	$100.3
1.81%	1.81%	0.00%
Actuarial Accrued Liability (AAL)	$1,375.00	$1,416.70	$41.70
Actuarial Value of Assets (AVA)	$953.10	$953.10	$0.00
Unfunded Actuarial Accrued Liability (UAAL)	$421.90	$463.60	$41.70
Funded Ratio (FR)	69.30%	67.30%	-2.00%
Amortization Period	Infinite	Infinite	N/A

SYNOPSIS OF PROVISIONS
The bill would amend Section 811.007(7) of the Texas Government Code to expand the definition of compensation for employees that are eligible to participate in ERS and LECOSRF. This expanded definition would include overtime pay. 

The bill would be effective September 1, 2017.

FINDINGS AND CONCLUSIONS
This bill would impact all active members as of September 1, 2017.

The actuarial analysis states that there is a risk of pre-retirement "pay spiking" where employees attempt to work additional amounts of overtime pay in the years prior to retirement, which are the years used to calculate the retirement benefit. Although the impact of pay spiking is not shown in the actuarial tables in their analysis, ERS anticipates this could result in additional increases in the actuarially accrued liability (AAL) and the actuarially sound contribution rate (ASC) if reasonable controls are not put into place. The actuarial analysis also includes an illustration to show that if its assumed, on average, pay spiking results in 2.0 percent higher benefits at retirement (in additional to the expected increase in benefits due to the inclusion of overtime pay), the projected accrued liability for ERS as of August 31, 2017 would increase by an additional $340 million and the ASC under Section 811.006 of the Texas Government Code would increase by an additional 0.44 percent of payroll for fiscal year 2018. For LECOSRF, the projected accrued liability as of August 31, 2017 would increase by an additional $16 million and the ASC by an additional 0.08 percent of payroll for fiscal year 2018.

The actuarial analysis assumes the compensation of non-Commissioned Peace Officer and Custodial Officer (CPO/CO) state employees would increase by 2.0 percent and the compensation of CPO/CO employees would increase by 5.5 percent when overtime is included in the definition of compensation. The actuarial review notes that actuarial analysis prepared by Gabriel Roeder Smith & Company (GRS) is a reasonable estimate of the changes due to the bill.

Under the current Pension Review Board (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 (ERS has a 31-year amortization limit set in its statute). Both ERS and LECOSRF would have infinite amortization periods (actuarially unsound) after bill enactment.

METHODOLOGY AND STANDARDS
An actuarial analysis must include a statement of the actuarial assumptions and methods of computation used in the analysis.  The assumptions and methods used in the analyses are the same as used in the ERS and LECOSRF actuarial valuations for 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 and 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
Actuarial Analysis by Actuary, R. Ryan Falls, FSA, EA, MAAA Gabriel Roeder Smith & Company, April 3, 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 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).
COLA - Cost-of-Living-Adjustment. 
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).