TO: | Honorable Dan Flynn, Chair, House Committee on Pensions |
FROM: | Ursula Parks, Director, Legislative Budget Board |
IN RE: | HB3056 by Meyer (Relating to the participation in the Texas Municipal Retirement System of certain employees of certain municipalities subject to the Texas Local Fire Fighters Retirement Act.), As Introduced |
ACTUARIAL EFFECTS
The bill would allow the City of University Park (City) to close its current University Park Fireman's Relief and Retirement Fund (Retirement Fund) to new entrants and place new employees of the University Park Fire Department in the Texas Municipal Retirement System (TMRS).
Based on the January 1, 2015 Actuarial Valuation
University Park Firemen's Relief and Retirement Fund
Current Plan
If Bill Enacted
Change
Return on Assets/Discount Rate
8.00%
7.75%
-0.25%
Payroll Growth
4.00%
3.75%
-0.25%
Actuarial Accrued Liability (AAL)
$20,598,261
$21,133,693
$535,332
Actuarial Value of Assets (AVA)
$9,440,082
$9,440,082
0
Unfunded Actuarial Accrued Liability (UAAL)
$11,158,279
$11,693,611
$535,332
Amortization Period (years)
53.7
88.4
34.7
Employer Contribution
18.38%
18.38%
0.00%
Employee Contribution
13.62%
13.62%
0.00%
Total Contribution ((% of payroll and adjusted for overtime)
32.00%
32.00%
0.00%
Employer's Recommended 30-year Contribution Rate (% of payroll)
22.67%
24.46%
1.79%
BACKGROUND
TMRS member municipalities voluntarily join the retirement system and have their own retirement plans within the general framework of the TMRS Act. Plan provisions may vary from city to city depending upon the options selected by each individual municipality. Revisions to available options require legislative action. Each plan in TMRS is funded independently by the municipalities, its employees and investment earnings.
SYNOPSIS OF PROVISIONS Current employees of the City's fire department who are members of the Retirement Fund would continue to participate and would retire and receive benefits under that Fund. The bill does not specifically mention if employees first hired by the City fire department before the "closure effective date" and re-hired after the "closure effective date" would fall under the definition of employees excluded from the Retirement Fund. The provisions of this bill would take effect September 1, 2017. FINDINGS AND CONCLUSIONS The analysis indicates the expected impact of these changes is a decrease in the growth of City and member contributions because no new firefighters would be added to the fund; as well as a slightly lower expected rate of return on fund assets because an increasing portion of the trust fund would be needed in order to pay benefits. As a result, the actuaries reduced the associated assumptions. The analysis further notes that the rate of change of the assumed rate of return and payroll growth is expected to be slow at first, but the rate of decrease is expected to accelerate as time passes. It also states the actuaries do not believe it is possible to adopt a single assumed rate of return or a single payroll growth rate which is appropriate indefinitely. PRB actuaries note that the actuarial analysis does not provide a projection of expected contributions. As of right now, the Retirement Fund is funded based on a fixed rate of total payroll. Actual member contributions are 15% of total pay and actual City contributions are 15.54% of pay; however the City has been picking up 2% of the members contributions resulting in the City contributing 17.54% of total pay and the members contributing 13% of total pay. Since the members and the City contribute on a fixed rate basis, the expected Retirement Fund are not expected to change as a result of passage of this bill. The bill does not make any changes to benefit provisions for current members nor does it specifically require an increase in member or City contributions; however, the combination of the change in the assumed rate of return and payroll growth rate result in an increase in liabilities and amortization period for the Retirement Fund. It is important to note that the calculation of the amortization period on a level percent of payroll basis may not be appropriate if the plan is closed to new entrants. There is an implicit assumption when calculating an amortization period on this basis that total payroll will grow indefinitely and therefore the total dollar amount of contributions will also grow indefinitely. As the actuarial analysis notes, the rate of growth of total expected payroll (for members of the Retirement Fund) is expected to slow as the active population begins to decline. Ultimately, the total expected payroll will begin to decrease instead of grow. For this reason, the actuarial analysis notes that the assumed rate of payroll growth will need to decrease in the future, but does not attempt to quantify the impact of these future changes. Therefore, as long as the funding policy of the Retirement Fund is defined as a fixed percentage of total expected payroll total dollar contributions can be expected to increase in the near term, but slowly decrease as the active population declines. The PRB actuarial review further states that the Retirement Fund is subject to the Funding Soundness Restoration Plan (FSRP) requirements, as outlined in Texas Government Code Section 802.2015, based on the January 1, 2015 actuarial valuation. The FSRP requirements state that if a plan's actual contributions are not sufficient to amortize the UAAL within 40 years, and have not been for several years, the plan and its associated governmental entity are required to develop a plan to reduce the amortization period to 40 years. Given that the amortization period for the If Bill Enacted scenario in the table above is 88.4 years based on the current funding policy, closing the plan to new entrants would require the Retirement Fund and the City to work together to develop a new funding policy and/or modify benefits of current members in order to decrease the amortization period to 40 years to comply with the statutory requirement. Also, the specific language outlined in the FSRP requirements refer to "actual contributions" when making this determination. As noted above, if the funding policy of the Retirement Fund is defined as a fixed percentage of total expected payroll (of members of the Retirement Fund), then expected actual contributions calculated on this basis cannot be assumed to increase indefinitely, or even for a 30 or 40 year period. Therefore, any FSRP developed after the provisions in this bill are acted upon must take into account a declining payroll for the active population while the total liability continues to increase. METHODOLOGY AND STANDARDS SOURCES GLOSSARY Actuarial Accrued Liability (AAL) -The portion of the PVFB that is attributed to past service. Unfunded Actuarial Accrued Liability (UAAL) - The Actuarial Accrued Liability (AAL) less the Actuarial Value of Assets (AVA).
The bill would add Section 31A to the Texas Local Fire Fighters Relief and Retirement Act (TLFFRA) to allow the City of University Park to adopt ordinances that would concurrently:
b) allow these excluded employees to participate in TMRS.
The bill would also amend the definition of "Department" in Texas Government Code Section 851.001(7) of the TMRS Act to include employees of the City excluded from the Retirement Fund and allowed in TMRS in accordance with the proposed Section 31A of TLFFRA.
The PRB actuarial review notes that the bill would only impact employees of the City fire department hired on or after the "closure effective date" described above. The actuarial analysis for the Retirement Fund notes that closing the Retirement Fund to new entrants will result in a slowly declining active population and the decline of the total participant base over an unspecified number of years until no additional fund members exist. It also notes that the number of retirees and beneficiaries covered would remain relatively constant in the near term as new retirees and beneficiaries replace those who die. As of December 31, 2015, the Retirement Fund had a total of 78 members with the following breakdown of membership: 35 actives, 42 retirees and beneficiaries, and 1 vested terminated member.
The actuarial assumptions and methods use for the Retirement Fund are the same as used by the actuaries for the January 1, 2015 actuarial valuation, except for the lowering of the assumed rate of return to 7.75% from 8.00% and assumed payroll growth rate to 3.75% from 4.00%. The assumptions and methods used by the actuaries are reasonable for the near term, but as noted in the actuarial analysis, are likely not reasonable in the long-term and would need to be reduced further. The actuaries who performed the actuarial analysis do not believe it is possible to adopt a single assumed rate of return or a single payroll growth rate which is appropriate indefinitely.
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 University Park Firemen's Relief and Retirement Fund 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.
Actuarial Analysis by John M. Crider, Jr., ASA, MAAA; and Donna L. Hamaker, EA, March 24, 2017.
Actuarial Analysis by Mark R. Randall, MAAA, FSA, EA; and Joseph n, MAAA, FSA, EA, April 5, 2017.
Actuarial Review by Robert M. May, FSA, EA, MAAA, Board Actuary; and Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 9, 2017.
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.
Source Agencies: | 338 Pension Review Board
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LBB Staff: | UP, KFa
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