TO:	Honorable Dan Flynn, Chair, House Committee on Pensions
FROM:	Ursula Parks, Director, Legislative Budget Board
IN RE:	HB3190 by Uresti, Tomas (Relating to an adjustment to certain benefits paid by the Teacher Retirement System of Texas.), As Introduced

Based on the February 28, 2017 Update of the August 31, 2016 Actuarial Valuation

Teacher Retirement System of Texas (TRS)	Current	Proposed	Difference
Actuarial Funded Ratio	79.50%	79.30%	(0.2%)
Unfunded Actuarial Accrued Liability (billions)	$36.60	$37.00	$0.40
Amortization Period (years)	34.3	35.4	1.2

ACTUARIAL EFFECTS

The bill would provide a 0.5% cost of living increase (COLA) to retirees of TRS. The actuarial analysis provided by GRS assumes that the retiree has to be retired on or before August 31, 2016.

The bill would increase the unfunded actuarial accrued liability (UAAL) of TRS by $0.4 billion, decrease the actuarial funding ratio from 79.5 percent to 79.3 percent, and increase the amortization period by 1.2 years, from 34.3 years to 35.4 years. According to the PRB actuarial review, the bill would have a slight negative effect on the actuarial soundness of TRS. Under the current PRB Guidelines for Actuarial Soundness, 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 (TRS has a 31-year amortization limit set in its statute). Additionally, the passage of this bill would not be allowed under Texas Government Code Section 821.006, since the amortization period of TRS exceeds 30 years by one or more years.

SYNOPSIS OF PROVISIONS

The bill would add Section 824.7015 to the Government Code, which would increase the amount of the monthly service retirement benefit, disability retirement benefit, or death benefit paid to TRS retirees by a 0.5 percent. The bill would impact current retirees as of the effective date of the bill.

The bill would take effect immediately if it receives a vote of two-thirds of all the members elected to each house. If the bill does not receive the necessary votes for immediate effect, it would take effect September 1, 2017.

FINDINGS AND CONCLUSIONS

According to the actuarial analysis provided by GRS, in order for the funding period to be the statutory benchmark of 30 years, the State's contribution rate would need to increase by 0.35% from 7.7% (the 7.7% includes the State's 6.80% plus the additional contributions made by employers that do not provide social security coverage which is assumed to be approximately 0.9% of total payroll) to 8.05%.The first 0.29% of pay is the increase necessary to fund the current UAAL over 30 years. An additional 0.06% of pay would be needed to pay for the ad hoc COLA over the next thirty years. The actuarial analysis also recommends that the State make additional appropriations so that the COLA does not impact the funding period of TRS in any way by either appropriating a one-time lump sum of  approximately $449 million during fiscal year 2018 or by increasing the State's contribution rate over a shorter duration of 10 to 15 years. The actuarial analysis also notes that this would be the most sustainable and equitable policy for providing this type of supplemental payment. Otherwise, all other financing alternatives create a drag on the System requiring future taxpayers to pay for a benefit for current retirees.

The actuarial review notes that these changes would impact current retirees as of the effective date of the bill.

METHODOLOGY AND STANDARDS

The TRS analysis relies on the actuarial value of assets as of the mid-year February 28, 2017 actuarial valuation, and the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS actuarial valuation as of August 31, 2016.

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, Gabriel Roeder Smith & Company, 4/26/2017.

Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, 4/27/2017.

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).

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).