ACTUARIAL EFFECTS

The bill would amend Chapters 814 and 824 of the Texas Government Code by adding Sections 814.013 and 824.009, which would suspend annuity payments to members of Employees Retirement System of Texas (ERS) and Teacher Retirement System of Texas (TRS) who are convicted of certain offenses that arise from their employment and if the victim is a minor student.

According to the brief actuarial analysis provided by ERS, the proposed changes would not have an impact on the unfunded actuarial accrued liability (UAAL), the funded percentage, or the contribution necessary to amortize the UAAL over the actuarially sound period. Additionally, benefits could only decrease under the proposed legislation. TRS has indicated the bill would not have a material impact on their system.  The Pension Review Board (PRB) believes the bill could potentially impact these public retirement systems; however, it would not have a material impact on any system.

SYNOPSIS OF PROVISIONS

The bill would revoke the service retirement annuity for certain employees convicted of sexual misconduct. The bill amends Chapters 814 and 824, Government Code, which would make members of ERS and TRS who have, or had, regular direct contact with students and who are convicted of certain offenses that arise from such employment and the victim/student is a minor, ineligible for a full service retirement annuity from ERS and TRS. The bill would permit the resumption of full annuity payments or the accrual of service credit under certain circumstances. A member who is deemed ineligible for a full service retirement annuity under the bill would be allowed to request a refund of contributions, without interest. Benefits payable to an alternate payee would not be affected by a person's ineligibility to receive a full service retirement annuity.

Sections 814.013 and 824.009 would apply to an offense committed on or after the effective date of rules adopted by the boards of trustees of the Employees Retirement System of Texas and the Teacher Retirement System of Texas. The bill would take effect immediately with a two-thirds vote or on September 1, 2017 if the necessary vote is not received.

FINDINGS AND CONCLUSIONS

The actuarial review states that the bill would not change the situation of the affected public retirement systems being actuarially sound or unsound. Under the current PRB guidelines for actuarial soundness, funding should be adequate to amortize the unfunded actuarial accrued liability over a period which should never exceed 40 years, with 15-25 years being a more preferable target. ERS and TRS have 31-year amortization limits set in their statutes.

METHODOLOGY AND STANDARDS

The statement from ERS's actuary relies on the participant data, financial information, benefit structure, and actuarial assumptions and methods used in the ERS actuarial valuations for August 31, 2016. 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

ERS email with a statement from Ryan Falls, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, February 21, 2017.

TRS email with a statement from Merita Zoga, Director of Governmental Relations, February 21, 2017.

Actuarial Review by Kenneth J. Herbold, EA, Staff Actuary, Pension Review Board, February 21, 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).