LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
85TH LEGISLATIVE REGULAR SESSION
 
April 26, 2017

TO:
Honorable Joan Huffman, Chair, Senate Committee on State Affairs
 
FROM:
Ursula Parks, Director, Legislative Budget Board
 
IN RE:
SB685 by Seliger (Relating to the standard service retirement annuity for certain members of the elected class of the Employees Retirement System of Texas.), As Introduced

Based on the August 31, 2016 projected to August 31, 2017 Actuarial Valuation


Employees Retirement System of Texas (ERS)  Current  Proposed  Difference
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% 12.25% -0.03%
Unfunded Actuarial Accrued Liability (millions) $9,481.90 $9,453.00 ($28.90)
Amortization Period (years) 38 38 0
Funded Ratio 74.00% 74.10% 0.10%


ACTUARIAL EFFECTS
The bill would not change the amortization period of the Employees Retirement System of Texas (ERS) from 38 years. The bill would cause a decrease in the cost of benefits provided by ERS to approximately 170 active legislative members and a small number of active non-legislative members and vested terminated participants who retire on or after September 1, 2017. The bill would not have a material impact on the actuarial soundness (or actuarial unsoundness) of ERS.

According to the ERS actuarial analysis, the bill would decrease the normal cost rate by 0.03 percent of payroll, from 12.28 percent to 12.25 percent, and decrease the actuarial accrued liability (AAL) and unfunded actuarial accrued liability (UAAL) by $28.9 million.

The actuarial analysis found that the bill would not attempt to modify any of the benefit or contribution provisions identified in Section 811.006, and as such, could be enacted while the State contributions to ERS remain less than the contribution amount required for the system to meet the statutory 31-year amortization limit.
 

SYNOPSIS OF PROVISIONS
The bill would create Section 814.013(c), Government Code, which sets the standard service retirement annuity for service in the elected class of membership to an amount equal to two years of service credit in that class times two percent of the state salary paid to a district judge on August 31, 2017, which is $140,000. The change made by this Act would apply only to the standard annuity for a person retiring on or after September 1, 2017. This limitation does not apply to members of the elected class who are classified as district or criminal district attorneys, as defined in Section 812.002(a)(3).

The bill would be effective September 1, 2017.

FINDINGS AND CONCLUSIONS

The bill would reduce service retirement benefits for approximately 170 active legislative members and a small number of active non-legislative members and vested terminated participants who retire on or after September 1, 2017. Under the bill, the salary figure used for computing benefits is frozen at $140,000, the 2017 pay level for a district judge, and there would not be post-retirement adjustments to the benefit level, as there are now. The multiplier is also reduced from 2.3 percent to 2.0 percent.

Under the current 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. The actuarial review noted that ERS is currently actuarially sound.  The bill, if enacted, would not change the amortization period of ERS from 38 years. The actuarial review also found that the actuarial analysis prepared by GRS is a reasonable estimate of the changes due to the bill.

The bill, if enacted, would decrease the cost of benefits provided by ERS to members of the elected class who retire on or after September 1, 2017. Because the bill would reduce benefits, it results in a small cost savings. The actuarial analysis states that for the elected class members impacted by this proposal, the normal cost with the limitations in the proposal is about one-half the normal cost under the current provisions, which means under the bill, the benefit accruals would be about one-half as valuable as the current provisions. As a result, the reduction in cost for the population affected is significant even though the impact on the overall ERS plan may seem small. This reduction in value is a product of both the limitation on pay at retirement as well as the loss of future increases as the State district judge salary increases.

The ERS actuarial analysis also estimates that the bill would reduce the statutory total contribution rate necessary to amortize the UAAL within 31 years from 20.17 percent to 20.12 percent of payroll.


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 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 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 Ryan Falls, FSA, EA, MAAA, Gabriel, Roder, Smith & Company, March 8, 2017.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 26, 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).











Source Agencies:
338 Pension Review Board
LBB Staff:
UP, KFa