ACTUARIAL EFFECT
The bill would amend the Texas Government Code to set the salary of a district court judge equal to 82.5 percent of the salary of a justice of the supreme court (other than the chief justice), sets other judicial court salaries relative to that of a justice of the supreme court (other than the chief justice) instead of a district court judge, and adds a Section to the Government Code to define the determination of the salary of a justice of a supreme court (other than the chief justice).

Based on the current plan provisions and the 2018 fiscal year total contribution rate of 19.50% for the Employees Retirement System (ERS) and approximately 23.123% for Judicial Retirement System Plan Two (JRS II), the amortization periods for the unfunded actuarial accrued liability (UAAL) for both retirement systems currently exceed 31 years. Under the bill provisions, the UAAL would increase by $22.2 million for ERS and $5.1 million for JRS II. While the amortization period for ERS would not be impacted, the amortization period for JRS II would increase from 76 years to infinite.

The PRB actuarial review states that 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. (ERS and JRS II have a 31-year amortization limit set in statute.) JRS II is currently actuarially unsound.  The bill, if enacted, would make JRS II more unsound by changing the amortization period from 76 years to infinite.

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

Judicial Retirement System of Texas Plan Two	Current	Proposed	Difference
Employer Contribution	15.66%	15.66%	0.00%
Employee Contribution	7.46%	7.46%	0.00%
Total Contribution	23.12%	23.12%	0.00%
Normal Cost (% of payroll)	21.05%	21.05%	0.00%
Unfunded Actuarial Accrued Liability (millions)	$37.40	$42.50	$5.10
Amortization Period (years)	76	Infinite	N/A

Employees Retirement System of Texas	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%	12.28%	0.00%
Unfunded Actuarial Accrued Liability (millions)	$9,481.90	$9,504.10	$22.20
Amortization Period (years)	38	38	0

SYNOPSIS OF PROVISIONS

The bill would amend Section 659.012(a) of the Texas Government Code to set the salary of a district court judge to equal to 82.5 percent of the salary of a justice of the supreme court (other than the chief justice). The bill would also set the salary of a justice of a court of appeals (other than the chief justice) to 91 percent of the salary of a justice of the supreme court (other than the chief justice), effective January 1, 2019.

The bill would add Section 659.0121 to define the determination of the salary of a justice of the supreme court (other than the chief justice) as the sum of:

•         one-third of the average salary, on January 1, of justices, excluding chief justices, on the highest appellate courts of the nine most populous states, as determined by the decennial census, not including Texas; plus

•         one-third of the salary, on January 1, of a judge of a United States court of appeals; plus

•         one-third of the average starting base salary, on January 1, of first-year associate attorneys employed with the five private law firms with the largest number of attorneys licensed in this state.

The bill would require the Legislative Budget Board to calculate the salary and notify the comptroller of the amount not later than March 1 of each year.

Except as otherwise provided by the act, the bill would take effect January 1, 2019.

FINDINGS AND CONCLUSIONS
GRS noted in the analysis that the bill does not attempt to modify any of the benefit or contribution provisions that are identified in Sections 811.006 or 840.106, and therefore it is the opinion of the actuary that the bill could be enacted while the State contributions to ERS and JRS II remain less than the contribution amounts outlined in Sections 811.006 and 840.106.

The actuarial analysis notes that the bill would limit annual judicial salary increases to not exceed the greater of four percent or the percentage by which the Consumer Price Index for All Urban Consumers ("CPI-U") published by the Bureau of Labor Statistics of the United States Department of Labor, or its successor index, increased during the previous calendar year.

The ERS actuarial analysis also stated that currently, supreme court pay is $168,000, and assumed future annual increases are 3.5% per year. Based on guidance from ERS staff, the analysis's interpretation of salary based on the provisions of Section 659.0121 would result in a salary level for supreme court justices of $185,136 for fiscal year 2018. Given the limit of annual increase of 4.0% per year under the bill and the current supreme court pay of $168,000, the new determination is projected to exceed the amount payable until October 1, 2032. The PRB's review of the analysis is based on this interpretation.

Since the bill would affect all judges, the analysis notes that the bill would cause a slight raise in State appropriations to fund JRS I, as it is not advance-funded, but funded through legislative appropriations.

The PRB actuarial review noted that the bill would increase the salary base for all current and future judges outlined in the bill, including: judges of a district court, justices of a court of appeals other than the chief justice, and justices of the supreme court other than the chief justice on or after January 1, 2019. The bill would also increase the service retirement benefit for current and future elected class members since the benefit calculation relies on the current salary of a district court judge, and for retired members of the elected class, the annuity is reset anytime the salary of a district court judge is changed. The raised salary base would impact the UAAL of ERS; the actuarial analysis notes that the UAAL would increase by $22.2 million if the bill is enacted.

METHODOLOGY AND STANDARDS
The JRS II analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the JRS II actuarial valuation as of 8/31/2016 and ERS actuarial valuation as of 8/31/2016.

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 JRS II 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 R. Ryan Falls, FSA, EA, MAAA, Gabriel Roeder Smith & Company 4/7/2017.

Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, 4/10/2017.

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).