| TO: | Honorable Joan Huffman, Chair, Senate Committee on State Affairs |
| FROM: | Ursula Parks, Director, Legislative Budget Board |
| IN RE: | SB2190 by Huffman (Relating to the public retirement systems of certain municipalities.), As Introduced |
SB 2190 would make significant changes to Articles 6243e.2(1) (affecting the Houston Firefighters' Relief & Retirement Fund (HFRRF)), 6243g-4 (affecting the Houston Police Officer's Retirement System(HPOPS)), and 6243h (affecting the Houston Municipal Employees Retirement System (HMEPS)), Revised Civil Statues, to reduce benefits, increase employee contributions, outline funding policies, codify certain actuarial assumption sand methods for purposes of valuing benefits, and detail an approach to making modifications to the assumptions, methods and benefits under certain economic scenarios with the intent of minimizing the volatility of future contribution requirements for the affected retirement systems. Currently, the City of Houston's (City) contribution structure for HFRRF is outlined in its governing statute, and for HMEPS and HPOPS the contributions are established through the most recent meet and confer agreements with the City.
The proposed changes of the bill, if enacted, would help strengthen the long-term sustainability and improve the actuarial soundness of the affected retirement systems by lowering the current and future liabilities.
Background on Actuarial Analyses
It is the our understanding that the actuarial analyses relating to SB 2190 provided for HFRRF, HPOPS, and HMEPS have been completed based on the language developed during negotiations between the City of Houston and the respective system. In some cases, this language differs from the language included in SB 2190. The PRB has noted in the Synopsis of Provisions section the differences between the plan provisions as outlined in the bill and the actuarial analyses and we have provided commentary in the Findings and Conclusions section regarding the potential impact of these differences. In addition, HFRRF did not provide an analysis of the bill. Per Texas Government Code Section 802.302(h), the PRB used an actuarial analysis prepared by Retirement Horizons Incorporated (RHI) at the direction of the City of Houston.
Baseline and If Bill Enacted Scenarios
The following table provides the key financial impact on HFRRF, HPOPS and HMEPS as provided in the actuarial analyses. The Baseline scenario utilizes assumptions, methods, and plan provisions described in the latest valuation reports from the systems (July 1, 2015 valuation reports for HFRRF and HMEPS and July 1, 2016 valuation report for HPOPS), with modifications, including a lowered 7.0% discount rate; the change from an open to a closed 30-year amortization period; and marking the assets to market.
The If Bill Enacted scenario shows the effect of the additional changes to assumptions, methods, increased employee contributions, and the decreased benefit provisions as contained in the bill.
The following tables outline the previously mentioned scenarios.
|
Houston Firefighters' Relief & Retirement Fund |
Baseline |
If Bill Enacted |
Change |
|
Discount Rate |
7.00% |
7.00% |
|
|
Amortization Method |
Ultimate EAN |
Ultimate EAN |
|
|
|
| ||
|
Actuarial Accrued Liabilities (AAL) |
$5,223,159 |
$4,249,641 |
($973,518) |
|
Actuarial Value of Assets (AVA) |
($3,729,670) |
($3,729,670) |
$0 |
|
Unfunded Actuarial Accrued Liability (millions) |
$1,493,489 |
$519,971 |
($973,518) |
|
|
| ||
|
Funded Ratio |
71.41% |
87.76% |
16.35% |
|
|
| ||
|
Employer Normal Cost |
34.69% |
13.14% |
(21.55%) |
|
Administrative Expense |
2.00% |
2.00% |
0.00% |
|
Amortization Payment |
34.28% |
10.68% |
(23.60%) |
|
Total Employer Contribution for FYE 2018 |
70.97% |
25.82% |
(45.15%) |
The definition of payroll changes under the bill to exclude overtime. To be consistent, total employer contribution and associated items making up that contribution are reported as a percentage of payroll excluding overtime in both the Baseline and If Bill Enacted scenarios. Also, the provision for administrative expenses expressed here exceeds the maximum allowable under the bill, which is 1.00%.
|
Houston Police Officer's Retirement System |
Baseline |
If Bill Enacted |
Change |
|
Discount Rate |
7.0% |
7.0% |
|
|
Amortization Method |
Individual EAN |
Ultimate EAN |
|
|
|
| ||
|
Actuarial Accrued Liabilities (AAL) |
$6,894,274 |
$6,081,391 |
($812,883) |
|
Actuarial Value of Assets (AVA) |
($4,758,079) |
($4,758,079) |
$0 |
|
Unfunded Actuarial Accrued Liability (millions) |
$2,136,195 |
$1,323,312 |
($812,883) |
|
|
| ||
|
Funded Ratio |
69.01% |
78.24% |
9.23% |
|
|
| ||
|
Employer Normal Cost |
29.82% |
12.86% |
(16.96%) |
|
Administrative Expense |
1.00% |
1.00% |
0.00% |
|
Amortization Payment |
22.14% |
17.91% |
(4.23%) |
|
Total Employer Contribution for FYE 2018 |
52.96% |
31.77% |
(21.19%) |
Both scenarios include the discounted value of expected POB proceeds ($750 million).
|
Houston Municipal Employees Pension System |
Baseline |
If Bill Enacted |
Change |
|
Discount Rate |
7.00% |
7.00% |
|
|
Amortization Method |
Individual EAN |
Ultimate EAN |
|
|
|
|
|
|
|
Actuarial Accrued Liabilities (AAL) |
$5,509,951 |
$4,734,999 |
($774,952) |
|
Actuarial Value of Assets (AVA) |
($2,400,023) |
($2,625,896) |
$225,873 |
|
Unfunded Actuarial Accrued Liability (millions) |
$3,109,928 |
$2,109103 |
($1,000,825) |
|
|
|
|
|
|
Funded Ratio |
43.56% |
55.46% |
11.90% |
|
|
|
|
|
|
Normal Cost (% of payroll) |
8.39% |
6.98% |
(1.41%) |
|
Administrative Expenses |
1.19% |
1.19% |
0.00% |
|
Amortization Payment |
29.64% |
19.67% |
(9.97%) |
|
Total Employer Contribution for FYE 2018 |
39.22% |
27.84% |
11.38% |
If Bill Enacted scenario includes the discounted value of expected POB proceeds ($250 million).Also, the provision for administrative expenses expressed here exceeds the maximum allowable under the bill, which is 1.00%.
ACTUARIAL EFFECTS
PRB's actuarial review states that the affected retirement systems are currently identified as being actuarially sound under the PRB Guidelines for Actuarial Soundness. However, the City has stated that its pension liabilities for the three retirement systems have risen to $8.1 billion and it is facing the prospect of increasing costs that have the potential to outpace its ability to pay. The proposed changes help strengthen the long-term sustainability and improve the actuarial soundness of the affected retirement systems.
Also, the PRB actuarial review states that the differences in the bill provisions versus the provisions valued in the actuarial analyses would have no material impact on the conclusions regarding actuarial soundness. Further, while the bill requires voter approval for the issuance of POBs, the HPOPS and HMEPS actuarial analyses do not address the impact on future costs if the proceeds of the POBs are not received. However, if the POBs are not issued, the bill provides that the amortization schedule established for the initial liability layer should be adjusted beginning with the annual required contribution for the fiscal year ending June 30, 2019. Since the bill requires an automatic adjustment of the required contributions for HPOPS and HMEPS should the systems not receive the planned POB proceeds; the bill would still serve to improve the actuarial soundness of these two systems.
Corridor Midpoint
The bill establishes a unique funding and benefit policy that establishes a "target" contribution rate for the City, develops a minimum and maximum corridor around the City's target contribution rate, and defines steps that must be taken should the annual calculated contribution move outside this corridor. The following tables outline the projected corridor midpoint for the three systems.
|
Forecast of Corridor Midpoint for HFRRF | ||||
|
FY |
City Normal Cost Rate |
Admin Expenses |
Amort. Of UAAL |
City Cont. Rate |
|
2017 |
36.48% | |||
|
2018 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2019 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2020 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2021 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2022 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2023 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2024 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2025 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2026 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2027 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2028 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2029 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2030 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2031 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2032 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2033 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2034 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2035 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2036 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2037 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2038 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2039 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2040 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2041 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2042 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2043 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2044 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2045 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2046 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2047 |
13.14% |
2.00% |
10.68% |
25.82% |
|
2048 |
13.14% |
2.00% |
0.00% |
15.14% |
|
Corridor Projection Results for HPOPS | |||||
|
Valuation as of July 1, |
Employer Normal Cost |
Employer Cont Rate for FY Following Val Date |
Employer Cont. Rate |
Comp (in Millions) |
Employer Cont (in Millions) |
|
2016 |
13.86% |
31.77% |
31.35% |
424.3 |
133 |
|
2017 |
13.89% |
31.85% |
31.77% |
436 |
138.5 |
|
2018 |
13.86% |
31.82% |
31.85% |
448 |
142.7 |
|
2019 |
13.88% |
31.84% |
31.82% |
460.3 |
146.5 |
|
2020 |
13.95% |
31.92% |
31.84% |
472.9 |
150.6 |
|
2021 |
14.00% |
31.98% |
31.92% |
485.9 |
155.1 |
|
2022 |
14.04% |
32.03% |
31.98% |
499.3 |
159.7 |
|
2023 |
14.07% |
32.07% |
32.03% |
513 |
164.3 |
|
2024 |
14.09% |
32.10% |
32.07% |
527.1 |
169.1 |
|
2025 |
14.10% |
32.12% |
32.10% |
541.6 |
173.9 |
|
2026 |
14.11% |
32.13% |
32.12% |
556.5 |
178.8 |
|
2027 |
14.11% |
32.13% |
32.13% |
571.8 |
183.7 |
|
2028 |
14.11% |
32.13% |
32.13% |
587.5 |
188.8 |
|
2029 |
14.12% |
32.14% |
32.13% |
603.7 |
194 |
|
2030 |
14.12% |
32.14% |
32.14% |
620.3 |
199.4 |
|
2031 |
14.12% |
32.14% |
32.14% |
637.4 |
204.8 |
|
2032 |
14.13% |
32.15% |
32.14% |
654.9 |
210.5 |
|
2033 |
14.13% |
32.14% |
32.15% |
672.9 |
216.3 |
|
2034 |
14.13% |
32.14% |
32.14% |
691.4 |
222.2 |
|
2035 |
14.14% |
32.14% |
32.14% |
710.4 |
228.3 |
|
2036 |
14.14% |
32.14% |
32.14% |
730 |
234.6 |
|
2037 |
14.14% |
32.13% |
32.14% |
750.1 |
241.1 |
|
2038 |
14.15% |
32.14% |
32.13% |
770.7 |
247.6 |
|
2039 |
14.15% |
32.13% |
32.14% |
791.9 |
254.5 |
|
2040 |
14.15% |
32.13% |
32.13% |
813.6 |
261.5 |
|
2041 |
14.16% |
32.13% |
32.13% |
836 |
268.6 |
|
2042 |
14.16% |
32.13% |
32.13% |
859 |
276 |
|
2043 |
14.16% |
32.13% |
32.13% |
882.6 |
283.6 |
|
2044 |
14.17% |
32.13% |
32.13% |
906.9 |
291.4 |
|
2045 |
14.17% |
32.13% |
32.13% |
931.9 |
299.4 |
|
2046 |
14.17% |
14.17% |
32.13% |
957.5 |
307.7 |
|
2047 |
14.18% |
14.18% |
14.17% |
983.8 |
139.4 |
|
Corridor Projection Results for HMEPS | |||||
|
Valuation as of July 1, |
Normal Cost/Employer Contribution Rate for Fiscal year Following Valuation Date |
Employer Contribution Rate for Fiscal Year |
Comp (in Millions) |
Legacy Liability Contributions (in Millions) |
Employer Contributions (in Millions) |
|
2016 |
8.17% |
29.36% |
613.8 |
180.2 | |
|
2017 |
8.21% |
8.17% |
630.7 |
124 |
175.5 |
|
2018 |
8.25% |
8.21% |
648 |
127.4 |
180.6 |
|
2019 |
8.29% |
8.25% |
665.8 |
130.9 |
185.8 |
|
2020 |
8.34% |
8.29% |
684.1 |
134.5 |
191.3 |
|
2021 |
8.37% |
8.34% |
702.9 |
138.2 |
196.9 |
|
2022 |
8.41% |
8.37% |
722.3 |
142 |
202.4 |
|
2023 |
8.44% |
8.41% |
742.1 |
145.9 |
208.4 |
|
2024 |
8.47% |
8.44% |
762.5 |
149.9 |
214.2 |
|
2025 |
8.50% |
8.47% |
783.5 |
154.1 |
220.4 |
|
2026 |
8.52% |
8.50% |
805.1 |
158.3 |
226.8 |
|
2027 |
8.54% |
8.52% |
827.2 |
162.7 |
233.1 |
|
2028 |
8.56% |
8.54% |
849.9 |
167.1 |
239.6 |
|
2029 |
8.58% |
8.56% |
873.3 |
171.7 |
246.4 |
|
2030 |
8.60% |
8.58% |
897.3 |
176.4 |
253.3 |
|
2031 |
8.62% |
8.60% |
922 |
181.3 |
260.5 |
|
2032 |
8.63% |
8.62% |
947.4 |
186.3 |
267.9 |
|
2033 |
8.64% |
8.63% |
973.4 |
191.4 |
275.4 |
|
2034 |
8.64% |
8.64% |
1,000.20 |
196.7 |
283.1 |
|
2035 |
8.65% |
8.64% |
1,027.70 |
202.1 |
290.8 |
|
2036 |
8.65% |
8.65% |
1,056.00 |
207.6 |
299 |
|
2037 |
8.66% |
8.65% |
1,085.00 |
213.3 |
307.1 |
|
2038 |
8.66% |
8.66% |
1,114.80 |
219.2 |
315.8 |
|
2039 |
8.67% |
8.66% |
1,145.50 |
225.2 |
324.5 |
|
2040 |
8.67% |
8.67% |
1,177.00 |
231.4 |
333.5 |
|
2041 |
8.68% |
8.67% |
1,209.40 |
237.8 |
342.6 |
|
2042 |
8.68% |
8.68% |
1,242.60 |
244.3 |
352.1 |
|
2043 |
8.69% |
8.68% |
1,276.80 |
251.1 |
361.9 |
|
2044 |
8.69% |
8.69% |
1,311.90 |
258 |
372 |
|
2045 |
8.70% |
8.69% |
1,348.00 |
265.1 |
382.2 |
|
2046 |
8.70% |
8.70% |
1,385.00 |
272.3 |
392.9 |
|
2047 |
8.71% |
8.70% |
1,423.10 |
- |
123.9 |
Actuarial Assumptions and Methods
The PRB actuaries have noted in their review that the non-prescribed assumptions and methods used in the actuarial analyses are reasonable. The bill mandates the use of the Ultimate Entry Age Normal (UEAN) cost method and a 7.00% assumed rate of investment return, rather than what the systems used in the most recently published actuarial valuations.
The Entry Age Normal (EAN) level percent of payroll cost method is a mathematical construct designed to spread the costs of a participant's total benefit as a level amount over their entire career. This is done by calculating an annual amount that will remain relatively constant when expressed as a percentage of pay, and be sufficient to fully fund the anticipated benefits when the participant separates service. This results in a relatively stable normal cost contribution requirement from year to year.
The PRB actuarial review further states that the UEAN cost method is a variation of the Entry Age Normal (EAN) cost method. The UEAN cost method calculates the total anticipated benefits, or Present Value of Future Benefits (PVFB), based on a member's actual benefit provisions, but calculates the future accruals or Present Value of Future Normal Costs (PVFFNC)using the benefit provisions for new hires. The Actuarial Accrued Liability(AAL) is the difference between the PVFB and PVFNC. The purpose of this approach is to produce a stable normal cost calculation over the anticipated careers of the entire population, not just over the individual participant's career. When comparing results between these two variations, the UEAN cost method will result in a higher AAL than EAN. However, this is offset by lower expected future normal costs. Both cost methods converge to the same values at the time the participant is expected to separate service.
The following tables show the changes to assumptions and methods for each system.
|
Summary of Changes in Assumptions for HFRRF | |||||||
|
| |||||||
|
|
July 1, 2015 Val |
Baseline |
If Bill Enacted | ||||
|
Cost Method |
Individual EAN |
Ultimate EAN |
Ultimate EAN | ||||
|
Discount Rate |
8.50% |
7.00% |
7.00% | ||||
|
Inflation |
3.00% |
2.75% |
2.75% | ||||
|
Payroll Growth |
3.00% |
2.75% |
2.75% | ||||
|
Individual Pay Increase Rate |
Nominal rate = Real rate inflation. No changes were made to the real rate so all nominal rates decreased in accordance with the change in inflation. | ||||||
|
Cost of Living Adjustment |
3.00% |
3.00% |
2.00% | ||||
|
DROP Interest Crediting Rate |
8.50% |
7.00% |
4.75% | ||||
|
DROP Duration |
5% 3 years 30% 8 years
65% 10 years |
9 years |
9 years | ||||
|
Payment of DROP balances |
Unknown |
Installments over 15 years for active members and 10 years for inactive members. |
A factor of 0.8654 was applied to active DROP balances and a factor of 0.9105 was applied to inactive DROP balances to account for the 4.75% DROP interest crediting rate. | ||||
|
Development of Valuation Pay |
Valuation pay is projected by increasing the prior year's pay with the nominal individual pay increase rate. |
Historical valuation pay was regressed with the nominal individual pay increase rate. |
Based on input from the City of Houston and the HFRRF actuary, the valuation pay was reduced 9% for future years to account for the removal of overtime. | ||||
|
Load of Nature of Average Monthly Salaries |
5% load applied to active liabilities and normal cost for differences between the definition of avg monthly salary (average of the highest 78 pay periods), and the average of the final 78 pay periods. |
5% load was removed for members with under 20 years of service. | |||||
|
|
|
| |||||
|
Summary of Changes in Assumptions for HPOPS | |||||||
|
| |||||||
|
|
July 1, 2016 Val |
Baseline |
If Bill Enacted | ||||
|
Cost Method |
PUC |
Individual EAN |
Ultimate EAN | ||||
|
Discount Rate |
8.00% |
7.00% |
7.00% | ||||
|
Payroll Growth |
3.00% |
2.75% |
2.75% | ||||
|
Ultimate Salary Increase Rate |
2.00% |
2.75% |
2.75% | ||||
|
Cost of Living Adjustment |
2.70% |
2.70% |
2.00% | ||||
|
DROP Interest Crediting Rate |
6.40% |
6.40% |
5.10% | ||||
|
Retirement Rates |
|
See age/service table in valuation |
For members hired after October 9, 2004, 3% per year the member's first retirement eligibility exceeds 45 is added to the retirement rate at first eligibility up to a maximum increase of 30% at age 55. For members in DROP as of July 1, 2016, retirement rates are multiplied by 110% to reflect that future employee contributions are no longer credited to the DROP balance. | ||||
| Summary of Changes in Assumptions for HMEPS | |||
|
July 1, 2015 Val |
Baseline |
If Bill Enacted | |
| Discount Rate |
8.00% |
7.00% |
7.00% |
| Inflation |
2.50% |
2.25% |
2.25% |
| Payroll Growth |
3.00% |
2.75% |
2.75% |
| Ultimate Salary Increase Rate |
3.25% |
3.00% |
3.00% |
| Cost of Living Adjustment |
Pre-2005 hires: 3.00% |
Pre-2005 hires: 3.00% |
1.00% |
|
Post-2004 hires: 2.00% |
Post-2004 hires: 2.00% | ||
| DROP Interest Crediting Rate |
4.65% |
4.65% |
4.00% |
SYNOPSIS OF PROVISIONS
SB 2190 would amend and add sections to Title 109, Revised Civil Statutes Articles 6243e.2(1), 6243g-4, and 6243h to reduce benefits (summarized in tables below), increase employee contributions (summarized in tables below), outline funding policies, codify certain actuarial assumptions and methods for purposes of valuing benefits, and detail an approach to making modifications to the assumptions, methods and benefits under certain economic scenarios with the intent of minimizing the volatility of future contributions requirements for the affected retirement systems. The bill would also require the city to make contributions as outlined by the risk sharing sections.
Risk Sharing Corridor
The bill would set baseline assumptions in statute to implement the risk sharing corridor. The corridor sets a minimum and maximum city contribution rate. In a falling-cost environment, gains are used to accelerate the payoff of unfunded liabilities or reduce the interest rate. In a rising-cost environment, adjustments are made to the amortization period,employee contributions, or benefits to reduce the city contribution rate.
Additional Reporting Requirements
The bill would add reporting requirements, including the requirement to conduct actuarial experience studies at least once every four years with the first experience study published no later than September 30, 2022. The systems must also contract with an outside investment consultant to perform an audit on investments at least once every three years. Final risk sharing valuations must be jointly submitted by the pension systems and the city to the PRB for validation and confirmation that the system and the city are in compliance with the article.
Written Agreements
The bill would allow the system and the city to enter into a written agreement to offer an alternative plan or plans, including defined contribution plans, if both parties consider it appropriate.
City Approval of POBs
The bill would amend Chapter 107, Local Government Code to require voter approval for POBs issued to fund the Houston pension systems.
Effective Date
Except as otherwise provided by the Act, the Act takes effect immediately if it receives a vote of two-thirds of all the members elected to each house, or September 1, 2017.
It is our understanding the actuarial analyses provided for HFRRF, HPOPS and HMEPS have been completed based on the language developed during negotiations between the City of Houston and the respective system. In some cases, this language differs from the language included in the bill. We have noted the differences in the following tables, which outline the primary changes to benefit provisions.
|
Summary of Plan Benefit Changes for HFRRF | |
|
| |
|
Employee Contributions | |
|
Current |
9.00% |
|
Proposed |
10.50% |
|
| |
|
Final Average Salary | |
|
Current |
Highest 78 pay periods of salary |
|
Proposed |
Highest 78 pay periods of salary, excluding overtime |
|
|
|
|
Retirement Benefit | |
|
Eligibility | |
|
Current |
20 Years of Service |
|
Proposed |
Rule of 70 for new hires |
|
|
|
|
Amount | |
|
Current |
Final Average Salary x [Years of Service (20 max) x 2.5% Years of Service (>20) x 3.0%; 80% max] |
|
Proposed |
Hired on or before effective date: Final Average Salary x [Years of Service prior to effective date (20 max) x 2.5% Years of Service prior to effective date (>20) x 3.0% Years of Service after effective date (20 max) x 2.75% per year Years of Service after effective date (>20) x 2.0%; 80% max] (The actuarial analysis states no maximum applies to the crediting rate earned after the effective date for members hired prior to the effective date.) |
|
| |
|
Termination Benefit | |
|
Current |
Terminate with at least 10 years of service but less than 20 years of service, choice of: Refund of employee contributions with 5% interest or Final Average Salary x 1.7% x Years of Service, payable at age 50 |
|
Proposed |
Members hire before the effective date will not receive interest on employee contributions made after the effective date
Members hired after the effective date receive a refund of employee contributions without interest only |
|
|
|
|
Cost of Living Adjustment (COLA) | |
|
Current |
3.0% compounded, beginning at age 48 |
|
Proposed |
Simple crediting rate of 100% of the 5 year smoothed return minus 5.00%%, not less than 0% or greater than 4%
For fiscal years ending June 30, 2018 and 2019, no minimum or maximum applies. For Fiscal years ending June 30, 2018, 2019 and 2020, the member must be 70 years of age or older. Members must be 55 years of age or older for fiscal years ending on or after June 30, 2021 |
|
| |
|
Deferred Retirement Option Plan (DROP) | |
|
Current |
Eligibility is 20 Years of Service
Interest credited is 100% of the 5 year average investment return, not less than 5.0% or greater than 10.0%
COLA and member contributions credited to account
No maximum participation period
Retirement annuity is increased upon exit by 2% per year of DROP participation up to a maximum of 20% |
|
Proposed |
Must be hired prior to effective date
Interest credited is 65% of the 5 year compounded average investment return, no less than 5.5%
COLA or member contributions not credited to account for participants who enter DROP on or after effective date (The actuarial analysis assumes this change applies to all current DROP participants, not just those who enter on or after the effective date.)
Member contributions not credited to account
Participation limited to 13 years (The actuarial analysis does not mention this maximum participation period, but assumed DROP participation of no more than 9 years, so the maximum has no effect.)
Retirement annuity is increased upon exit by 2% per year of DROP participation up to a maximum of 20% as long as accrued at least 20 years of service as of the effective date (The actuarial analysis assumes members must be current DROP participants to receive this increase.) |
|
|
|
|
Post Retirement Option Plan (PROP) | |
|
Current |
Up to 100% of DROP account, $5,000 Lump Sum payment, and/or a portion of monthly annuity may be deposited and earn the same interest credit as DROP accounts |
|
Proposed |
No new funds may be added to PROP accounts |
|
Summary of Plan Benefit Changes for HPOPS | |
|
| |
|
Employee Contributions | |
|
Current |
If sworn prior to October 9, 2004 9.00% If sworn after October 9, 2004 10.20% |
|
Proposed |
All 10.50% |
|
| |
|
Retirement Benefit | |
|
Eligibility (if sworn after October 9, 2004) | |
|
Current |
Age 55 with 10 Years of Service |
|
Proposed |
Rule of 70 |
|
|
|
|
Amount (if sworn prior to October 9, 2004) | |
|
Proposed |
Total benefit will be subject to maximum 80% of Final Average Salary (The actuarial analysis does not take into account this maximum.) |
|
| |
|
Termination Benefit (if sworn after October 9, 2004) (The actuarial analysis does not include this change.) | |
|
Eligibility | |
|
Current |
None |
|
Proposed |
10 Years of Service |
|
| |
|
Amount | |
|
Current |
None, refund of employee contributions (without interest) only |
|
Proposed |
Monthly annuity payable at age 60 equal to Years of Service x 2.25% x Final Average Salary or refund of employee contributions (without interest) |
|
| |
|
Cost of Living Adjustment (COLA) | |
|
Current |
Simple crediting rate of 80% increase in CPI-U, not less than 2,4% or greater than 8.0% |
|
Proposed |
Simple crediting rate of 100% of the 5 year smoothed return minus 5.00%, not less than 0% or greater than 4%
Must be 70 years of age or older as of April 1 of the fiscal year for fiscal years ending June 30, 2018 and 2019 and 55 years of age or older for fiscal years end on or after June 30, 2021 (The actuarial analysis assumes a COLA is granted for anyone 70 years of age or older for the fiscal year ending June 30, 2020.) |
|
| |
|
Deferred Retirement Option Plan (DROP) (if sworn prior to October 9, 2004) | |
|
Current |
Eligibility is 20 Years of Service
Interest credited is 100% of the 5 year average investment return, not less than 3.0% or greater than 7.0%
COLA credited to account
8.75% of member contributions are credited to account
No maximum participation period
Retirement annuity is recalculated upon exit as the greater of annuity credited to DROP immediately prior to DROP exit (i.e. including COLA) or using service at DROP entry and Final Average salary at DROP exit |
|
Proposed |
No entry after June 30, 2027
Interest credited is 65% of the 5 year compounded average investment return, no less than 2.5%
COLA not credited to account for participants who enter DROP on or after effective date (The actuarial analysis assumes this change applies to all current DROP participants, not just those who enter on or after the effective date.)
Member contributions not credited to account
Participation limited to 20 years
No recalculation of annuity at DROP exit for participants who enter DROP on or after effective date (The actuarial analysis assumes this change applies to all current DROP participants, not just those who enter on or after the effective date.) |
|
| |
|
Post Retirement Option Plan (PROP) (if sworn prior to October 9, 2004) | |
|
Current |
Up to 100% of DROP account, $5,000 Lump Sum payment, and/or a portion of monthly annuity may be deposited and earn the same interest credit as DROP accounts |
|
Proposed |
No new funds may be added to PROP accounts |
|
Summary of Plan Benefit Changes for HMEPS | |
|
| |
|
Employee Contributions | |
|
Current |
Group A: 5.00% Group B: 0.00% Group D: 0.00% |
|
Proposed |
Group A: 7.00% for FYE 2018; 8.00% thereafter Group B: 2.00% for FYE 2018; 4.00% thereafter Group D: 3.00% (2.00% for service benefit; 1.00% for cash balance benefit) |
|
| |
|
Post-Retirement Survivor Benefit (Groups A &B) | |
|
Current |
100% Joint & Survivor, no actuarial reduction |
|
Proposed |
80% Joint & Survivor, no actuarial reduction |
|
| |
|
Cost of Living Adjustment (COLA) | |
|
Current |
Group A/B: 3.0% not compounded, if hired before 2005; 2.0% not compounded, if hired after 2004. Group D: 0% |
|
Proposed |
50% of the rolling 5 year net investment return minus 2.00% less than the assumed rate of return (currently 5.00%), not less than 0.00% or greater than 2.00% |
|
| |
|
Deferred Retirement Option Plan (DROP) (Groups A & B) | |
|
Current |
Interest credited is 50% of the prior year investment return, not less than 2.5% or greater than 7.5%
COLA credited to account |
|
Proposed |
Interest credited is 50% of the rolling 5 year net investment return, not less than 2.5% or greater than 7.5%
COLA credited on or after 62 years of age |
FINDINGS AND CONCLUSIONS
Given that the bill provisions for the three retirement systems would strengthen the funding policy and reduce current liabilities, it increases the long-term funding security for all members of the affected retirement systems. It impacts all current and future active members because it increases the employee contributions for all three affected systems. In addition, certain classes of active and inactive members are impacted by changes in plan provisions.
As noted elsewhere, the benefit provisions valued under the actuarial analyses differ in various ways from the bill language. The PRB's impact statement reviews the benefit provisions evaluated by the actuarial analyses and does not review the additional bill provisions not reviewed in the actuarial analyses received by the PRB. The differences are briefly noted below.
For HFRRF, we note four (4) specific differences between the bill provisions and the actuarial analysis. Three (3) of the four(4) are related to participation in the DROP. We do not have sufficient data to determine the direction or magnitude of the impact of these differences.
For HPOPS, we note five (5) specific differences between the bill provisions and the actuarial analysis. Overall, incorporating these differences would likely increase the total liability and required employer contributions shown in the analysis. We do not have sufficient data to determine the magnitude of the impact, but believe it would be small.
Additionally, all three analyses make some adjustments to the starting assumptions and methods used in the most recent actuarial valuation in order to establish a “baseline” scenario to “normalize” the calculated liabilities and provide a clearer picture of the impact associated with the assumption, method, and benefit changes required by the bill.
In addition to these changes, there are additional considerations to note for the HFRRF actuarial analysis given it was prepared at the request of the City, and not at the request of the retirement system itself. Specifically, RHI did not have a complete census file and therefore relied on grouped census data for retirees, disabled members, beneficiaries, and members with deferred benefits,as well as aggregate DROP balances for inactive members as of from the July 1,2015, provided by HFRRF actuary. RHI also did not receive a formal actuarial communication from the HFRRF actuary to confirm the plan provisions or actuarial assumptions and methods being used. Given these issues, the actual costs and savings could be materially different from the results provided in the actuarial analysis provided by the City.
Based on the benefit provisions as provided in the analyses, the establishment of the Baseline scenarios for all three retirement systems, and assuming the issues raised specifically with the HFRRF analysis would not result in a material difference in results, the actuarial analyses provide a reasonable estimate of the changes due to the bill.
GASB EFFECTS
All three actuarial analyses include data showing impact on accounting information. The passage of SB 2190 with the assumption and benefit changes (lower discount rate, strengthened funding policy, employee contribution increases, and benefit reductions) is likely to have a positive impact on the retirement systems and the City under the Governmental Accounting Standards Board (GASB) reporting standards (GASB 67 & 68).
|
Houston Firefighters' Relief & Retirement Fund ($ amount in 000s) |
Baseline |
If Bill Enacted |
|
Total Pension Liability (TPL) |
$5,317,821 |
$4,164,952 |
|
Plan Fiduciary Net Position (FNP) |
$3,729,670 |
$3,729,670 |
|
Net Pension Liability (NPL) |
$1,588,151 |
$435,282 |
|
Houston Police Officer's Pension System ($ amount in 000s) |
Baseline |
If Bill Enacted |
|
Total Pension Liability (TPL) |
$7,400,000 |
$6,394,000 |
|
Plan Fiduciary Net Position (FNP) |
$4,080,000 |
$4,080,000 |
|
Net Pension Liability (NPL) |
$3,320,000 |
$2,314,000 |
|
Houston Municipal Employees Pension System ($ amount in 000s) |
Baseline |
If Bill Enacted |
|
Total Pension Liability (TPL) |
$5,584,635 |
$4,859,952 |
|
Plan Fiduciary Net Position (FNP) |
$2,400,023 |
$2,400,023 |
|
Net Pension Liability (NPL) |
$3,184,612 |
$2,459,929 |
METHODOLOGY AND STANDARDS
According to the PRB actuaries, to the best of their knowledge, no material biases exist with respect to the data, methods or assumptions used to develop the analyses other than those specifically identified above and in the actuarial review. The PRB did not audit the information provided but has reviewed the information for reasonableness and consistency with other information provided by or for the affected retirement systems. The PRB is not responsible for the accuracy or completeness of the information provided to the agency. 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 HFRRF, HPOPS, or HMEPS 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
City of Houston Cost Analysis for HFRRF by David A. Sawyer, FSA, EA, MAAA; and Carly A. Nichols, FSA, EA, MAAA, Retirement Horizons Incorporated, March 15, 2017.
HPOPS Actuarial Analysis by Mark R. Randall, FCA, MAAA, EA; and Joseph P. Newton, FSA, EA, MAAA, Gabriel Roeder Smith & Company, March 7, 2017.
HMEPS Actuarial Analysis by Joseph P. Newton, FSA, EA, MAAA; and Lewis Ward, Consultant, Gabriel Roeder Smith & Company, February 17, 2017.
Actuarial Review by Robert M. May, FSA, EA, MAAA, Board Actuary; and Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, March 17, 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.
Net Pension Liability (NPL) - The liability of employers and non-employer contributing entities for pension benefits shown on the entity's balance sheet for FYE 6/30/2015 and later. The NPL equals the TPL minus the market value of plan assets. (If plan assets exceed the TPL, there is a Net Pension Asset.)
Total Pension Liability (TPL) - The portion of the actuarial present value of projected benefit payments attributed to past periods of employee service under the Entry Age Normal valuation method.
Discount Rate - A single rate used to discount and calculate the TPL which is equivalent to discounting future payments reflected in the TPL at the long-term expected rate of return until plan assets are projected to be exhausted, and discounting at the municipal bond rate for subsequent payments reflected in the TPL.
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, NV, KFa
|