Honorable Larry Taylor, Chair, Senate Committee on Education
John McGeady, Assistant Director Sarah Keyton, Assistant Director
Legislative Budget Board
HB3 by Huberty (Relating to public school finance and public education; authorizing the imposition of a fee.), Committee Report 2nd House, Substituted
Based on the August 31, 2018 Actuarial Valuation. ACTUARIAL EFFECTS According to the actuarial review, TRS is currently actuarially unsound. TRS would remain actuarially unsound with an increase in the amortization period from 87 to 95 years.
Difference Unfunded Actuarial Accrued Liability (billions)
$1.20 Amortization Period (years)
8 Actuarially Determined 30-year Employer Contribution Rate (% of payroll)
The bill would provide every full-time classroom teacher and librarian a salary allotment of $5,000 beginning in the 2019-2020 school year. The bill would also provide additional targeted pay raises through increases in the Minimum Salary Schedule (MSS) and the teacher incentive allotment.
The actuarial analysis notes that the bill would not explicitly change the benefit provisions of TRS, but the benefits paid from and contributions paid into TRS are based on the salaries of the individual members and thus a significant change to the salary levels would have an impact on the financial position of TRS over the short term.
The actuarial analysis of Senate Bill 3, as Introduced, states the salary increases related to the $5,000 pay raise proposed in the bill would exceed the current payroll growth assumption of 3 percent. The analysis projects this would increase the unfunded actuarial accrued liability from $46.1 billion to $47.3 billion, which is an increase of $1.2 billion. The higher payroll would lead to increased future member contributions which would slightly offset the impact of the increased liability. The net impact would be an increase in the calculated funding period from 87 years to 95 years as of August 31, 2018 and an increase in the actuarially determined employer contribution (ADEC) rate from 9.48 percent to 9.50 percent. Additionally, this anasumes increases in the MSS and the teacher incentive allotment may have a small impact on the UAAL and amortization period.
SYNOPSIS OF PROVISIONS
The bill would provide a one-time $5,000 salary increase to all full-time classroom teachers effective with the 2019-2020 school year. This increase in pay would not be taken into consideration when determining the minimum monthly salary required under the Education Code, Section 21.402.
The bill would also provide targeted pay raises through increases in the MSS and the teacher incentive allotment.
According to the actuarial review, TRS is currently actuarially unsound. TRS would remain actuarially unsound with an increase in the amortization period from 87 to 95 years.
The bill would be effective September 1, 2019.
FINDINGS AND CONCLUSIONS
The actuarial analysis assumes approximately 42.6 percent of the TRS active population would be eligible for the $5,000 salary increase. The bill would not affect TRS directly, but previously unanticipated changes to member pay can impact members' total expected compensation.
The Actuarial Analysis (AA) notes that their assumptions include both individual member salary increases and overall payroll growth which takes into account all forms of potential increases. While these assumptions are long-term estimates and therefore annual deviations are expected, the bill would provide a material salary increase that would exceed the current payroll growth assumption of 3 percent, resulting in a $1.2 billion increase in total liability. Additionally, the AA notes that the impact of this increase on the estimated funding period is partially offset due to the increase in expected future contributions. The Actuarially Determined Employer Contribution (ADEC) necessary to amortize the unfunded accrued liability over a 30-year period would only need to increase by 0.02 percent from 9.48 percent to 9.50 percent. Despite only a slight increase in the ADEC rate, the amortization period would increase by 8 years from 87 to 95 years because elevated funding periods such as 87 years are particularly sensitive to even minor changes in the assets and/or liabilities.
PRB's actuarial review notes that the rate of contribution, as a percent of payroll, would not be impacted by this bill. However, any increase in expected payroll would have an impact on the expected contributions made to TRS. The actuarial analysis estimated the following increase in total state contributions to TRS for FY 2020-2025:
|Year||Contribution Increase ($ millions)|
The actuarial review further notes the values provided above rely on the assumption that state-provided salary increases would be lower than normally assumed for the 3 years following the 2019-2020 school year. The actuarial analysis above is based solely on the impact of the $5,000 increase and does not take into account the additional target pay raises. Therefore, if future salary increases are assumed to remain at current levels, both the total liability and amortization period are likely to be slightly higher than shown above.
METHODOLOGY AND STANDARDS
For purposes of determining increases in total payroll growth, the actuarial analysis (AA) assumed approximately 1 percent of the current 3 percent payroll growth assumption is due to State-provided increases and 2 percent occurs from other sources. Further, the AA assumed the 1 percent State-provided increase would not be provided for the following 3 school years (i.e. the 2nd year of the biennium and the following biennium). Therefore, for approximately 42.6 percent of the active population, the expected payroll growth is 2 percent plus $5,000 for FY 2020, 2 percent for FY 2021-2023, returning to 3 percent for years thereafter. All other actuarial assumptions and methods are the same as used in the TRS actuarial valuation for August 31, 2018.
According to the PRB actuary, the actuarial assumptions, methods and procedures are reasonable for the purpose of this analysis. 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.
Actuarial Analysis of Senate Bill 3, as Introduced, by Daniel Siblik, ASA, Consultant and Actuary, and Joseph P. Newton, FSA, Gabriel Roeder Smith & Company, February 1, 2019.
Actuarial Review of Senate Bill 3, as Introduced, by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, February 6, 2019.
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 sufficient to cover the normal cost and to amortize the UAAL over as brief a period as possible, but not to exceed 30 years, with 10-25 years being the preferable target range.
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).
338 Pension Review Board
WP, HL, AM, ASa, KFB