LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
86TH LEGISLATIVE REGULAR SESSION
 
March 25, 2019

TO:
Honorable Jim Murphy, Chair, House Committee on Pensions, Investments & Financial Services
 
FROM:
John McGeady, Assistant Director     Sarah Keyton, Assistant Director
Legislative Budget Board
 
IN RE:
HB9 by Bonnen, Greg (Relating to the contributions to and benefits under the Teacher Retirement System of Texas.), As Introduced

Projected as of August 31, 2019
Teacher Retirement System of Texas (TRS) Current  Proposed  Difference
Unfunded Actuarial Accrued Liability (millions) $48,918 $48,918 $0
Amortization Period (years) 99 32 -67
Actuarial Soundness Unsound Unsound N/A

ACTUARIAL EFFECTS
The bill would increase the annual base employer contribution for TRS incrementally over the 2022-2026 fiscal years, providing for an ultimate increase of 2 percent over the five-year period. The bill would also provide a one-time supplemental payment to certain TRS annuitants.

Under the current PRB Pension Funding Guidelines, 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. TRS statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as no more than 31 years. According to both statutory and PRB criteria, TRS is currently actuarially unsound.  Under the bill, expected future funding would improve significantly but TRS would remain actuarially unsound with an amortization period of 32 years.

The PRB's actuarial review (AR) states that the one-time supplemental payment to certain TRS annuitants would be expected to cost approximately $658 million. However, this payment would be financed by a one-time appropriation from the State, in addition to the increased annual required contributions outlined under the bill and would therefore have no cost to the system.

Under Texas Government Code Section 821.006, the one-time supplemental payment could not be enacted without first establishing a total contribution rate to TRS that brings the amortization period down below 31 years.

SYNOPSIS OF PROVISIONS
The bill would increase the annual base employer contribution for TRS from 6.8 percent to 8.8 percent of payroll phased in over the 2022-2026 fiscal years.



  Contribution Rates  
Fiscal Year Base Supplemental* Member Total**
2020 6.80% 1.50% 7.70% 15.46%
2021 6.80% 1.50% 7.70% 15.46%
2022 7.80% 1.50% 7.70% 16.46%
2023 8.05% 1.50% 7.70% 16.71%
2024 8.30% 1.50% 7.70% 16.96%
2025 8.55% 1.50% 7.70% 17.21%
2026 8.80% 1.50% 7.70% 17.46%
*Paid by districts that do not participate in Social Security. Equal to approximately 0.91% of total payroll.
**Equal to the Base Rate (split between State and Employers) plus the member rate, plus 0.91% for Supplemental Rate, plus 0.05% additional contributions made on behalf of members who have returned to work.

The bill would also grant a one-time supplemental payment equal to the lesser of the annuitant's regular monthly annuity or $2,400 which is payable no later than September 2021.

The bill would take effect on September 1, 2019.

FINDINGS AND CONCLUSIONS
The actuarial analysis (AA) details the increase in contributions and the expected impact on current contribution rates and the amortization period. According to the AA, the expected funding period would decrease from 99 to 32 years. The AA further notes that while this would result in a significantly improved amortization period, the unfunded actuarial accrued liability would still experience negative amortization and would therefore be expected to continue to increase through 2030 before it would begin to decline.

The AA also states that the 32-year amortization period is based on TRS meeting its 3% payroll growth and 7.25% investment return assumptions and no other changes to benefits occur throughout that period. The AR also notes the plan experienced an asset loss for the 6-month period ending February 28, 2019, which is expected to create a deferred asset loss as of August 31, 2019. Therefore, absent an unexpected asset gain to offset this loss, the amortization period is expected to remain flat or increase slightly as this deferred loss is recognized over the next four years.

The bill would impact annuitants eligible to receive the one-time supplemental payment. The PRB's review states that the cost of the one-time supplemental payment provided for in the bill would be required to be offset by an additional appropriation from the State. If such an appropriation were not received, the supplemental payment would not be made.

METHODOLOGY AND STANDARDS
The TRS AA relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS actuarial valuations for August 31, 2018 and the February 28, 2019 update. The AA notes that the results of the February 28th update are projected forward to August 31, 2019 assuming a negative 0.48 percent return on assets for the six-month period ending February 28, 2019 and the currently assumed annual rate of 7.25 percent for the remainder of the fiscal year. It was also assumed that the active membership will increase by 1 percent from 2018 to 2019.

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.

SOURCES
Actuarial Analysis by Daniel Siblik, ASA, and Joseph P. Newton, FSA, GRS, March 21, 2019.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, March 22, 2019.

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 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 ent 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:
WP, AM, ASa