ACTUARIAL EFFECTS
The bill would allow departments that meet specific criteria to terminate participation in the Texas Emergency Services Retirement System (TESRS). The actuarial analysis (AA) notes the bill would have a negative impact on TESRS due to a loss of contributions if a department chose to terminate participation, and because the bill does not include a procedure to require a terminating department to contribute an amount necessary to maintain the system's actuarial condition.

Under the current Pension Review Board (PRB) Pension Funding Guidelines, funding should be sufficient to cover the normal cost and to amortize the unfunded actuarial accrued liability (UAAL) over as brief a period as possible, but not to exceed 30 years, with 10 - 25 years being the preferable target range. TESRS statute defines actuarial soundness, for purposes of determining if State contributions are necessary, as no more than 30 years. TESRS is currently actuarially sound with State appropriations; under the bill, if departments terminate their participation, TESRS would continue to require State appropriations, and could require additional contributions from remaining departments to be actuarially sound.

SYNOPSIS OF PROVISIONS
The bill would amend Section 862.001 of the Texas Government Code to allow participating emergency service departments to elect to terminate participation in TESRS as long as they met specific criteria: the terminating department would have to consist of volunteer firefighters and at least six full-time firefighters; the full-time firefighters would need to be employed by a home-rule municipality of which the department is a part; and the governing body of the terminating department would be required to elect to provide retirement benefits to the volunteer firefighters through participation in an alternative retirement system.

If a department decided to terminate its participation in TESRS, it would forfeit all contributions to the System necessary to pay the benefits of the department's vested members. The bill would also allow the TESRS Board of Trustees to adopt rules to implement the provisions of the bill.

The bill would take effect September 1, 2019.

FINDINGS AND CONCLUSIONS
The PRB actuarial review (AR) notes the changes would not have an immediate, direct impact on the plan but changes in participating departments' behavior could have an impact. In particular, the ability for an employer to terminate participation in the plan and "withdraw" would be a significant change in how the plan is administered. The AR further states that TESRS is a cost-sharing retirement system where the sum of the expected contributions from all participating departments is used to pay the normal cost of the System, and excess contributions are used to pay the System's unfunded liability. Therefore, allowing certain departments the ability to terminate their participation in TESRS would result in a loss of expected future contributions.

The AA cautions that allowing a department to terminate participation from TESRS may trigger vesting of the accrued benefit of each active participant on the date of termination, regardless of their length of service, pursuant to Internal Revenue Code requirements. If such vesting would be required, it would negatively impact the actuarial condition of the system to a degree that would be dependent on the age and service characteristics of the active participants.

Additionally, the AA notes concerns with the wording in Section 862.001(d), stating that it implies that either the governing body of a participating department or the department itself has an element of ownership or control of the contributions made to TESRS; however, contributions to a cost-sharing retirement system are co-mingled with all other contributions and, once made, may only be used to pay benefits and therefore could not be returned.

Finally, the AA states Section 862.001(e) of the bill would allow the TESRS Board of Trustees to adopt rules to implement the bill, but cautions that without any wording to protect the actuarial condition of TESRS, there would be a negative impact on the System should a department terminate participation. The AR states that it is not clear from the language in the bill the latitude provided to the board in establishing these rules. However, given the language regarding "forfeit[ing] all contributions to the system necessary to pay the benefits of vested member," it appears the intent is to limit the expected cost to the terminating department to the contributions already made to the system.

The bill would not have an immediate, direct impact on any current members, but the bill could impact current members whose departments elected to withdraw from participation. The AA states there are currently 36 departments meeting the criteria required by the bill, and there are 572 active participants in those 36 departments.

SOURCES
Actuarial Analysis by Mark R. Fenlaw, FSA, and Rebecca B Morris, ASA, Rudd and Wisdom, Inc., April 11, 2019.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 12, 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 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).