TO:	Honorable Joan Huffman, Chair, Senate Committee on State Affairs
FROM:	John McGeady, Assistant Director     Sarah Keyton, Assistant Director Legislative Budget Board
IN RE:	HB2384 by Leach (relating to judicial compensation and assignment, the contributions to, benefits from, membership in, and administration of the Judicial Retirement System of Texas Plan One and Plan Two, and the compensation and retirement benefits of certain prosecutors and other members of the elected class of the Employees Retirement System of Texas.), Committee Report 2nd House, Substituted

Projected as of August 31, 2019

Judicial Retirement System of Texas Plan II (JRS II)	Current	Proposed	Difference
Employee Contribution (effective)*	7.48%	9.47%	1.99%
Employer Contribution	15.66%	15.66%	0.00%
Total Contribution	23.14%	25.13%	1.99%
31-Year Contribution Rate (as a % of pensionable pay)	23.96%	27.63%	3.67%
Unfunded Actuarial Accrued Liability (millions)	$43.50	$68.10	$24.60
Funded Ratio	91.50%	87.30%	-4.20%
Amortization Period (years)	96	Infinite	N/A
Actuarial Soundness	Unsound	Unsound	N/A

* Statutory member contribution rate is 7.50%. Rate of 7.48% reflects the fact that some eligible members have elected to cease contributions. Similarly, the proposed change of the statutory rate to 9.50% would yield an effective rate of approximately 9.47%.

ACTUARIAL EFFECTS
This bill would redefine and restructure salaries for judges and district attorneys, amend the definition of salary used to calculate annuities for JRS I and II and elected class members of ERS, amend the ERS elected class annuity calculation to be consistent with board rule, and increase member contributions to JRS II.

JRS II - According to the actuarial analysis (AA), the amortization period of JRS II would increase from 96 years to infinite. The bill would also increase the unfunded actuarial accrued liability (UAAL) by $24.6 million. 

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. JRS II statute requires that any legislation that reduces the rate of contributions or interest rates, credits additional service, or provides benefit improvements that increase the actuarial cost of JRS II require a State contribution sufficient to cover the normal cost and amortize the unfunded actuarial accrued liability over a 31-year period. According to the AA, given the bill does not attempt to modify benefits or contributions, it could be enacted while the State and employer contributions remain less than the contribution amounts outlined in JRS II statute.

Texas County and District Retirement System (TCDRS) - According to TCDRS, the bill would increase the salary of 34 county judges. Since the bill would only impact 34 of the system's 230,000 total active members, it would not have much, if any, actuarial impact on the system.

SYNOPSIS OF PROVISIONS
The bill would establish a tiered service- and position-based salary structure for judges and tie the salaries of district attorneys to this structure. Service as a county court judge would be included for purposes of determining judicial salaries. 

The bill would amend the JRS I governing statute to base the calculation of future retirement benefits on 120 percent of the State base salary. The annuities of past JRS I retirees who may have retired under a different salary schedule will continue to be based on the prescribed state base salary schedule. The bill would also repeal disability benefits from JRS I, Government Code Subchapter C, Chapter 834.

For JRS II, the annuities of members who retire on or after the effective date of the bill would be calculated based on the salary structure at the time the judge retires. No future adjustments to the annuity would be made once the judge retires. Service as a county court judge would not be included for purposes of calculating annuities under JRS I or II. Additionally, the bill would increase JRS II active member contributions from 7.5 percent to 9.5 percent of pay for service after September 1, 2019.

The bill would amend ERS such that service retirement benefits for elected class service are based on the restructured definition of the base salary of a district court judge. The bill would also amend current statute to be consistent with multipliers set by board rule, which currently adjusts elected class retirements from a 2.0 to a 2.3 percent multiplier. Additionally, the annuity for district attorneys would be equal to 2.3 percent of the annual salary paid in accordance with the new salary structure times years of service in that membership class, at the time of retirement. District attorneys are represented in the membership of non-legislator elected officials in the ERS plan.

This bill would take effect September 1, 2019. 

FINDINGS AND CONCLUSIONS
The bill would impact future JRS I retirees, future JRS II retirees, the elected class of ERS and district attorneys in ERS. 

For JRS II, the AA indicates that the provisions in the bill would increase the normal cost rate by 2.25 percent, from 20.83 percent to 23.08 percent. Also, the amortization of the UAAL over 31 years as a percent of payroll would increase by 1.42 percent, from 3.13 percent to 4.55 percent. This adds up to an increase in the contribution rate needed to fund the normal cost and amortize the UAAL over 31 years of 3.67 percent, from 23.96 percent to 27.63 percent. The effective increase in employee contribution of 1.99 percent would not be not large enough to offset the increase, so the amortization period of the UAAL for JRS II would increase from 96 years to infinite. In addition, the UAAL would increase from $43.5 million to $68.1 million, and the funded ratio of JRS II would decrease from 91.5 percent to 87.3 percent. 

METHODOLOGY AND STANDARDS
The PRB's review states that the systems' August 31, 2018 actuarial valuations assume judicial salaries will increase by 3 percent per year and certain cost-of-living adjustments (COLAs) in JRS I tied to judicial salaries will be 2.75 percent per year, beginning September 1, 2019. The AA notes that there may be some expectation that the implementation of the tiered judicial pay structure would eliminate or significantly delay the need for future increases to the State base salary and the resulting judicial pay schedule; therefore, the AA assumes the State base salary would increase by 2.50 percent per year beginning in the 2022-2023 biennium. All other actuarial assumptions and methods are the same as used in the February 28, 2019 update to the JRS II 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 JRS II or JRS I 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, May 17, 2019.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, May 17, 2019.
Email Correspondence from TCDRS General Counsel, March 14, 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).