LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
86TH LEGISLATIVE REGULAR SESSION
 
April 3, 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:
HB2469 by Gutierrez (Relating to retirement benefits for certain peace officers who are members of the Teacher Retirement System of Texas.), As Introduced

Projected as of August 31, 2019
Teacher Retirement System of Texas (TRS)    Current  Proposed  Difference
30-Year Contribution Rate (as a percent of pensionable pay) 17.30% 17.34% 0.04%
Unfunded Actuarial Accrued Liability (millions) $48,918 $49,068 $150
Amortization Period (years) 99 109 10
Actuarial Soundness Unsound Unsound N/A

ACTUARIAL EFFECTS

If enacted, the bill would create a separate tier with enhanced benefits for members of the Teacher Retirement System of Texas (TRS) who are classified as "peace officers." These enhanced benefits would include a higher multiplier and new retirement eligibilities if certain criteria for service are met for peace officers within TRS.

The bill would increase the unfunded actuarial accrued liability (UAAL) by approximately $150 million and change the amortization period as of August 31, 2019 from 99 to 109 years.

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.

The PRB's actuarial review notes that according to both statutory and PRB criteria, TRS is currently actuarially unsound. Under the bill, TRS would become more actuarially unsound with an amortization period of 109 years. However, under Texas Government Code Section 821.006, the bill could not be enacted without first establishing a total contribution rate to TRS that makes the plan actuarially sound.

SYNOPSIS OF PROVISIONS
The bill would create a separate tier for "peace officers" within TRS. The bill would define a peace officer as a member of the retirement system who has been commissioned by a public school district as a law enforcement officer under Section 37.081 or 51.203, Education Code, or other law.

The bill would enhance the benefits payable to peace officers through new retirement eligibility requirements, a five-year averaging period for the calculation of the final average earnings, and an increase of the benefit multiplier by 0.5 percent from 2.3 percent to 2.8 percent for members who attain 20 years of service as a peace officer.

Peace officers would become eligible for unreduced retirement benefits from TRS at age 55 with 10 years of peace officer service or with 20 years of service regardless of age. Members with 20 years of peace officer service under age 57 who do not meet Rule of 80 would be eligible to retire with combined benefits reduced by 5 percent per year from age 57.

Member contributions for peace officers would increase to 9.5 percent of annual compensation for service rendered after September 1, 2020. Employer contributions for service rendered after September 1, 2020 for peace officers would be 1.0 percent of members' compensation.

Members leaving service due to disability would have a minimum benefit equal to 50.0 percent of the officer's average annual compensation. For members also providing evidence that their disability would make the individual incapable of substantial gainful employment, as determined by the federal Social Security law, the member would be eligible for a benefit equal to 100.0 percent of the officer's average annual compensation.

The bill would take effect on September 1, 2019.

FINDINGS AND CONCLUSIONS
The actuarial analysis (AA) states that the bill would impact the benefits of 3,909 members, which is less than half a percent of the total active population of TRS. The additional contribution rate required to lower the funding period to 30 years would increase by 0.04 percent on all payroll, from 1.84 percent to 1.88 percent.

The AA further states that, while the impact of the additional benefits would be diluted in comparison to the entire System, the value of benefits for the peace officers would increase from a normal cost of 11.58 percent to 17.02 percent under the new tier.

METHODOLOGY AND STANDARDS
The TRS actuarial analysis 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, except peace officers are assumed to retire at a rate of 25.0 percent per year once eligible for unreduced benefits, the incidence of disability would be 3 times larger than previously assumed and 10.0 percent of all disabilities would classify as disabled under federal Social Security law. According to the AA, the changes to the disability provisions are material.

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 1.0 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, Gabriel Roeder Smith & Co., March 28, 2019.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, March 29, 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).





Source Agencies:
338 Pension Review Board
LBB Staff:
WP, AM, ASa