Based on the updated February 28, 2019 Actuarial Valuation projected to August 31, 2019.
Teacher Retirement System of Texas (TRS)	Current	Proposed	Difference
Employer Contribution	7.76%	7.76%	0%
Employee Contribution	7.70%	7.70%	0%
Total Contribution	15.46%	15.46%	0%
30-Year Contribution Rate (% of payroll)	16.30%	16.32%	0.02%
Unfunded Actuarial Accrued Liability (millions)	$48,918	$48,968	$50
Amortization Period (years)	99	101	2
Actuarial Soundness	Unsound	Unsound	N/A

Based on the updated February 28, 2019 Actuarial Valuation projected to August 31, 2019.
Peace Officer Supplemental Retirement Fund (POSRF)	Current	Proposed	Difference
Employer Contribution	N/A	2.13%	2.13%
Employee Contribution	N/A	0.50%	0.50%
Total Contribution	N/A	2.63%	2.63%
30-Year Contribution Rate (% of payroll)	N/A	3.54%	3.54%
Unfunded Actuarial Accrued Liability (millions)	N/A	$24	$24
Amortization Period (years)	N/A	Infinite	N/A
Actuarial Soundness	N/A	Unsound	N/A

ACTUARIAL EFFECTS
The bill would enhance retirement eligibility conditions for peace officers in the current trust fund of the Teacher Retirement System of Texas (TRS) and provide additional benefits through the new Peace Officer Supplemental Retirement Fund (POSRF) to be administered by TRS.

TRS - The actuarial analysis (AA) states that while the enhanced benefits would be payable from the new supplemental fund, the standard 2.3 percent of pay annuity would still be payable from TRS. The analysis adds that it is expected the impacted members would retire earlier with the enhanced options than they otherwise would, which would impact the costs to TRS. The bill would increase the unfunded actuarial accrued liability (UAAL) of TRS by approximately $50 million. The amortization period would increase to 101 years.

POSRF - The bill would create a new supplemental fund for members of TRS classified as "peace officers." According to the AA, the POSRF would start out with a UAAL of approximately $24 million due to enhanced benefits that would be provided for existing members who did not begin contributing to the Fund at the beginning of their careers. Under the bill, the proposed State contribution rate of 2.13 percent would not be sufficient to ever amortize the initial UAAL.

The actuarial review (AR) notes that under Texas Government Code Section 821.006, the bill could not be enacted without first establishing a total contribution rate to TRS that brings the amortization period down to 31 years or less and establishing an initial contribution rate to POSRF that achieves an amortization period of 31 years or less. 

Under the current Pension Review Board (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 AR notes that according to both statutory and PRB criteria, TRS is currently actuarially unsound.  Under the bill, TRS would become more actuarially unsound.

SYNOPSIS OF PROVISIONS
The bill would provide enhanced benefits through TRS and a supplemental program for members of TRS classified as "peace officers." The bill would define a "peace officer" as a member of the retirement system who was elected, employed or appointed as a peace officer under Section 37.081 or 51.203, Education Code, or other law. 

The bill would enhance the benefits payable to peace officers under TRS through new retirement eligibility requirements. The bill would also establish a supplemental plan that provides for 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 as well as increased disability benefits. In addition to any current TRS retirement eligibility provisions, peace officers would become eligible to retire at age 55 with 10 years of service or at any age with 20 years of service. Peace officers would be eligible for an unreduced benefit at age 57 or a reduced benefit if they retire before age 57.  

The bill would require the State to contribute 2.13 percent of aggregate compensation of the peace officers and members would contribute 0.5 percent of pay to the POSRF. The benefit payable by the POSRF would be the total accrued benefit less the amount payable under the standard TRS benefit formula (for non-peace officer members) for service rendered as a peace officer.

The bill would take effect September 1, 2019.

FINDINGS AND CONCLUSIONS
The AA indicates since the funding period of TRS would exceed 30 years by one or more years, passage of this bill would not be allowable under Texas Government Code Section 821.006 without an additional 1.86 percent in contributions. If applied only to payroll of peace officers, the additional contributions for peace officers would need to be increased to approximately 4.5 percent of payroll, in addition to 1.84 percent across all member payroll.

The AA also states that although benefits would only be earned prospectively, the newly created POSRF would have an initial UAAL of approximately $24 million because contributions to the POSRF did not begin at the beginning of eligible members' careers and therefore will not have as many years to accumulate and generate investment earnings. The proposed State contribution rate of 2.13 percent of pay would not be sufficient to cover the full normal cost and amortize the initial UAAL. A State contribution of 3.54 percent would be necessary to amortize the initial UAAL over 30 years. The AA states that without this level of funding, the POSRF is not sustainable and will not be able to pay the benefits as proposed.

The bill would impact all TRS members who met the definition of "peace officer." The AA notes there are currently 3,909 active members defined as peace officers in TRS.

METHODOLOGY AND STANDARDS
The TRS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS updated actuarial valuation for February 28, 2019, with results projected 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. Active membership was assumed to increase by 1 percent from 2018 to 2019. It was also assumed that peace officers would retire at a rate of 25 percent per year once eligible to retire with unreduced benefits; the incidence of disability for peace officers would be three times larger than the current assumed patterns; and 10 percent of all disabilities would classify as disabled under federal Social Security law.

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 and Company, April 29, 2019.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 30, 2019.

GLOSSARY
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.
Rule of 80 - The sum of the member's age and years of service credit equals the number 80.
Unfunded Actuarial Accrued Liability (UAAL) - The Actuarial Accrued Liability (AAL) less the Actuarial Value of Assets (AVA).