Based on the projected 1/1/2019 Actuarial Valuation.

Galveston Employees' Retirement Plan for Police	Baseline	Proposed	Difference
Employee Contribution	12.00%	12.00%	0%
Employer Contribution	14.83%	18.00%	3.17%
Total Contribution	26.83%	30.00%	3.17%
Unfunded Actuarial Accrued Liability (000s)	$39,559	$39,559	$0
Amortization Period (years)	42	30	-12

ACTUARIAL EFFECTS
The bill would make significant changes to the governing statute of the Galveston Employees' Retirement Plan for Police (the Plan), including increasing the City of Galveston's contribution rate to a fixed 18.00 percent.

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. According to this criteria, the Plan is currently actuarially unsound. The bill would improve expected future funding, and the UAAL would be expected to be fully amortized in 30 years.

The PRB actuarial review (AR) states that some of the changes made reflect current operation and therefore have no impact on the plan.

SYNOPSIS OF PROVISIONS
The bill would make changes to Article 6243p, Title 109 Revised Civil Statutes regarding board composition and governance structure, employee and employer contributions, and retirement eligibility for normal and early retirement benefits for the Galveston Employees' Retirement Plan for Police.

The Plan's board would be increased to eight members with four trustees that would be elected by members of the Plan and four that would be appointed by various representatives of the City. The bill would require all trustees to have financial, accounting, business, investment, budgeting, real estate, or actuarial expertise. The board would be required to review any future benefit adjustments and all actuarial assumptions against the Plan's long-term funding policy goals; measure investment performance of the Plan against relevant benchmarks; and review the Plan's asset allocation to determine appropriate risk levels for the Plan.

Employee and employer contributions could not be lowered and/or benefits increased or added if, as a result, the amortization period of the Plan would exceed 25 years. If the amortization period of the Plan exceeded 25 years at the time of a proposed contribution and/or benefit change, the proposal would be prohibited if an actuarial valuation determined the amortization period would be increased.  

Employee contributions would be set at a fixed rate of 12 percent of pay, which reflects their current contribution rate. Employee contributions could not be lowered by more than 2 percent at a time and would only be authorized if the amortization period did not exceed 20 years, and if the Pension Review Board (PRB) certified that the reduction in contributions would not increase the Plan's amortization period above 25 years. Member contributions could not be reduced below 8.5 percent or increased above the rate contributed by the City.

The City contribution would be set to a fixed 18 percent of pay. Further, employee and employer contributions could not be lowered and/or benefits increased or added if, as a result, the amortization period of the Plan would exceed 25 years; or if the actual rate of return did not equal or exceed the assumed rate of return in each of the previous eight fiscal years. 

The bill would change the normal and early retirement eligibility requirements. Members would be eligible for a normal retirement benefit at age 58 with 25 years of creditable service. Early retirement eligibility would remain at 55 years of age but would require 25 years of creditable service rather than the former 10 years.

In general, modification of benefits, member qualifications, benefit eligibility requirements, and contribution policy would require approval of five trustees. However, in order to increase benefits or contribution amounts, or to lower the City's contribution rate, the board would need the approval of six trustees.

The bill would take effect September 1, 2019.

FINDINGS AND CONCLUSIONS
Current statute states the City, acting under the advice of the actuary for the Plan, is required to contribute an amount equal to at least the normal cost plus interest on the UAAL at the rate of interest assumed in the valuation, as well as a sufficient amount to pay the cost of plan administration. However, the City has been contributing at a fixed rate that was negotiated through collective bargaining. The actuarial analysis (AA) assumes city contributions for 2019 will be 17 percent of payroll, paid retroactively to January 1, 2019 and effective January 1, 2020, the City will begin making its annual 18 percent contribution at the beginning of the year. The AR states the 2019 contribution equal to 17 percent of pay is not part of the bill but, as understood by the PRB, is based on discussions between the Plan and the City. The differences between this assumption and an approximate contribution of 15.89 percent of pay (calculated as the current 14.83 percent of pay prorated for 8 months plus the increased 18 percent of pay prorated for 4 months) would not have a significant impact on the analysis.

The AA discusses the advantages and disadvantages of a fixed contribution rate. Specifically, the AA notes that a fixed contribution rate is easier to budget but there is no automatic mechanism to adjust the funding policy when actual experience differs from the assumptions, plan provisions change, or the underlying demographics change. The AA also highlights the following risks associated with the likelihood of actual plan experience differing from the assumptions used in the analysis:   investment, contribution, asset/liability mismatch, and demographic risks.

The AA notes that the UAAL is projected to gradually increase for several years before it begins to decrease around 2031. The increased contribution rates are expected to be sufficient to eliminate the UAAL around 2050 as long as all assumptions are met.

The AA incorporates a change to retirement eligibility for members hired after January 1, 2019 and changes to assumptions for the January 1, 2019 valuation adopted by the board in November 2018. The board changed the early retirement eligibility outlined in Section 7.03, Article 6243p to age 50 with 20 years of credited service and the unreduced early retirement eligibility in Section 7.04, Article 6243p to age 55 with 20 years of credited service.

The bill would also change the Early and Normal Retirement provisions outlined in Sections 7.01 and 7.02 of Article 6243p, Title 109 Revised Civil Statutes for all current and future active plan members. However, it is assumed this change would have no impact on members because of the previously mentioned, more generous retirement provisions in Sections 7.03 and 7.04.

METHODOLOGY AND STANDARDS
The AA relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the Plan's actuarial valuation for January 1, 2018, except for the following:

-  7 percent assumed rate of return
-  Society of Actuaries' new Public Safety Mortality Tables
-  Updated retirement assumptions adopted at the Plan's November 2018 board meeting
-  Annual administrative expenses will equal 0.95 percent of payroll, and
-  4 percent payroll growth for the next five years and 3.50 percent payroll growth thereafter.

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 the Plan 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 David A. Sawyer, FSA, EA, MAAA, Retirement Horizons Incorporated, April 1, 2019.

Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 4, 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).