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

Galveston Employees' Retirement Plan for Police	Baseline	Proposed	Difference
Employee Contribution (% of payroll)	12.00%	12.00%	0%
Employer Contribution (% of payroll)	14.83%	18.00%	3.17%
Total Contribution (% of payroll)	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 18 percent of payroll through 2024. Contribution rates could be modified after 2025 and would become subject to the actuarially determined contribution rate (ADCR).

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, employee and employer contributions, and the addition of an ADCR beginning in 2025 for the Galveston Employees' Retirement Plan for Police.

The bill would increase the Plan's board composition to eight members, including the president of the municipality's police association (or the president's designee), three trustees elected by members of the Plan and four designated by various representatives of the City. The bill would add qualifications for trustees, which would require all trustees to have financial, accounting, business, investment, budgeting, or actuarial experience; a bachelor's degree from an accredited institution of higher education; or they would have to be vetted to verify they are capable of performing the duties of a trustee. The trustees would be required to undergo training in the laws governing the Plan's operations; the programs, functions, rules, and budget of the Plan; the scope and limitations on the rulemaking authority of the board; the results of the Plan's most recent actuarial valuation; and the laws applicable to a trustee in performing their duties.

The Plan's assumed rate of return would be set at seven percent to be used in preparation of any actuarial valuation conducted on or after September 1, 2019 and before January 1, 2020. All subsequent rates of return adopted by the board would need to be reviewed as part of each annual valuation.

Employee contributions would be set at a rate of 12 percent of pay, which reflects their current contribution rate, through 2024 but could be modified after 2025.

The City contribution would be set to 18 percent of pay through 2024 but could be modified after 2025.  The City contribution must be made not later than the 15th business day following the beginning of the City's fiscal year (October 1). Not later than December 31, the City would be required to calculate the difference, if any, between actual payroll for the previous fiscal year, and the assumed payroll used to determine the amount the City contributed to the Plan, and contribute to the Plan the calculated difference multiplied by the City's contribution rate.

Modification of benefits, member qualifications, benefit eligibility requirements, and contribution rates would require approval of six trustees. The board would not be able to lower or remove contributions and/or increase or add new benefits if, as a result, the amortization period of the Plan would be increased to a period that would exceed 25 years. The board of trustees would not be able to modify the contribution rates set in statute before January 2025.

Finally, the bill would add a funding mechanism to determine future contribution rates according to an ADCR. Beginning January 1, 2025, if the actuarial valuation recommended an ADCR that exceeded the aggregate (employee and City) contribution rate, the excess contribution would be split equally as a percentage of pay between the City and employee contribution rates.

The bill would take effect immediately if it receives a vote of two-thirds of all members elected to each house. Otherwise, the bill would take effect September 1, 2019.

FINDINGS AND CONCLUSIONS
The actuarial analysis (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 AA assumes City contributions for 2019 would be 17 percent of payroll for the period beginning January 1, 2019 through September 30, 2019, paid retroactively to January 1, 2019.  City contributions of 18 percent, for the 2020 plan year, would be contributed by October 23, 2019. 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 exclusion of this assumption would not have a significant impact on the analysis.

The AA notes that the UAAL is projected to gradually increase for several years before it begins to decrease. The contribution rates are expected to be sufficient to eliminate the UAAL within 30 years as long as all assumptions are met.

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 19, 2019.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 22, 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.
Actuarially Determined Contribution Rate (ADCR) - The contribution rate actuarially determined to fund the normal cost, the costs of administering and the unfunded actuarial accrued liability of the fund over a closed amortization period that does not exceed 30 years.
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).