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:	HB3951 by Longoria (Relating to the state salary for retired judges.), As Introduced

Projected to August 31, 2019

Judicial Retirement System of Texas Plan Two (JRS II)	Current	Reflecting CSHB 2384	Reflecting CSHB 2384 and HB 3951	Difference due to Combined Bills
Employee Contribution (% of payroll)	7.48%	9.47%	9.47%	1.99%
Employer Contribution (% of payroll)	15.66%	15.66%	15.66%	0.00%
Total Contribution (% of payroll)	23.14%	25.13%	25.13%	1.99%
Normal Cost (% of payroll)	20.83%	22.96%	22.96%	0.00%
31-Year Contribution Rate (as a % of pensionable pay)	23.96%	27.98%	32.34%	8.38%
Unfunded Actuarial Accrued Liability (millions)	$43.50	$77.30	$144.50	$101.00
Amortization Period (years)	96	Infinite	Infinite	N/A
Actuarial Soundness	Unsound	Unsound	Unsound	N/A

ACTUARIAL EFFECTS
The bill would require the recalculation of annuities of current JRS II annuitants if the 86th Legislature increases the state salary of district or appellate judges or justices. The PRB and GRS believe the Committee Substitute for House Bill 2384 (CSHB 2384) is currently the only legislation that could trigger the increase in benefits under this bill. As a result, the actuarial analysis of this bill assumes that CSHB 2384 would be passed in its current form.

According to the actuarial analysis (AA), JRS II's amortization period would increase from 96 years to infinite. The combined bills would also increase the unfunded actuarial accrued liability (UAAL) by $101 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 defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as no more than 31 years. According to both statutory and PRB criteria, JRS II is currently actuarially unsound. Under the bill, JRS II would become more actuarially unsound, with an infinite amortization period.
 
The AA notes that under Texas Government Code Section 840.106, if the bill is enacted, the total contribution rate to JRS II would have to be increased to 32.34 percent.

SYNOPSIS OF PROVISIONS
The bill would require the Employees Retirement System of Texas to recompute the annuities of current retired judges or justices and their beneficiaries, if the 86th Legislature enacts legislation that would increase the state salary of district or appellate judges or justices or authorizes such increases in the General Appropriation Act. 

The new annuity would be recalculated on the effective date of the salary increase as if the retiree's salary on the date of retirement was that of a judge or justice who had eight years and one day of service and was of the same classification as the last court to which the retiree was elected or appointed.

The bill would take effect on September 1, 2019.

FINDINGS AND CONCLUSIONS
The bill would impact all current JRS II retirees and beneficiaries.

The AA indicates that the enactment of this bill and CSHB 2384, versus enacting CSHB 2384 alone, would increase the contribution rate needed to fund the normal cost and amortize the UAAL over 31 years from 27.98 percent to 32.34 percent; increase the UAAL from $77.3 million to $144.5 million; and decrease the funded ratio from 85.8 percent to 76.4 percent.

METHODOLOGY AND STANDARDS
Except as outlined below, the JRS II analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2019 update to the JRS II actuarial valuation for August 31, 2018. 

The AR notes that the August 31, 2018 actuarial valuation for JRS II assumes judicial salaries will increase by 3.0 percent per year. The AA assumes CSHB 2384 will be passed in its current form. The AA for CSHB 2384 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 will increase by 2.50 percent per year beginning in the 2022-2023 biennium. 

According to the PRB actuary, the assumptions and methods are reasonable for the purpose of this analysis.

SOURCES
Actuarial Analysis for HB 3951, Introduced by R. Ryan Falls, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, 4/18/2019.
Actuarial Analysis for HB 2384, Committee Report 1stHouse, Substituted by R. Ryan Falls, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, 4/7/2019.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, 4/20/2019.

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).