LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT
 
86TH LEGISLATIVE REGULAR SESSION
 
April 24, 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:
HB3983 by Leach (Relating to service retirement benefits payable by the Employees Retirement System of Texas to commissioned peace officers employed by the attorney general.), As Introduced

Based on the updated February 28, 2019 Actuarial Valuation projected to August 31, 2019.
Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF)
Current  Proposed  Difference
Employer Contribution (% of payroll) 1.49% 1.48% -0.01%
Employee Contribution (% of payroll) 0.50% 0.50% 0.00%
Total Contribution (% of payroll) 1.99% 1.98% -0.01%
Expected Payroll for FY 2020 (millions) $1,750.00 $1,766.80 $16.80
Normal Cost (% of payroll) 2.08% 2.08% 0.00%
31-Year Contribution Rate* (% of payroll) 3.14% 3.14% 0.00%
Unfunded Actuarial Accrued Liability (millions) $546.60 $552.10 $5.50
Amortization Period (years) Infinite Infinite N/A
Actuarial Soundness Unsound Unsound N/A
*In addition to the annual court fee contribution of $17.4 million.

ACTUARIAL EFFECTS
The bill would amend the definition of "law enforcement officer" to include peace officers employed by the Office of the Attorney General for the purpose of retirement benefits and eligibilities with the Employees Retirement System of Texas (ERS) and the Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOSRF). This change would have a negative impact on the funded status of both ERS and LECOSRF.

LECOSRF - According to the AA, the bill would increase the UAAL for LECOSRF by $5.5 million. The total expected payroll for the 2020 fiscal year would increase by approximately $16.8 million. Under the bill, the employer contribution rate would decrease as a percent of payroll by 0.01 percent because the dollar amount from court fees would not change even though expected payroll would increase in FY 2020. 

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. ERS 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, both ERS and LECOSRF are currently actuarially unsound.  Under the bill, according to the AA, ERS and LECOSRF would become more actuarially unsound. 

The AA notes that under the Texas Government Code Section 811.006, if the bill is enacted, the total contribution rate of ERS and LECOSRF would have to be increased to 23.29 percent and 3.14 percent of payroll (in addition to expected annual court fees of $17.4 million), respectively. 

SYNOPSIS OF PROVISIONS
The bill would amend the Texas Government Code to include peace officers employed by the Office of the Attorney General to the definition of "law enforcement officer" as eligible for a retirement benefit with ERS and LECOSRF under Title 8, Subtitle B.

The ERS board of trustees would be required to adopt rules necessary to implement the changes in law made under the bill. The ERS board of trustees and the attorney general would be required to implement the changes in law only if the legislature appropriates money specifically for this purpose. If the legislature does not appropriate money, the ERS board and the attorney general would be allowed, but not required, to implement the law using other appropriations available for the purpose. 

If the ERS board of trustees and the attorney general implement the provisions of the bill, the Office of the Attorney General would collect contributions for LECOSRF beginning the first pay period after December 31, 2019.

The bill would take effect September 1, 2019.

FINDINGS AND CONCLUSIONS
The AA includes detailed charts of the effects the bill would have on both ERS and LECOSRF, based on the projected August 31, 2019 actuarial valuation results. The AA notes that the bill would increase the required appropriations for the total combined State and employer contributions. The PRB actuarial review (AR) states the increases in payroll of ERS by approximately $300,000 and of LECOSRF by approximately $16.8 million would increase the expected cost of benefits to the plan.

The bill would impact current and future peace officers employed by the Office of the Attorney General, who are members of ERS. The AA notes that there are approximately 187 individuals who would be affected.

METHODOLOGY AND STANDARDS
The ERS and LECOSRF analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS and LECOSRF updated actuarial valuations for February 28, 2019, with results projected to August 31, 2019. The AA also assumes, for the applicable members, that LECOSRF service would be granted for all past and prospective service.

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 ERS and LECOSRF 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 R. Ryan Falls, FSA, EA, MAAA, Gabriel, Roeder, Smith and Company, April 18, 2019.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 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).


Source Agencies:
338 Pension Review Board
LBB Staff:
WP, NV, KFB