Projected as of August 31, 2019

Teacher Retirement System of Texas (TRS)	Current	Impact of CCR SB 12	Impact of CCR SB 12 + CCR HB 3
Unfunded Actuarial Accrued Liability (millions)	$48,918	$48,526	$48,758
Amortization Period (years)	99	29	29
Actuarial Soundness	Unsound	Sound	Sound

ACTUARIAL EFFECTS
The bill would increase the annual base employer contribution, supplemental contribution for public education employers, and member contribution rates for the Teacher Retirement System of Texas (TRS) incrementally over the 2020-2025 fiscal years.

The actuarial analysis (AA) based its estimates on the Conference Committee Report (CCR) for House Bill 3 (HB 3), which would provide a salary increase for active members, and the CCR for Senate Bill 12 (SB 12), which would increase the annual base employer, employee and supplemental employer contribution rates for TRS incrementally over the 2020-2025 fiscal years. The state contribution rate would increase by 1.45 percent over the six-year period, while the employee and supplemental employer contribution rates would increase by 0.55 percent and 0.50 percent, respectively, by 2025. According to TRS, these increases in contribution rates would significantly improve the expected amortization period from 99 to 29 years.

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. TRS statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as no more than 31 years. TRS is currently actuarially unsound. Under the bill, expected future funding would improve significantly, and TRS would become actuarially sound according to both statutory and PRB criteria. Further, after taking into account the cumulative impact of the Conference Committee Report for SB 12 (CCR SB 12) and CCR HB 3, which provides funding for salary increases for Teachers, Librarians, Counselors, and Nurses, TRS would be actuarially sound according to both statutory and PRB criteria.

The bill would also provide a one-time supplemental payment to certain TRS annuitants. The PRB's actuarial review (AR) states that the one-time supplemental payment to certain TRS annuitants is expected to cost approximately $589 million. However, this payment would be financed by a one-time appropriation from the State, in addition to the increased annual required contributions outlined under the bill and would therefore have no cost to the system.

SYNOPSIS OF PROVISIONS
The bill would increase the annual base employer contribution, supplemental employer contribution and member contribution rates for TRS phased in over the 2020-2025 fiscal years, by the amounts listed in the chart below.

	Contribution Rates
Fiscal Year	Base	Supplemental*	Member
2019	6.80%	1.50%	7.70%
2020	7.50%	1.50%	7.70%
2021	7.50%	1.60%	7.70%
2022	7.75%	1.70%	8.00%
2023	8.00%	1.80%	8.00%
2024	8.25%	1.90%	8.25%
2025	8.25%	2.00%	8.25%
*Paid by public education employers.

The bill would also grant a one-time supplemental payment to certain TRS annuitants equal to the lesser of their current monthly annuity or $2,000, which is payable no later than September 2020.

The bill would take effect on September 1, 2019.

FINDINGS AND CONCLUSIONS
The actuarial analysis (AA) details the increase in contributions and the expected impact on current contribution rates and the amortization period from CCR SB 12 alone, as well as the cumulative impact of CCR SB 12 and CCR HB 3. According to the AA, the expected funding period would decrease from 99 to 29 years in both scenarios.

The AA further notes that while the proposal would produce a 29-year funding period, the UAAL would still experience negative amortization and would therefore be expected to continue to increase through 2027 before it would begin to decline. The AR also notes the plan experienced an asset loss for the 6-month period ending February 28, 2019, which is expected to create a deferred asset loss as of August 31, 2019. Therefore, absent an unexpected asset gain to offset this loss, the amortization period is expected to remain flat or increase slightly as this deferred loss is recognized over the next four years.

The bill would impact annuitants eligible to receive the one-time supplemental payment and active members beginning in the 2022 fiscal year. The AR states that the cost of the one-time supplemental payment provided for in the bill must be offset by an additional appropriation from the State. If such an appropriation is not received, the supplemental payment would not be made.

METHODOLOGY AND STANDARDS
The TRS AA relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS actuarial valuations for August 31, 2018 and the February 28, 2019 update. The AA notes that the results of the February 28th update are projected forward 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. It was also assumed that the active membership would increase by 1 percent from 2018 to 2019.

The AA also states that the 29-year amortization period is based on the proposed contributions remaining in place until the end of the 29 years; TRS meeting its 3 percent payroll growth and 7.25 percent investment return assumptions; and that no other changes to benefits occur throughout that period.

For the combined impact with CCR HB 3, the AA states that the HB 3 intends to provide funding for salary increases to specific members that would exceed the current assumption.  Thus, the AA projects that the unfunded actuarial accrued liability will increase from the increase in pay. Partially offsetting this liability increase would be a higher payroll than is currently projected which would lead to larger future contribution dollars, and likely smaller than expected increases for the few years that follow. Therefore, the AA assumes that 1 percent of the current 3 percent salary increase assumption would be due to State-provided increases over time and thus 2 percent would still occur from other sources in 2020 and 2021. The 1 percent increase provided by the State would not be expected to return until the 2024 school year and beyond. This would lead to a larger than expected increase for 2020 followed by a slightly lower than assumed increase for the three-year period 2021 through 2023.

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, GRS, May 25, 2019.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, May 25, 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)