Projected as of 8/31/2019

Teacher Retirement System of Texas	Current	Proposed	Difference
Unfunded Actuarial Accrued Liability (millions)	$48,900	$48,900	$0
Funded Ratio	76.50%	76.50%	0%
Amortization Period (years)	99	29	-70
Actuarial Soundness	Unsound	Sound	N/A

ACTUARIAL EFFECTS

The bill would increase the annual base employer contribution, supplemental employer contribution for districts that do not participate in Social Security and member contribution rates, phased in over the 2020-2025 fiscal years. In addition, the bill includes a provision for a one-time supplemental payment to certain annuitants equal to the lesser of their regular monthly annuity or $500.

The bill would significantly decrease the amortization period of TRS from 99 to 29 years but would not change the estimated 8/31/2019 unfunded actuarial accrued liability (UAAL) or funded ratio.

The PRB's actuarial review (AR) states that TRS is currently actuarially unsound. Under the bill, expected funding levels would improve significantly and TRS would become actuarially sound. 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. TRS statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as no more than 31 years.

SYNOPSIS OF PROVISIONS

The bill would increase the annual base employer contribution, supplemental employer contribution and member contribution rates 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	7.25%	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 districts that do not participate in Social Security

In addition, the bill includes a provision for a one-time supplemental payment to certain annuitants equal to the lesser of their regular monthly annuity or $500. This payment would be funded by a one-time appropriation from the State.

The bill would be effective September 1, 2019.

FINDINGS AND CONCLUSIONS

The actuarial analysis (AA) details the increase in contributions by origin and illustrates the expected impact from current contribution rates. The following table illustrates the impact outlined in the AA.

	Payroll (millions)			Contribution Rates					Increase in Contributions (millions)
Fiscal Year	Total	Non-OASDI		Base	Supp*	Member	Total Effective Rate		Base	Supp*	Member
2019	$44,999	$27,343		6.80%	1.50%	7.70%	15.46%		$0	$0	$0
2020	46,799	28,436		7.25%	1.50%	7.70%	15.91%		211	0	0
2021	48,203	29,290		7.50%	1.60%	7.70%	16.22%		337	29	0
2022	49,649	30,168		7.75%	1.70%	8.00%	16.83%		472	60	149
2023	51,138	31,073		8.00%	1.80%	8.00%	17.14%		614	93	153
2024	52,672	32,005		8.25%	1.90%	8.25%	17.70%		764	128	290
2025	54,252	32,966		8.25%	2.00%	8.25%	17.77%		787	165	298
*Supplemental contribution paid by districts that do not participate in Social Security

As shown above, the final total effective rate for fiscal year 2025 and thereafter would be 17.77 percent which is comprised of: 1) the base employer rate of 8.25 percent (split between the State and school districts); 2) the member rate of 8.25 percent; 3) the supplemental contribution (paid by school districts that do not participate in Social Security) of 2.0 percent (which is approximately 1.22 percent of total payroll); and 4) additional contributions made on behalf of members who have returned to work after retirement (approximately 0.05 percent of total payroll).

The AA states that the 29-year amortization period is based on TRS meeting its 3 percent payroll growth and 7.25 percent investment return assumptions and no other changes to benefits occur throughout that period.

The AR notes that while the bill would reduce the amortization period to 29 years, the UAAL would still experience negative amortization and is therefore expected to continue to increase through 2028 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 all current and future active members as well as annuitants eligible to receive the onetime supplemental payment, which is expected to cost approximately $195 million.

METHODOLOGY AND STANDARDS

The TRS analysis 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 -0.48 percent return on assets for the six-month period ending February 28th, 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 will increase by 1 percent from 2018 to 2019.

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, Gabriel Roeder Smith and Company, 3/12/2019.

Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, 3/12/2019.

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 uned actuarial accrued liability. The State Pension Review Board recommends that funding should be sufficient to cover the normal cost and to amortize the UAAL ove-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.

Negative Amortization - The increase in the unfunded actuarial accrued liability because the amortization payment is not sufficient or large enough to cover the interest that accrues on the unfunded liability.

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).