Projected as of August 31, 2019

Teacher Retirement System (TRS)	Current	Proposed	Difference
Unfunded Actuarial Accrued Liability (in millions)	$48,918	$48,758	($160)
Amortization Period (years)	99	29	-70
Actuarial Soundness	Unsound	Sound	N/A

ACTUARIAL EFFECTS
The bill would provide supplemental appropriations to TRS for the biennium ending August 31, 2021.

Under the current PRB Pension Funding Guidelines, funding should be sufficient to cover the normal cost and to amortize the unfunded actuarially 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 statutes define actuarial soundness, for purposes of making modifications to benefit and contribution levels, as no more than 31 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 contributiones 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.

The PRB's actuarial review (AR) states that the bill would appropriate an additional $524 million to TRS, contingent upon the passage of SB 12, or similar legislation. The PRB's actuarial review further notes that 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.

SYNOPSIS OF PROVISIONS

The bill would provide additional State contributions to TRS from the Economic Stabilization Fund to pay for the costs associated with the CCR SB 12 and CCR HB 3 for the state fiscal biennium ending August 31, 2021. The additional appropriations of $263 million for the fiscal year ending August 31, 2020 and $261 million for the fiscal year ending August 2021 are contingent on SB 12.

In addition, the bill would provide a supplemental appropriation to TRS of $589 million from the Economic Stabilization Fund for the two-year period beginning on the effective date of the bill to provide a one-time additional payment to certain annuitants if TRS meets its statutory requirement of actuarial soundness.

The bill would take effect only if the bill receives a vote of two-thirds of the members present in each house of the legislature.

FINDINGS AND CONCLUSIONS

The AA details the increase in contributions and illustrates the expected impact on current contribution rates and the amortization period, based on the analysis of the CCR HB 3 and the CCR SB 12. Based on this assumption, the expected funding period would decrease from 99 to 29 years. The AA notes that while the proposal would produce a 29-year funding period, the UAAL would still experience negative amortization and is therefore 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 includes an appropriation of $589 million from the Economic Stabilization Fund to provide a one-time supplemental payment to certain annuitants. It is the PRB's understanding this is the expected cost of a one-time supplemental payment to certain annuitants equal to the lesser of their regular monthly annuity or $2,000 included in the CCR SB 12. The cost of the one-time payment is expected to be completely offset by this appropriation and is not expected to impact the retirement system.

The review further notes that the $524 million that would be appropriated to TRS would be contingent upon SB 12. The analysis for the CCR SB 12 shows that it would increase the annual base employer contribution phased in over the 2020-2025 fiscal years, increase the employee contribution phased in over the 2022-2025 fiscal years and increase the supplemental employer contribution over the 2021-2025 fiscal years.

	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 districts that do not participate in Social Security. Equal to approximately 1.27% of total payroll by 2025.

The actuarial review notes that the bill would impact annuitants eligible to receive the one-time supplemental payment and active members beginning in fiscal year 2022.

METHODOLOGY AND STANDARDS

The 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 will increase by 1 percent from 2018 to 2019.

Additionally, the AA states that the 29-year funding period as of August 31, 2019 is based on the following: the contribution rates become effective as proposed and remain in place until the end of the 29 years; the trust fund generates investment returns of 7.25 percent each year, measured from the smoothed value of assets; payroll grows at 3 percent per year throughout the period; and no other changes to benefits occur throughout the time period.

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
TRS Actuarial Analysis of Conference Committee Report for SB 12 by Daniel Siblik, ASA, and Joseph P. Newton, FSA, GRS, May 24, 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. An infinite amortization signifies the unfunded liability could never be eliminated.
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).