Projected as of August 31, 2019

Employees Retirement System (ERS)	Current Plan	1.00% Increase*	1.50% Increase
Employee Contribution (% of payroll)	9.50%	9.50%	9.50%
Combined State and Agency Contribution (% of payroll)	10.00%	11.00%	11.50%
Total Contribution	19.50%	20.50%	21.00%
Amortization Period (years)	Infinite	100	59
Actuarial Soundness	Unsound	Unsound	Unsound

*Calculated by PRB


Projected as of August 31, 2019

Teacher Retirement System (TRS)	Current	Proposed	Difference
Unfunded Actuarial Accrued Liability	$48,918	$48,918	$0
Amortization Period (years)	99	30	-69
Actuarial Soundness	Unsound	Sound	N/A

ACTUARIAL EFFECTS
The bill would provide supplemental appropriations to ERS and 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. ERS and TRS statutes define actuarial soundness, for purposes of making modifications to benefit and contribution levels, as no more than 31 years.

ERS: The actuarial analysis (AA) for ERS is based on a 1.5% increase in the State contribution rate. The AA estimates that the increase would improve the expected amortization period from infinite to 59 years.

The Pension Review Board's (PRB) actuarial review states that under the bill, the $148.7 million appropriated to ERS is approximately 1.0% of total expected payroll for the biennium. The actuarial analysis prepared for ERS includes an additional 0.5% of total payroll, which includes funding from sources other than the State general revenue fund. It is the PRB's understanding that the additional contributions are intended to be ongoing. Therefore the PRB analysis is based on a 1.00% increase in the annual employer contribution to 10.5%, and the ERS analysis is based on a 1.50% increase to 11.0%, beginning September 1, 2019. The PRB's review further notes that ERS is currently actuarially unsound. Under both the 1.0% and the 1.5% annual contribution increase scenarios, ERS would remain actuarially unsound, however the amortization period would decrease to a finite period.

TRS: The AA for TRS based its estimates on a proposed committee substitute for House Bill 9 (HB 9), which would increase the annual base employer contribution for TRS incrementally over the 2020-2024 fiscal years, providing for an ultimate increase of 2% over the five-year period. A 2.0% increase in the State contribution rate would significantly improve the expected amortization period from 99 to 30 years.

The PRB's actuarial review states that the bill would appropriate an additional $684 million to TRS, contingent upon the passage of HB 9 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 ERS and TRS from the general revenue fund for the state fiscal biennium ending August 31, 2021. The TRS additional appropriations from the general revenue fund are contingent on HB 9 or similar legislation.

In addition, the bill would provide a supplemental appropriation to TRS of $658.2 million from the Economic Stabilization Fund to provide a one-time additional payment to certain annuitants if TRS meets its statutory requirement of actuarial soundness.

The bill would take effect immediately, except that the additional payment from the Economic Stabilization Fund 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
ERS: The ERS AA estimates that the 1.5% increase in contributions to the System would amount to $103.4 million and $103.9 million for fiscal years 2020 and 2021, respectively. The analysis also estimates that the amortization period would decrease to 59 years.

The PRB's review notes that the appropriation amount in the bill of $148.7 million is currently equal to approximately 1.0% of total payroll. If the actual increase in the annual contribution were 1.0%, the PRB estimates the amortization period would improve from infinite to 100 years. The PRB's review further states that if the supplemental appropriation were only a one-time appropriation, rather than an ongoing increase in employer contributions, the amortization period would likely remain at infinite.

TRS: The TRS AA details the increase in contributions and illustrates the expected impact on current contribution rates and the amortization period, based on the analysis of a proposed committee substitute to HB 9. Based on this assumption, the expected funding period would decrease from 99 to 30 years. The TRS AA notes that while the proposal would produce a 30-year funding period, the UAAL would still experience negative amortization and is therefore expected to continue to increase through 2029 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 PRB's review states that the bill includes an appropriation of $658 million for TRS from the Economic Stabilization Fund to provide a one-time supplemental payment to certain TRS 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 $2,400. 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 $684 million that would be appropriated to TRS would be contingent upon the passage of HB 9 or similar legislation. The analysis provided by TRS for the proposed committee substitute to HB 9 would increase the annual base employer contribution for TRS phased in over the 2020 - 2024 fiscal years.

*Paid by districts that do not participate in Social Security. Equal to approximately 0.91% of total payroll
**Equals the Base Rate (split between State and Employers) plus the member rate plus 0.91% supplemental rate plus 0.05% additional contributions made on behalf of members who have returned to work.

The actuarial review notes that the bill would impact annuitants eligible to receive the one-time supplemental payment.

METHODOLOGY AND STANDARDS
The ERS AA relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS actuarial valuation for August 31, 2018 actuarial valuation and projected to August 31, 2019.

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 will increase by 1 percent from 2018 to 2019.

According to the PRB actuary, other than the potential differences with the bill language outlined above, 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 or 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
ERS Actuarial Analysis by R. Ryan Falls, FSA, EA, MAAA, GRS, March 17, 2019.
TRS Actuarial Analysis of the proposed committee substitute to HB 9 by Daniel Siblik, ASA, and Joseph P. Newton, FSA, GRS, March 17, 2019.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, March 18, 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).