TO:	Honorable Rafael Anchia, Chair, House Committee on Pensions, Investments & Financial Services
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB1124 by Muñoz, Jr. (Relating to a cost-of-living adjustment applicable to certain benefits paid by the Teacher Retirement System of Texas, including a related study.), As Introduced

COST ESTIMATE

Based on the February 28, 2021 Actuarial Valuation.

Teacher Retirement System of Texas (TRS)	Current	Proposed	Difference
Unfunded Actuarial Accrued Liability (billions)	$          50.5	$              51.8	$                   1.3
Amortization Period (years)	26	27	1

ACTUARIAL EFFECTS

According to the Teacher Retirement System of Texas (TRS) actuarial analysis, the bill would increase the unfunded actuarially accrued liability (UAAL) by $1.3 billion, which would increase the system's amortization period from 26 years to 27 years. The analysis also notes that without additional contributions to offset the interest charges (7.25 percent per year), the $1.3 billion UAAL for this benefit enhancement would increase to $8 billion over the 26-year period, to be financed in year 27.
 
The actuarial review states 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. 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 sound, with an amortization period of 26 years. The projected funding period would increase to 27 years following the passage of this bill.
 
SYNOPSIS OF PROVISIONS
 
The bill would amend the Government Code by adding Section 824.703 to provide a cost-of-living adjustment (COLA) in the amount of the lesser of 3 percent of the current monthly annuity or $100. To receive the benefit the effective date of retirement, or for other annuitants the effective date payments began, must be after August 31, 2004 and on or before August 31, 2015. The increase in monthly payments would occur as soon as practicable if the board determines the COLA would not increase the amortization period above TRS's 31 year statute. The COLA would not apply to annuitants whose benefit is fixed by statute, disabled retirees with less than 10 years of service creditor, and deferred retirement option plan (DROP) participants regarding their DROP account.
 
Additionally, the bill would require TRS to conduct a study on the possibility of providing future COLAs with structural changes or offering an alternative annuity payment option such as a graduated scale with the annuity payments increasing on an annual basis. The study can only consider alternative payment options that are projected by TRS's actuary to have no fiscal impact to the state. A written report of the study with results and recommendations must be sent to the Texas legislature no later than September 1, 2022. This study provision would expire September 1, 2023.
 
FINDINGS AND CONCLUSIONS

The actuarial analysis notes that for the funding period to remain at the current 26 years as of February 28, 2021, the state could either make a lump sum contribution of $1.3 billion on September 1, 2021 or provide an increase of 0.16% in the state contribution rate as of September 1, 2021 to continue throughout the remaining period. The increase would amount to $83 million for fiscal year 2022. If those contribution changes are not made, the PRB's actuarial review notes that at the end of year 26, the bill would increase the required contributions by $8 billion for fiscal year end (FYE) 2047.
 
 
GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB) EFFECTS

The actuarial analysis notes any increase in the UAAL would have to be immediately recognized in the plan sponsor's balance sheet, resulting in a commensurate increase in the Net Pension Liability (NPL). It further notes that because the increase in NPL is not accompanied by a commensurate increase in contributions, the NPL would be expected to grow from $1.3 billion in FYE 2022 to $8 billion for FYE 2046. The state would be allocated 55 percent of this amount and the remaining 45 percent would be allocated to participating employers.
 
METHODOLOGY AND STANDARDS

The TRS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the February 28, 2021 actuarial valuation. 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 assumes 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 & Company, April 2, 2021.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 3, 2021.
 
 
GLOSSARY
 
Actuarial Accrued Liability(AAL) - The current value of benefits attributed to past years.
Actuarial Value of Assets (AVA) - The value of assets used for the actuarial valuation. The AVA can be either the market value (MVA) or a smoothed value of assets.
Amortization Payments - The portion of the total contribution used to reduce the unfunded actuarial accrued liability (UAAL).
Amortization Period - The specified length of time used when calculating the amortization payment portion of an actuarially determined contribution, or as the time it would theoretically take to fully fund the UAAL or fully recognize a surplus. The PRB 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 - An actuarial cost method is a way to allocate pieces of a participant's total expected benefit to each year of their working career. In other words, it is a technique to determine how much of the present value of future benefits (PVFB) to assign to past service (AAL) vs. future service (present value of future normal costs, or PVFNC).
Funded Ratio (FR) - The ratio of actuarial assets to the actuarial accrued liabilities.
GASB 68 and related terminology - A statement of the Governmental Accounting Standards Board (GASB) concerning accounting for pension by governmental employers effective for FYE June 30, 2015 and later.
Net Pension Liability (NPL) - The liability of employers and non-employer contributing entities for pension benefits shown on the entity's balance sheet for FYE June 30, 2015 and later. The NPL equals the total pension liability (TPL) minus the market value of plan assets. If plan assets exceed the TPL, there is a Net Pension Asset.
Total Pension Liability (TPL) - The portion of the actuarial present value of projected benefit payments attributed to past periods of employee service under the Entry Age Normal valuation method.
Discount Rate -  A single rate used to discount and calculate the TPL which is equivalent to discounting future payments reflected in the TPL at the long-term expected rate of return until plan assets are projected to be exhausted, and discounting at the municipal bond rate for subsequent payments reflected in the TPL.
Market Value of Assets (MVA) - The fair market value of the system's assets.
Normal Cost (NC) - Computed differently under different actuarial cost methods, the normal cost generally represents the current value of benefits attributed to the present year. The employer normal cost equals the total normal cost of the plan reduced by employee contributions.
Present Value of Future Benefits (PVFB) - The current value of all benefits expected to be paid from the plan to current plan participants.
Present Value of Future Normal Costs (PVFNC) - The current value of benefits attributed to the present year and all future years (includes the normal cost as the first year).
Unfunded Actuarial Accrued Liability (UAAL) - The difference between the actuarial accrued liability and the actuarial value of assets; therefore, the UAAL is the amount that is still owed to the fund for past obligations.