Honorable Rafael Anchia, Chair, House Committee on Pensions, Investments & Financial Services
FROM:
Jerry McGinty, Director, Legislative Budget Board
IN RE:
HB1552 by Ashby (Relating to retirees of the Teacher Retirement System of Texas who resume certain employment with a school district.), As Introduced
ACTUARIAL EFFECTS The bill would amend the Government Code to remove the requirement of employers to contribute to the Teacher Retirement System of Texas (TRS) for retirees who have returned to work as a full-time bus driver. According to TRS, the provisions of the bill could lower the collected surcharges by as much as $800,000 per year, with a total present value of $14.3 million of lost revenue to TRS over the current funding period of 27 years. The actuarial review states that under the current Pension Review Board 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 sound, with an amortization period of 27 years. The projected funding period would remain at 27 years if the bill were enacted.
SYNOPSIS OF PROVISIONS Texas Government Code Section 825.4092 requires the employer to pay contributions for certain TRS retirees who have resumed employment with a school district. Currently, employers are not required to pay contributions for retirees who retired from TRS before September 1, 2005. The bill would expand this exception to also include retirees who are employed by the school district as a full-time bus driver even if they retired on or after September 1, 2005. This change would apply to all retirees returning as full-time bus drivers, even if they retired before, on, or after the effective date of the bill.
FINDINGS AND CONCLUSIONS The TRS actuarial analysis notes the total surcharge collected from employers for bus driver positions for fiscal year 2020 was $831,095. Assuming this amount grows at the general payroll growth rate of 3 percent, the analysis estimates the total present value of lost revenue over the next 27 years would be approximately $14.3 million. Below is a table that shows the estimated loss in revenue for the next 5 fiscal years.
Fiscal Year Lost Revenue 2022 $ 881,709 2023 908,160 2024 935,405 2025 963,467 2026 992,371 Total: $ 4,681,111
The analysis cautions that while the lost revenue for this exception is not sufficiently large to impact the expected funding period, it increases the risk that exceptions for other occupations and circumstances could be included in the future. The surcharge is important to keep the revenue into TRS at appropriate levels and to not provide employers an incentive to rehire retirees rather than hire new employees, which could hinder TRS' ability to manage and ultimately lower its unfunded actuarial accrued liability.
METHODOLOGY AND STANDARDS According to the PRB actuary, total contributions lost by the fund are assumed to equal the total surcharge collected by the fund for fiscal year 2020, increased by 3 percent per year. Otherwise, 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, 2020.
SOURCES Actuarial Analysis by Joseph P. Newton, FSA, Gabriel,Roeder, Smith & Company, March 16, 2021. Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, March 16, 2021.
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).