TO:	Honorable Rafael Anchia, Chair, House Committee on Pensions, Investments & Financial Services
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB1585 by Lambert (Relating to the operations and functions of the Teacher Retirement System of Texas.), Committee Report 1st House, Substituted

ACTUARIAL EFFECTS

This actuarial impact statement focuses on the provision of the bill that allows certain retirees of the Teacher Retirement System of Texas (TRS) who are re-employed to receive a partial reduction in their benefit payment rather than lose the total amount. The enactment of this bill would not impact the current unfunded actuarial accrued liability (UAAL) or funding period of the TRS. Over time, if the amounts withheld are smaller than under current provisions, it would mean smaller actuarial gains generated in future valuations.

The actuarial review states 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. TRS is currently actuarially sound, with an amortization period of 27 years. The bill would not impact the UAAL or funding period.
 
SYNOPSIS OF PROVISIONS

The bill would make several changes to the TRS statute and would continue TRS through 2033.
Most of the bill provisions relate to the administration of TRS, but the bill would also allow certain retirees (TRS members who retired after 1/1/2011 and exceed retiree rehire employment limitations) who return to employment after retirement to accept a reduction rather than outright loss of monthly benefits. The reduction would not apply if a disability retiree exceeds the 90-day limit for a school year, unless other existing exceptions for disability retirees apply. It would make conforming changes throughout TRS statute to allow for a reduction in benefits rather than a full loss in certain situations. The benefit payment for a given month would be reduced by the lesser of:

1.     the retiree's benefit payment for that month; or
2.     the total compensation earned by the retiree for employment during that month.
 
FINDINGS AND CONCLUSIONS

The actuarial analysis states that this would not have an expected cost to the plan because all retirees are currently assumed to receive their full benefit payment in the future. It also states that for fiscal year 2020, there were a total of $1,820,419 of annuities ceased by Texas Government Code Section 824.601 (Loss of Benefits). Using example members and the potential impact, the actuarial analysis estimated the total amount of annuities withheld from members to decrease by 25 percent, or approximately $450,000 per year. 

The analysis further states that it is possible that behavior of certain affected individuals may change due to the lowering of annuity reduction, but both the size of the affected group and the change to the reduction in the annuity are small enough to not be material.

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 valuation for August 20, 2020. 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 & Company, March 19, 2021.
Actuarial Review by Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, March 20, 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 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 -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.
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.