TO:	Honorable Rafael Anchia, Chair, House Committee on Pensions, Investments & Financial Services
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB3787 by Dean (Relating to the loss of benefits by and the payment of certain employer contributions for certain retirees of the Teacher Retirement System of Texas who resume service.), As Introduced

ACTUARIAL EFFECTS

According to the Teacher Retirement System of Texas (TRS) actuarial analysis, the elimination of state and retiree contributions collected by the retirement system from the employer on behalf of rehired retirees would have detrimental effects to the actuarial soundness of TRS.

Additionally, the combined impact of removing both the loss of benefit provision and the requirement for employers to make contributions on behalf of retirees is likely to have a significant impact on employer and retiree behavior such that significantly more retirees are likely to be rehired. The estimated reduction in expected contributions could extend the funding period up to three  years and ultimately increase the total unfunded liability $10-15 billion by the end of the current 26-year funding period.

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 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 26 years. The projected funding period would increase to 29 years, following the passage of the bill.
 
SYNOPSIS OF PROVISIONS

The bill would amend the Government Code so that any annuitants who retired on or before January 1, 2021 would not be subject to a withholding of their benefits if they return to work for a Texas public educational institution. Any retiree who returns to work in online supplemental educational and support services provided by a nonprofit entity would also not be subject to a loss of their benefits.

For any member who retired after January 1, 2021 and returned to work for a Texas public educational institution, the bill would require TRS to send a written warning once the retiree became subject to a loss of benefits due to further employment exceeding any limitations listed in statute under Texas Government Code Section 824.602(a). If TRS determined that a retiree continued to exceed the statutory limitations on employment, a second notice must be provided requesting the retiree to: 1) return the prorated amount of the monthly benefit attributable to the period; or 2) pay the difference between what they were actually compensated and what is permissible.  If the retiree continues to exceed the statutory limitations of employment, monthly benefits may be withheld, as currently provided for in the Government Code.

The bill would also repeal Texas Government Code sections 825.4092(b) and (d) which currently 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 all retirees who resume employment with a school district. Texas Government Code sections 825.408(a-1) and (a-2) would also be repealed, as they concern interest on late payments of contributions that the bill would be eliminating.

FINDINGS AND CONCLUSIONS

The actuarial analysis focused on three key components of the bill:

Allowing all retirees as of January 1, 2021 to return to work without an impact to their annuity:

The analysis notes that the loss of benefit provisions in the bill are not expected to adversely affect the system. Further, the exception for retirees for online supplemental education or support services provided by a nonprofit entity is unlikely to have a meaningful impact on TRS actuarial soundness.  The bill would impact retirees that retired between January 1, 2011 and January 1, 2021 who return to work, meeting the exception added.

Written warnings on employment after retirement thresholds being breached:
 
The analysis states it is unlikely this provision would have a negative impact on the actuarial soundness of TRS.

Repeal of rehired retiree contributions and subsequent behavior:

The actuarial analysis states that the repeal of the requirement for an employer to pay the state and retiree contributions of a retiree that has returned to work could have significant impact on the actuarial soundness of TRS. The analysis notes that this bill would provide an incentive for employers to hire retirees, additionally specifying that most of the contributions the employer makes go to paying off the UAAL. A small adjustment of three percent of future hires being retirees instead of traditional new hires increases the funding period by one year and the missed contributions and investment earnings would accumulate to $8-12 billion over the current funding period.

The analysis also states that the contributions are vital to maintaining the actuarial soundness of the system. The actuaries suggest that repealing the contributions, combined with a one-time allowance for retirees to return to employment without a time requirement or annuity suspension, would likely create a significant increase in the number of retirees being rehired.  They also note that there are approximately 85,000 retirees under the age of 65 and 95,000 between the age of 65 and 70.  If 10,000 of those are rehired it would add one or more years to the funding period, and the missed contributions and investment earnings would be $2-3 billion over the current funding period. Combining the one-time window to return to employment with the elimination of the contributions could add as many as three years to the current funding period resulting in $10-15 billion less in total assets over the funding period.

GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB) EFFECTS

The actuarial review 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. It further notes that 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 4, 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 fiscal year end 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 fiscal year end 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.