TO:	Honorable Rafael Anchia, Chair, House Committee on Pensions, Investments & Financial Services
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB3929 by Bernal (Relating to the loss of benefits of 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, eliminating the requirement that the employer pay the contributions that would otherwise be made if the position were held by a regular active member, if they are employed in a position necessary for implementing a special education program, could have negative effects on the actuarial soundness of the system. Additionally, eliminating the requirement for a 12-month break in service to return to work if the added exemption is met could change the retirement behavior of the membership of TRS.

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.  Under the bill, TRS is assumed to continue to be actuarially sound. However, the actual impact of the bill is highly dependent on the ultimate change in employer and employee behavior and what positions will meet this exception.
 
SYNOPSIS OF PROVISIONS

The bill would amend the Government Code to allow retirees to return to work without the current 12 month waiting period if they were working in a necessary position, as determined by the TRS board of trustees, for implementing a special education program under Subchapter A, Chapter 29 of the Education Code. However, IRS plan qualification requirements would still be met in accordance with Texas Government Code Section 825.506.  For a retiree who returns to work in such a position, the bill would eliminate the requirement that the employer pays the contributions that would otherwise be made if the position were held by a regular active member.
 
FINDINGS AND CONCLUSIONS

The analysis notes that the majority of the funding from employers goes directly to the unfunded liability, and therefore this bill could eliminate an important piece of the retirement system's revenue, which could cause a significant negative impact on the actuarial soundness of TRS. Additionally, it would incentivize employers to seek out retirees rather than hiring new employees because there would not be any costs associated with pension and healthcare contribution to rehire a retiree.  According to the actuarial analysis, eliminating the 12-month break-in-service requirement could also negatively affect the IRS qualification status of the fund, in addition to its actuarial soundness.
 
The analysis notes that the potential impact of the bill would depend on: (a) the number of retirees deemed necessary to implement a special education program and meet the new exemption (the bill doesn't specify any limiting provisions), and (b) the size of the economic incentive for both the retiree and the employer and its ultimate impact on retirement behavior. In estimating the impact the analysis provides two sets of results, assuming a 5 percent or 10 percent increase of employees retiring at their first eligibility, and calculating the loss of contributions if those members are re-employed. 
 

	Baseline	5% Increase in Retirements	10% Increase in Retirements
UAAL	$50,450	$51,270	$52,108
Change in UAAL		$820	$1,658
Funding Period	26	27	29
Total Missed Contributions, Additional Benefit Payments, and Missed Accumulated Investment Earnings over the Funding Period		$10 billion	$21 billion

 

The analysis notes that while the fund is below the statutory definition of actuarial soundness, it is not at a level that would be considered acceptable by the actuarial community. The UAAL is expected to continue to grow nominally until 2026 without impact from the bill. The actuarial analysis from the PRB indicates that if the surcharge is a hindrance to TRS participating employers and the state considers provisions of the bill to be worthy investments, the state could contribute the surcharge on behalf of the 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 actuaries, 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 12, 2021.
Actuarial Review by Marcia Dush, FSA, EA, MAAA, Board Actuary, and  Kenneth J. Herbold, ASA, EA, MAAA, Staff Actuary, Pension Review Board, April 13, 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.
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.