TO:	Honorable Rafael Anchia, Chair, House Committee on Pensions, Investments & Financial Services
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB4368 by Rodriguez (Relating to the administration of certain municipal police retirement systems.), As Introduced

COST ESTIMATE

Based on the December 31, 2019 Actuarial Valuation projected to December 31, 2020.

Austin Police Retirement System (APRS)	Current	Proposed	Difference
Employee Contribution (% of payroll)	13.00%	15.00%	2.00%
Employer Contribution (% of payroll)	21.31%	32.01%	10.70%
Total Contribution (% of payroll)	34.31%	47.01%	12.70%
Long-term Normal Cost (% of payroll)	24.98%	18.60%	(6.38%)
Amortization Period (years)	Infinite	31	N/A
Actuarial Soundness	Unsound	Sound	N/A

 
ACTUARIAL EFFECTS

The bill would amend Vernon's Civil Statutes to make significant changes to the benefits and financing structure of the Austin Police Retirement System (APRS). The bill would add a new benefit tier (Group B), increase employee contributions, establish a payment schedule to eliminate the legacy liability, and add an actuarially determined contribution (ADC) for the employer. The new benefit tier would not change current member benefits and therefore would not change the current unfunded actuarially accrued liability (UAAL) or funding status, however, it would reduce the long-term cost associated with the plan. The city contributions for fiscal year 2022 could increase by nearly $20 million.

The bill would decrease the long-term normal cost by over 6 percent of payroll due to benefit changes, and the contribution changes in the bill would cause the fund to change from never being funded to having an effective amortization period of 31 years.  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. APRS is currently actuarially unsound, with an infinite amortization period. The effective amortization period would be 31 years following the passage of this bill.
 
SYNOPSIS OF PROVISIONS
 

Benefit changes:

The bill would create a second benefit tier (Group B) for new hires beginning January 1, 2022. The primary differences between the current benefits and new tier benefits are outlined below:

	Group A (current benefit)	Group B (new tier)
Benefit Multiplier	3.20%	2.50%
Final Average Salary (Months)	36	60
Normal Retirement Date; earlier of	Age 55/ 20 years of service        23 years of service                Age 62	Age 50/ 25 years of service                Age 62

 
Financing changes:

The bill would establish a statutory funding policy for APRS consisting of fixed contributions for employees and a variable contribution rate for the city. The employee contribution would increase from 13 percent to 15 percent beginning January 1, 2022.  The city contribution rate would consist of two parts. First, it would establish a specified dollar payment that would pay off the UAAL (as of December 31, 2020), known as the legacy liability, in 31 years. The second part would be comprised of the employer's normal cost combined with a layered amortization component designed to eliminate any unexpected future changes in the unfunded liability. Each year's valuation would produce an amortization layer, with losses amortized over a period of no more than 30 years.
 
Contribution Corridor:

The actuarially determined portion of the employer contribution rate would be subject to a minimum and maximum corridor of plus or minus 5 percent of the projected corridor mid-point.  If the calculated contribution rate should exceed the corridor maximum, the bill would require the employer and APRS to enter into discussions to determine additional funding solutions. If the calculated contribution rate fell below the corridor minimum, the city would contribute the minimum rate.
 
FINDINGS AND CONCLUSIONS

The analysis highlights that while the benefit changes would have no immediate impact on the funding status of the system, as they would only affect members hired after January 1, 2022, the long-term cost of the system would be reduced, and the contribution changes would move the system from an infinite amortization period to an effective amortization period of 31 years. The analysis further notes that the assets for the system are expected to be depleted within the 50 years if no action is taken.
 
The review notes that the analysis does not include a projection of the expected corridor mid-point or the amortization schedule of the legacy liability. Below is the anticipated contribution changes for fiscal year 2022, based on the December 31, 2019 actuarial valuation.


 

Contributions (in millions)	Current	If Bill enacted
Member	$23.30	$26.90
Employer	$38.20	$57.30
Total	$61.50	$84.20

 
Based on the information included in the analysis, the projected $57.3 million employer contribution for fiscal year 2022 is approximately one-third employer normal cost and two-thirds amortization of the legacy liability. The initial legacy liability payment of approximately $39 million, as calculated by the PRB, would continue to increase by 3 percent per year. While the corridor mid-point would be dependent on the actuary's assumptions regarding how quickly current members will be replaced by new members, the corridor midpoint would be expected to decrease as a percent of total pay but increase on a dollar basis over the near term. At some point the increase in total compensation would be outpaced by the transition from Group A members to Group B members such that the expected corridor mid-point would decrease on both a dollar and percent of pay basis.
 
If the long-term normal cost does not go down by as much as projected, the required employer contribution rate could exceed the corridor maximum. The bill does not address action steps to be taken in the event the required contribution exceeds the maximum, and instead directs the system and the employer to enter into discussions. This structure creates future uncertainty and could cause the system and the employer to make additional, de facto benefit and/or contribution changes.
 
METHODOLOGY AND STANDARDS

The APRS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the APRS actuarial valuation for December 31, 2019.  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 APRS 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 Lewis Ward and Ryan Falls, FSA, EA, MAAA, 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 14, 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.