ACTUARIAL EFFECTSThe actuarial review states that the bill would be estimated to increase the unfunded actuarial accrued liability (UAAL) by approximately $0.9 billion based on guidance provided for the actuarial analysis that total payroll would increase by approximately $1.0 billion in fiscal year 2025. The actual cost would depend on how the salary increases are distributed.
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 to 25 years being the preferable target range.
The Teacher Retirement System of Texas (TRS) statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as less than 31 years. TRS is currently actuarially sound, with an amortization period of 27 years. The actuarial analysis states that the funding period should not increase due to an increase in the effective contribution rate received by TRS on all payroll by 0.06 percent.
SYNOPSIS OF PROVISIONSThe bill would make changes to multiple sections of the Texas Education Code, including but not limited to, increases to the state's minimum salary schedule for teachers and other specified positions.
Section 21.402 of the Education Code would be amended to redefine the minimum salary schedule for all classroom teachers, full-time librarians, full-time school counselors, and full-time school nurses from a minimum monthly schedule to a highest annual minimum.
This increase in compensation could also be satisfied by providing a one-time bonus payment during the 2025-2026 school year in an amount equal to the difference between compensation in the 2024-2025 school year and the amount a person would have earned if they had followed the previously described compensation increase, or by increasing their compensation in the 2024-2025 school year by at least $8,000 more than what their compensation was for the 2023-2024 school year.
The bill would also add Section 21.416 to the Education Code, which would create a grant program that would award funds to reimburse a school district or open enrollment charter school that hires a teacher who retired prior to September 1, 2022, for the increased contributions that would be paid to TRS. The funds would be appropriated by the Legislature through the General Appropriations Act and can be modified or limited to a date range other than September 1, 2022, or only for retired teachers who hold a certain certification; teach a certain subject or grade; are in a certain geographical area; or provide instruction to certain students, including to students with disabilities.
The bill would repeal Section 825.4092(f) of the Government Code, which currently prohibits surcharges related to rehiring retired teachers to be passed down to the retiree.
The bill would be effective on September 1, 2024.
FINDINGS AND CONCLUSIONSThe actuarial analysis states the bill could give salary increases to classroom teachers that would exceed the current assumption. However, the bill also reclassifies $2.6 billion of payroll to be subject to the two percent employer contribution rate, so the net impact should not impact the funding period.
METHODOLOGY AND STANDARDSThe 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, 2022, and updated for investment performance through February 28, 2023.
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.
SOURCESActuarial Analysis by Joseph P. Newton, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, November 9, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, November 9, 2023.
GLOSSARYActuarial 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.
The following information was supplied by Agency 338 - Pension Review Board:
ACTUARIAL EFFECTSThe actuarial review states that the bill would be estimated to increase the unfunded actuarial accrued liability (UAAL) by approximately $0.9 billion based on guidance provided for the actuarial analysis that total payroll would increase by approximately $1.0 billion in fiscal year 2025. The actual cost would depend on how the salary increases are distributed.
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 to 25 years being the preferable target range.
The Teacher Retirement System of Texas (TRS) statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as less than 31 years. TRS is currently actuarially sound, with an amortization period of 27 years. The actuarial analysis states that the funding period should not increase due to an increase in the effective contribution rate received by TRS on all payroll by 0.06 percent.
SYNOPSIS OF PROVISIONSThe bill would make changes to multiple sections of the Texas Education Code, including but not limited to, increases to the state's minimum salary schedule for teachers and other specified positions.
Section 21.402 of the Education Code would be amended to redefine the minimum salary schedule for all classroom teachers, full-time librarians, full-time school counselors, and full-time school nurses from a minimum monthly schedule to a highest annual minimum.
This increase in compensation could also be satisfied by providing a one-time bonus payment during the 2025-2026 school year in an amount equal to the difference between compensation in the 2024-2025 school year and the amount they would have earned if they had followed the previously described compensation increase, or by increasing their compensation in the 2024-2025 school year by at least $8,000 more than what their compensation was for the 2023-2024 school year.
The bill would also add Section 21.416 to the Education Code, which would create a grant program that would award funds to reimburse a school district or open enrollment charter school that hires a teacher who retired prior to September 1, 2022, for the increased contributions that would be paid to TRS. The funds would be appropriated by the legislature through the General Appropriations Act and can be modified or limited to a date range other than September 1, 2022, or only for retired teachers who hold a certain certification; teach a certain subject or grade; are in a certain geographical area; or provide instruction to certain students, including to students with disabilities.
The bill would repeal Section 825.4092(f), Texas Government Code, which currently prohibits surcharges related to rehiring retired teachers to be passed down to the retiree.
FINDINGS AND CONCLUSIONSThe actuarial analysis states the bill could give salary increases to classroom teachers that would exceed the current assumption. However, the bill also reclassifies $2.6 billion of payroll to be subject to the 2 percent employer contribution rate, so the net impact should not impact the funding period.
METHODOLOGY AND STANDARDSThe 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, 2022, and updated for investment performance through February 28, 2023.
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.
SOURCESActuarial Analysis by Joseph P. Newton, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, November 9, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, November 9, 2023.
GLOSSARYActuarial 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.