TO:	Honorable Giovanni Capriglione, Chair, House Committee on Pensions, Investments & Financial Services
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB600 by Bonnen (Relating to contributions to, benefits from, and the administration of systems and programs administered by the Teacher Retirement System of Texas.), As Introduced

COST ESTIMATE

Based on the February 28, 2023, Actuarial Valuation Update, Projected as of August 31, 2023

Teacher Retirement System of Texas (TRS)	Current	Proposed	Difference
Employer Contribution	8.25%	9.00%	0.75%
Employee Contribution	8.25%	9.00%	0.75%
Total Contribution	16.50%	18.00%	1.50%
Normal Cost (% of payroll)	12.23%	13.04%	0.81%
Unfunded Actuarial Accrued Liability (billions)	$54.4	$72.1	$17.7
Funded Ratio	78.7%	73.6%	-5.1%
Amortization Period (years)	27	31	4

ACTUARIAL EFFECTS

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 27 years. Under the bill, TRS would remain sound, with an amortization period to 31 years, assuming funding as specified in House Joint Resolution (HJR) 2.

SYNOPSIS OF PROVISIONS

The bill is the enabling legislation for HJR 2 and would amend various provisions of the Texas Government Code to create a gain sharing cost-of-living adjustment (COLA), provide a one-time COLA for certain annuitants, increase state and TRS member contributions, and provide a supplemental payment for certain annuitants. These provisions are described in further detail below.

Gain Sharing COLA

The gain sharing COLA structure would apply starting in fiscal year 2029 and each subsequent fiscal year.  Benefits would be increased if the investment returns for the preceding five fiscal years are greater than or equal to 7 percent. The COLA increase during an eligible fiscal year would be equal to the annuitant's monthly payment multiplied by a percentage rate. The percentage rate would be calculated as the average rate of return for the preceding five fiscal years minus 5 percent and that number multiplied by 50 percent rounded to the nearest one-tenth percent. The COLA could not exceed 2 percent of an annuitant's monthly benefit. The bill outlines eligibility for the COLA and would exclude disability retirees with less than 10 years of service credit, annuitants whose amounts are fixed in statute, and participants in a deferred retirement option plan (DROP) with regard to payment from their DROP accounts.

One-Time COLA

The bill would also provide a one-time COLA for annuitants receiving a monthly death or retirement benefit. This would apply to annuitants receiving either a standard or optional service or disability payment with a retirement or date of death for a member that occurred on or before December 31, 2020. The bill specifies how the one-time COLA percentage would apply as follows:
Six percent for retirees who retired before January 1, 2004; 4 percent for retirees who retired on or after January 1, 2004, but before January 1, 2014; 2 percent for retirees who retired on or after January 1, 2014, but before January 1, 2021. The same scale applies based on member's dates of death.

Contribution Changes

The bill would also raise the contribution rate for members' annual compensation paid on or after September 1, 2023, to the lesser of 9 percent or 9 percent reduced by 0.1 percent based on the state's contribution rate. The state contribution would also be increased to 9 percent from 8.25 percent.

The bill would also require an additional actuarially determined state contribution each fiscal year to amortize the system's unfunded liability by August 31, 2054. TRS would be required to provide to the Legislative Budget Board (LBB) before each regular legislative session the actuarially determined amount needed for the payment. This provision would expire September 1, 2055.

One-Time Supplemental Payment

The bill would also provide a one-time supplemental payment of $5,000 to annuitants aged 70 or older, payable not later than February 2024. The bill outlines eligibility for the supplemental payment and would exclude disability retirees with less than 10 years of service credit, annuitants whose amounts are fixed in statute, and participants in a DROP with regard to payment from their DROP accounts. This provision is contingent on the Legislature appropriating sufficient funds to TRS for the supplemental payment.

The bill would take effect September 1, 2023, but only if the constitutional amendment proposed by HJR 2, authorizing the legislature to provide one-time or ongoing benefit enhancements to TRS annuitants, was approved by voters in November 2023. If the proposed constitutional amendment was not approved by the voters, the bill would have no effect.

FINDINGS AND CONCLUSIONS

The actuarial analysis states that historically TRS has been funded by statutory contribution rates. This type of design presents particular challenges in that contributions and benefits are fixed, while investment and demographic experience vary.  Section 4 of the bill creates a legacy payment provision to amortize current and future unfunded actuarial liabilities by no later than the fiscal year ending August 31, 2054, based on actuarially determined payments. Importantly, the actuarially determined nature of the legacy payments is such that contributions to the plan will adapt to plan experience and keep the plan on a sustainable course. This type of approach is in line with industry best practice funding policies and the definition of an actuarially determined contribution by the Actuarial Standards of Practice.

This improves benefit security of plan participants and would save the state money over the long term because the quicker and more appropriate a reaction to an event is, the less expensive it will be to manage. In addition, the investment-related COLA will help minimize the volatility of the legacy payments. The two approaches (investment-related benefits and contributions that adapt to plan experience) will work hand-in-hand to increase the sustainability of TRS.

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 valuations for February 28, 2023, projected as of August 31, 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.

SOURCES
Actuarial Analysis by Joseph P. Newton, FSA, and Dana Woolfrey, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, March 16, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 17, 2023.

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.