COST ESTIMATEBased on the February 28, 2023, Actuarial Valuation projected to August 31, 2023
|
Employees Retirement System (ERS) |
Current |
Proposed |
Difference |
| Normal Cost (% of payroll) |
13.62% |
13.63% |
0.01% |
| Unfunded Actuarial Accrued Liability (millions) |
$14,502.1 |
$14,506.8 |
$4.7 |
| Funded Ratio |
69.2% |
69.2% |
0.0% |
| Amortization Period (years) |
31 |
31 |
N/A |
| Actuarial Soundness |
Sound |
Sound |
N/A |
Based on the February 28, 2023, Actuarial Valuation projected to August 31, 2023
|
| Law Enforcement and Custodial Officer Supplemental Plan (LECOS) |
Current |
Proposed |
Difference |
| Normal Cost (% of payroll) |
2.12% |
2.12% |
0.00% |
| Unfunded Actuarial Accrued Liability (millions) |
$763.4 |
$772.9 |
$9.5 |
| Funded Ratio |
57.2% |
56.9% |
- 0.3% |
| Amortization Period (years) |
Infinite |
Infinite |
N/A |
| Actuarial Soundness |
Unsound |
Unsound |
N/A |
|
ACTUARIAL EFFECTS The actuarial analysis from the Employees Retirement System (ERS) lists minor increases to the unfunded actuarial accrued liability and normal cost to both the ERS and Law Enforcement and Custodial Officer Supplemental Plan (LECOS) systems, assuming the ERS board adopts a rule to include juvenile justice officers in the definition of custodial officers, entitling them to additional benefits in both ERS and LECOS. The analysis notes that the current expected legacy contribution to ERS is $510 million annually, versus a necessary contribution of $498 million. The actuarial review states the impact of the bill would be $0.4 million annually, well within that cushion, or a $4.7 million one-time lump sum for the ERS system and a $9.5 million one-time lump for the LECOS system, for a total lump sum of $14.2 million. LECOS contributions would need to increase to 3.51 percent of payroll in addition to expected annual court fees of $13 million in order to reach the amortization period threshold required to become actuarially sound under the statutory definition. 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. The ERS statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as less than 31 years. Under the provisions of the bill, ERS is expected be actuarially sound with benefits expected to be fully funded by August 31, 2054. LECOS is currently unsound, with an amortization period of infinite. It would remain unsound without a separate bill providing additional funding. SYNOPSIS OF PROVISIONS The bill would add new Section 811.0011 to the Texas Government Code authorizing the ERS board to adopt a rule including juvenile justice officers in the definition of custodial officer for purposes of allowing those officers to participate in LECOS and receive enhanced benefits in ERS compared to regular employees. This may only occur if the addition of the new members would not increase the amortization period to be over the threshold to be actuarially sound or in any way reduce the benefit of current members. If the board adopts such a rule, the bill would require the board to consult with the Texas Juvenile Justice Board and adopt rules setting out standards for determining eligibility for service credit as a custodial officer, based on the need to encourage early retirement for persons with hazardous duties. The bill also specifies that if the board adopts a rule including juvenile justice officers in LECOS, service credit established before the rule's adoption would be considered service credit as a custodial officer. FINDINGS AND CONCLUSIONS The actuarial review states custodial officers participate in LECOS and receive enhanced benefits in ERS compared to regular service employees. If the ERS board extends these benefits to juvenile justice officers, this change would have an overall minor impact on either system's funding but would require additional funding for LECOS to become actuarially sound. The review also notes that approximately 600 juvenile justice officers would gain participation in LECOS and be covered under enhanced ERS benefits. The actuarial analysis recommends the legacy payment for ERS remain at the $510 million shown in the original legislative analysis for Senate Bill 321, 87th Legislature, Regular Session, 2021, which established the requirement for the actuarially determined legacy payment. The analysis also states that the payment remaining at this level will accelerate the pace at which the UAAL is eliminated and will significantly reduce volatility in the legacy contributions from biennium to biennium. METHODOLOGY AND STANDARDS The ERS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS and LECOSRF actuarial valuations for 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 ERS and LECOS 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 R. Ryan Falls, FSA, EA, MAAA and Dana Woolfrey, FSA, EA, MSAAA, Gabriel, Roeder, Smith & Company, 3/20/2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, 3/20/2023.
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.