Honorable Giovanni Capriglione, Chair, House Committee on Pensions, Investments & Financial Services
FROM:
Jerry McGinty, Director, Legislative Budget Board
IN RE:
HB1758 by Allen (Relating to the payment of certain employer contributions for employed retirees of the Teacher Retirement System of Texas.), As Introduced
ACTUARIAL EFFECTS
The actuarial analysis from the Teacher Retirement System of Texas (TRS) states the impact of the bill will depend on the frequency of TRS waiving the surcharges, which are a funding source taken into consideration when calculating TRS's funding period. The analysis further noted that TRS funding sources are currently fixed by statute, and each year the actuarial valuation considers all of the funding sources when determining the funding period and assessing the health of the plan.
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 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 as of the February 28, 2023, actuarial valuation projected to August 31, 2023. If TRS chose to waive surcharges at any point, it would likely increase the funding period, depending on when they chose to do so and how often.
SYNOPSIS OF PROVISIONS
This bill would amend Section 825.4092 of the Texas Government Code by adding Subsection (h) which would authorize TRS to waive the surcharges employers must pay for hiring retirees forone or more fiscal years.
FINDINGS AND CONCLUSIONS
The actuarial analysis states that any decrease in funding sources would weaken the financial position of TRS. The analysis also states that it would be difficult to anticipate a scenario in which TRS would electively waive the employer surcharge for reemployed retirees until after the unfunded actuarial accrued liability has been fully amortized.
The actuarial review notes the likely intention of waiving the surcharges is so more employers would rehire retired teachers in situations in which the surcharges are waived, so the bill could impact a retiree who wants to work but has not been able to because the district would not or could not pay the surcharges.
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 August 31, 2022.
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, EA, MAAA, and Dana Woolfrey, FSA, EA, MAAA, Gabriel, Roeder, Smith, & Company, March 17, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 19, 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.