TO:	Honorable Giovanni Capriglione, Chair, House Committee on Pensions, Investments & Financial Services
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB2406 by Geren (Relating to service retirement benefits payable by the Employees Retirement System of Texas to commissioned peace officers employed by the attorney general.), As Introduced

COST ESTIMATE

Based 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)	$14,502.10	$14,503.90	$1.80
Funded Ratio	69.20%	69.20%	0.00%
Amortization Period (years)	31	31	N/A

Based on the February 28, 2023, Actuarial Valuation projected to August 31, 2023

Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOS)	Current	Proposed	Difference
Normal Cost (% of payroll)	2.12%	2.12%	0.00%
Unfunded Actuarial Accrued Liability (millions)	$763.40	$768.60	$5.20
Funded Ratio	57.20%	57.00%	-0.20%
Amortization Period (years)	Infinite	Infinite	N/A

ACTUARIAL EFFECTS

The actuarial review states the bill would increase the unfunded actuarial accrued liability (UAAL) of ERS by $1.8 million and increase the LECOS UAAL by $5.2 million. The actuarial review states the increase to the UAAL for ERS can be fully financed through a one-time lump sum payment of $1.8 million or increasing the existing annual legacy contribution payment by $0.14 million through 2054.  The current $510 million appropriated as the annual legacy payment contains enough cushion to absorb the $0.14 million without any increase in contributions. The UAAL for LECOS can be fully financed through a one-time lump sum payment of $5.2 million.

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.

The ERS statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as less than 31 years. Under the bill, effective September 1, 2023, ERS would 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 peace officers employed by the Office of the Attorney General to the definition of law enforcement officers for the purpose of eligibility into LECOS.

FINDINGS AND CONCLUSIONS

According to the actuarial review, the bill would affect 185 peace officers who would gain participation in LECOSRF and be covered under the enhanced supplemental benefits.

METHODOLOGY AND STANDARDS

The ERS and LECOS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS and LECOS actuarial valuations for February 28, 2023, projected forward to 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 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 Ryan Falls, FSA, EA, MAAA, and Dana Woolfrey, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, April 17, 2023
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, April 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.