TO:	Honorable Joan Huffman, Chair, Senate Committee on Finance
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB2779 by Leach (Relating to the compensation and retirement benefits of certain elected state officials.), As Engrossed

COST ESTIMATE

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

Judicial Retirement System - Plan 1 (JRS-1)	Current	If Bill Enacted	Difference
Actuarial Accrued Liability (millions)	$159.4	$192.4	$33
Funded Ratio	0.0%	0.0%	0.0%

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

Judicial Retirement System - Plan 2 (JRS-2)	Current	If Bill Enacted	Difference
Normal Cost (% of Payroll)	26.81%	26.81%	0.00%
30 1-Year Contribution Rate (as a % of pensionable pay)	33.01%	33.40%	0.39%
Unfunded Actuarial Accrued Liability (millions)	$95.2	$118.80	$23.6
Funded Ratio	85.8%	82.9%	-2.9%
Amortization Period (years)	Infinite	Infinite	N/A
Actuarial Soundness	Unsound	Unsound	N/A

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

Employees Retirement System (ERS)	Current	If Bill Enacted	Difference
Normal Cost (% of Payroll)	13.62%	13.60%	-0.02%
Unfunded Actuarial Accrued Liability (millions)	$14,502.1	$14,470.7	($31.4)
Funded Ratio	69.20%	69.20%	0.00%
Amortization Period (years)	31	31	0
Actuarial Soundness	Sound	Sound	N/A

ACTUARIAL EFFECTS

The ERS analysis shows an increase in the JRS-1 actuarial accrued liability (AAL), and an increase in the JRS-2 unfunded actuarial accrued liability (UAAL), which translates to a lower funded ratio for JRS-2.  The analysis does not include the effect of the inflation adjustments and salary supplement. 

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.  

ERS and JRS-2 statutes define actuarial soundness, for purposes of making modifications to benefit and contribution levels, as less than 31 years. Benefits would be reduced under the bill, having a positive impact on actuarial soundness. Any increases to the UAAL or amortization period are due to pay increases only. ERS is projected to be actuarially sound as of September 1, 2023. Under the bill, ERS would remain actuarially sound. JRS-2 would remain actuarially unsound. 

SYNOPSIS OF PROVISIONS

The bill would increase the minimum annual base salary of a district court judge from $140,000 to $155,400 in fiscal year 2024 and $172,494 in fiscal year 2025. The bill would also change the salaries for any other positions with salaries calculated based on pay for a district judge. It would change the standard service retirement annuity for elected class members of ERS to be based on a salary of $140,000 adjusted for inflation and other factors as determined by the Texas Ethics Commission, and the elected class benefit would no longer be tied to the base pay for a district court judge. County judges would be entitled to an annual salary supplement from the state in an amount equal to 18 percent of the annual salary paid to a district judge with comparable years of service. The assumed salaries are as follows: 

Judge	State Base Salary (current through FY 2023)	State Base Salary (FY 2024)	State Base Salary (FY 2025)
Supreme Court Chief Justice/Court of Appeals Presiding Judge	$204,600	$226,776	$251,391
Supreme Court Justice / Court of Criminal Appeals Judge	$168,800	$186,480	$206,993
Court of Appeals Chief Justice	$156,500	$173,440	$192,243
Court of Appeals Justice	$154,000	$170,940	$189,743
District Court Judge	$140,000	$155,400	$172,494

FINDINGS AND CONCLUSIONS

According to the actuarial review, judges would receive higher salaries, which would translate to higher projected pension benefits for members of JRS-1, JRS-2 and ERS. Some elected class members of ERS would no longer receive benefit adjustments from time to time.

METHODOLOGY AND STANDARDS

The JRS-1, JRS-2, and ERS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the JRS-1, JRS-2, and ERS 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, JRS-1 and JRS-2 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

ERS Cost Estimate May 17, 2023. 

Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, May 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.