LEGISLATIVE BUDGET BOARD
Austin, Texas
 
ACTUARIAL IMPACT STATEMENT

88TH LEGISLATIVE REGULAR SESSION
 
March 29, 2023

TO:
Honorable Jeff Leach, Chair, House Committee on Judiciary & Civil Jurisprudence
 
FROM:
Jerry McGinty, Director, Legislative Budget Board
 
IN RE:
HB2779 by Leach (Relating to the compensation of a district judge and the associated retirement benefits of certain other elected state officials.), As Introduced


COST ESTIMATE

Based on the August 31, 2022, Actuarial Valuation projected to August 31, 2023. 
Judicial Retirement System of Texas Plan 1 (JRS I) 
 No Pay Increase   If Bill Enacted   Difference 
Unfunded Actuarial Accrued Liability (millions)                  $159.4               $192.4          $33.0 
Funded Ratio                   0.0%               0.0%           0.0% 

Based on the February 28, 2023, Actuarial Valuation projected to August 31, 2023. 
Judicial Retirement System of Texas Plan 2 (JRS II) 
 No Pay Increase   If Bill Enacted  Difference 
Normal Cost (% of payroll)                26.81%             26.81%          0.0% 
30/1-Year Contribution Rate (as % of pensionable pay)               31.60%            33.40%        1.80% 
Unfunded Actuarial Accrued Liability (millions)                 $70.5             $118.8        $48.4 
Funded Ratio                89.1%              82.9%       -6.20% 
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 of Texas (ERS)  
 No Pay Increase  If Bill Enacted  Difference 
Normal Cost (% of payroll)                13.62%             13.61%        0.01% 
Unfunded Actuarial Accrued Liability (millions)            $14,481.5         $14,558.4         $76.9 
Funded Ratio                  69.2%               69.1%         -0.1% 
Level Dollar Contribution Rate Through 2054                        $0                  $5.7            $5.7 
Amortization Period (years)                        31                     31  N/A 
Actuarial Soundness  Sound  Sound  N/A 

Figures in the No Pay Increase column are calculated assuming there is no legislation to increase salaries.

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 to 25 years being the preferable target range.  

Employees Retirement System (ERS) and JRS II statutes define actuarial soundness, for purposes of making modifications to benefit and contribution levels, as no more than 31 years. This bill would not affect benefits, it would only affect pay. ERS is projected to be actuarially sound as of September 1, 2023. Under the bill, ERS would remain actuarially sound but would require increased contributions. JRS II would remain actuarially unsound. 

The actuarial analysis notes that given the bill does not attempt to modify benefits or contributions, it is the actuary's opinion the bill is not subject to the JRS II statutory requirements under Section 840.106, Texas Government Code, and could be enacted without an increase to the JRS II employer contribution.

SYNOPSIS OF PROVISIONS 

This 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. 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 

The bill would change the standard service retirement annuity for elected class members of ERS to be based on a salary of $140,000, and the elected class benefit would no longer be tied to the base pay for a district court judge. 


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 I, JRS II and ERS. If financed with a one-time immediate contribution, the cost would be $33 million for JRS I, $48.4 million for JRS II and $76.9 million for ERS. Alternatively, the ERS legacy payment could be increased by $5.7 million each year through 2054. 

METHODOLOGY AND STANDARDS 

The ERS and JRS II analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the ERS and JRS II actuarial valuations for February 28, 2023. The JRS I analysis relies on the participant data, financial information, benefit structure, and actuarial assumptions and methods used in the JRS I actuarial valuation 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 ERS, JRS I, and JRS II 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, MAA, Gabriel, Roeder, Smith & Company, March 27, 2023. 

Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 27, 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.  


Source Agencies:
338 Pension Review Board
LBB Staff:
JMc, KDw, LCO, JPO