TO:	Honorable Giovanni Capriglione, Chair, House Committee on Pensions, Investments & Financial Services
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB3340 by Metcalf (Relating to relief and retirement funds for firefighters and police officers in certain municipalities.), As Introduced

COST ESTIMATE

Based on the July 1, 2022, Actuarial Valuation.

Houston Firefighters' Relief and Retirement Fund (HFRRF)	Current	Proposed	Difference
Normal Cost (% of payroll)	14.75%	14.77%	0.02%
Unfunded Actuarial Accrued Liability (millions)	$231.80	$267.30	$35.50
Funded Ratio	95.40%	94.80%	-0.70%
Amortization Period (years)	7.68	9.32	1.64

ACTUARIAL EFFECTS
According to the Houston Firefighters' Relief and Retirement Fund (HFRRF) actuarial analysis, the bill would increase the unfunded accrued liability (UAAL) by $35.5 million, which would increase the system's amortization period from 7.68 to 9.32 years.

The Houston Police Officer's Pension System (HPOPS) has not yet provided an actuarial analysis of this bill, so the actuarial impact to HPOPS cannot be determined at this time.

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. Under state law, certain systems with funding periods over 30 years are required to prepare a Funding Soundness Restoration Plan (FSRP) to make changes to the pension plan to put the system on a path to eventually achieve full funding.

SYNOPSIS OF PROVISIONS
This bill would amend the governing statutes of both HFRRF and HPOPS regarding annuity requirements for both plans.

Houston Fire
The bill would increase the maximum period for a deferred retirement option plan (DROP) from 13 years to 20 years, and the DROP crediting rate would change to 70 percent of the 5-year arithmetic average system returns from 65 percent of the 5-year geometric average system returns.

It would also change the retirement and DROP eligibility to 20 years of service for all members. Currently members hired on or after July 1, 2017, are not eligible to enter DROP and are not eligible for retirement until the sum of the member's age and service equals 70.

Houston Police
The bill would make the normal retirement age for all tiers of HPOPS either 20 years of credit service (YCS) or age 60 with at least 10 years of service. This would change from the earlier of those two ages for Tier 1 members and the Rule of 70 for Tier 2 members. It would remove a provision allowing certain members who separate from service with between 10 and 20 YCS to receive a monthly service pension upon reaching normal retirement age. It would change the DROP benefit credits to be calculated with the average aggregate annual 5-year rate of return rather than the compounded average aggregate annual 5-year rate of return. DROP participants would receive annual credit equal to 70 percent of this average rather than 65 percent.

FINDINGS AND CONCLUSIONS
According to the actuarial review, this bill would extend the maximum period that HFRRF members can remain in DROP, increase the HFRRF DROP crediting rate, and restore some prior benefit reductions for HFRRF members hired on or after July 1, 2017, as outlined in Senate Bill 2190, 85th Regular Session, Texas Legislature, when the system is more than 90 percent funded. Further, the review notes the bill allows for re-amortization of current liabilities to 15 years, in which case the city contribution rate would decrease to 23.09 percent of payroll. It does not appear such a policy is specifically included in the bill language.

METHODOLOGY AND STANDARDS
The HFRRF analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the risk sharing valuation study for July 1, 2022, but assuming the DROP crediting rate is equal to 5 percent.

According to the PRB actuary, the HFRRF 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 HFRRF 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
HFRRF Actuarial Analysis by Michael Ribble, FSA, MAAA, Buck, March 22, 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.