TO:	Honorable Jeff Leach, Chair, House Committee on Judiciary & Civil Jurisprudence
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB3474 by Leach (Relating to the operation and administration of and practices and procedures related to proceedings in the judicial branch of state government.), As Introduced

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. 

The Judicial Retirement System - Plan Two (JRS II) statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as less than 31 years. JRS II is currently actuarially unsound.  The actuarial analysis (AA) shows that under the provisions of the bill, the projected payroll would have a one-time increase of roughly $280,000 or 0.3 percent. There would be little impact to the fund. 

SYNOPSIS OF PROVISIONS RELATED TO PENSIONS

The bill would amend the Government Code to count time as a district attorney, criminal district attorney, or county attorney as service time for the purpose of calculating longevity pay for a variety of judicial branch positions. It would make conforming changes to the provisions related to pay of a statutory county court judge, a statutory probate court judge, a multicounty statutory county court judge, and a district attorney or criminal district attorney. It would also make changes to what would be considered years of service for state prosecuting attorneys, but it is slightly different than the other provisions.

FINDINGS AND CONCLUSIONS

The analysis references 26 members in JRS II with an average 14.8 years of past elected class service in the Employees Retirement System (ERS). It is possible that some additional service was not accounted for in the data available, but the analysis notes that it would have to be a significant amount of service outside of their elected class service to have a material impact on the actuarial condition of JRS II.

METHODOLOGY AND STANDARDS

The JRS II analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the JRS II actuarial valuation 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 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, Gabriel, Roeder, Smith & Company, March 10, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 25, 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.