TO:	Honorable Joan Huffman, Chair, Senate Committee on Finance
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB4034 by Johnson, Julie (relating to certain disability and death benefits payable by the public retirement systems for police and fire fighters in certain municipalities.), Committee Report 2nd House, Substituted

COST ESTIMATE

Based on the January 1, 2022, Actuarial Valuation.

Dallas Police & Fire Pension System (DPFPS)	Current	Proposed	Difference
Normal Cost (% of payroll)	17.1%	17.2%	0.1%
Unfunded Actuarial Accrued Liability (millions)	$3,041	$3,049	$8
Funded Ratio	41.1%	41.0%	-0.1%
Funding Period	68	70	2

ACTUARIAL EFFECTS

The actuarial analysis (AA) shows minor impacts to the normal cost, unfunded actuarial accrued liability (UAAL), and funded ratio. The funding period would increase by two years, projecting the system to become 100 percent funded in 2092 rather than 2090. 

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 Sections 802.2015 and 802.2016 of the Government Code, 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.

The Dallas Police and Fire Pension System DPFP is already subject to the FSRP requirement due to its 68-year amortization period as of January 1, 2022, 63-year amortization period as of January 1, 2021, and 55-year amortization period as of January 1, 2020. Enactment of this bill would make the system further unsound by increasing the amortization period from 68 to 70 years.

SYNOPSIS OF PROVISIONS

The bill would make changes to certain death and disability benefits for members of DPFP. It would change the multiplier for disability benefits for members who began service before March 1, 2011, to 2.5 percent rather than between 2.0 and 2.5 percent based on the member's age when retirement begins. It would set the standard death benefit multiplier for service after September 1, 2017, to 1.25 percent rather than between 1 and 1.25 percent based on a member's age when retirement begins.

It would also increase death benefits if the system board determined a member died in the line of duty, doubling the benefit from 50 percent of the member's accrued benefit with a maximum of 45 percent of average pay to 100 percent of the member's accrued benefit with a maximum of 90 percent of average pay.

The changes would only apply for disability or death benefits for which an application is filed on or after the bill's effective date on September 1, 2023.

FINDINGS AND CONCLUSIONS

The actuarial review states the most impactful change is doubling the line of duty death benefit
from 50 percent of the member's accrued benefit with a maximum of 45 percent of average pay to 100
percent of the member's accrued benefit with a maximum of 90 percent of average pay.

The bill would improve the benefit received for members who become disabled, or beneficiaries of members who died, while in active duty.

METHODOLOGY AND STANDARDS

DPFP analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the DPFP actuarial valuations for January 1, 2022, with a new assumption for line of duty deaths. The assumption is that 30 percent of pre-retirement active deaths will occur in line of duty deaths. According to the PRB Staff 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 DPFP 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 Jeffrey S. Williams, FCA, ASA, MAAA, EA The Segal Group, Inc., March 24, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 24, 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.