TO:	Honorable Giovanni Capriglione, Chair, House Committee on Pensions, Investments & Financial Services
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB4540 by Longoria (relating to certain benefits payable by the Judicial Retirement System of Texas Plan One and the Judicial Retirement System of Texas Plan Two.), Committee Report 1st House, Substituted

COST ESTIMATE

Based on the February 28, 2023, Actuarial Valuation projected forward to August 31, 2023.
Assuming no separate legislation to increase salaries

Judicial Retirement System - Plan 1               (JRS-1)	Current	Proposed	Difference
Additional Amount Owed to JRS-1	$164.80	$196.20	$31.40
Funded Ratio	0.00%	0.00%	0.00%
Projected Appropriation for Benefits (millions)
Fiscal year 2024	$16.50	$19.70	$3.20
Fiscal year 2025	$15.90	$18.90	$3.00
Fiscal year 2026	$15.30	$18.20	$2.90
Fiscal year 2027	$14.70	$17.50	$2.80
Fiscal year 2028	$14.00	$16.70	$2.70

Based on the February 28, 2023, Actuarial Valuation projected forward to August 31, 2023.
Assuming no separate legislation to increase salaries

Judicial Retirement System - Plan 2 (JRS-2)	Current	Proposed	Difference
Employee Contribution (% of payroll)	9.38%	9.38%	0.00%
Employer Contribution (% of payroll)	15.66%	15.66%	0.00%
Total Contribution (% of payroll)	25.04%	25.04%	0.00%
Normal Cost (% of payroll)	26.81%	26.81%	0.00%
Employer Contribution Rate to Fund by 8/31/2054 (% of payroll)	23.63%	29.98%	6.35%
Unfunded Actuarial Accrued Liability (millions)	$95.20	$192.90	$97.70
Funded Ratio	85.80%	74.90%	-10.90%
Amortization Period (years)	Infinite	Infinite	N/A

ACTUARIAL EFFECTS

The actuarial analysis shows the provisions of the bill would result in an increase in the unfunded actuarial accrued liability (UAAL) of JRS-2.

JRS-1 does not have any assets and is currently funded on a pay-as-you-go basis. The analysis shows JRS-1 would require an increase in appropriations to pay benefits.

The bill would decrease the funded ratio for JRS-2 and the system would require an increase in the contribution rate to fully fund the system in less than 31 years. Any legislation increasing the salaries of current judges would have a larger negative impact on JRS-2 and JRS-1 than implementing the provisions of the bill without a salary increase.

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. JRS-2 statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as less than 31 years. JRS-2 is currently actuarially unsound, with an infinite amortization period. The projected funding period would remain at infinite and therefore remain unsound with passage of the bill.

The actuarial review notes that if the bill is enacted and there are no salary increases, employer contributions for fiscal year 2024 would have to be increased from 15.66 percent to 29.98 percent of payroll. Because JRS-2 is not currently actuarially sound, passage of this bill would require a contribution increase sufficient to comply with the statutory actuarial soundness requirement for JRS-2.

SYNOPSIS OF PROVISIONS

If the 88th Legislature enacts legislation that increases the state salary used to compute the service retirement annuity of a judge, the bill would require the Employees Retirement System to recompute the annuities for all service retirees and death benefit beneficiaries of JRS-1 and JRS-2 as of the effective date of the salary increase for the judge of a court of the same classification as the court of which they were elected or appointed. Otherwise, the bill would only recompute the annuities for service retirees and death benefit beneficiaries of JRS-1 and JRS-2 who retired before September 1, 2019. The benefits would be calculated as if the member's salary on their retirement date would have been that of a judge on September 1, 2019, and would be classified under the last court of which they were elected or appointed. The benefits would be recomputed on the effective date of the bill.


FINDINGS AND CONCLUSIONS

The actuarial analysis notes current funding arrangements for JRS-2 are not sufficient to eliminate the UAAL over a finite period. Assuming the market value of assets earns 7 percent per year, JRS-2 is currently projected to remain solvent until 2067, after which the funding would revert to a pay-as-you-go status.

If there was a salary increase, the bill would impact all service retirees and beneficiaries of JRS-1 and JRS-2 who retired before the effective date of the salary increase. If there is no salary increase, the bill would impact members of JRS-1 and JRS-2 who retired before September 1, 2019.

METHODOLOGY AND STANDARDS

The JRS-1 and JRS-2 analyses rely on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the JRS-1 and JRS-2 actuarial valuations for February 28, 2023, projected forward to August 31, 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-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
Actuarial Analysis by R. Ryan Falls, FSA, EA, MAAA, and Dana Woolfrey, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, April 17, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, April 18, 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.