COST ESTIMATE
Based on the February 28, 2023, Actuarial Valuation projected forward to August 31, 2023
Teacher Retirement System of Texas (TRS)
|
Current
|
Proposed
|
Difference
|
Employer Contribution (% of payroll)
Employee Contribution (% of payroll)
Total Contribution (% of payroll)
|
8.25%
8.25%
16.50%
|
9.00%
9.00%
18.00%
|
0.75%
0.75%
1.50%
|
Normal Cost (% of payroll)
|
12.23%
|
13.04%
|
0.81%
|
Unfunded Actuarial Accrued Liability (billions)
|
$54.4
|
$71.9
|
$17.5
|
Funded Ratio
|
78.7%
|
73.6%
|
(5.1)%
|
Amortization Period (years)
|
27
|
31
|
4
|
ACTUARIAL EFFECTS
The resolution proposes an amendment to the Texas Constitution that would establish a long-term funding framework for benefit enhancements, including the cost-of-living adjustments authorized by SB 10.
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. TRS statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as less than 31 years. TRS is currently actuarially sound, with an amortization period of 27 years, and would remain sound assuming passage of the constitutional amendment outline in HJR 2 in conjunction with SB 10.
SYNOPSIS OF PROVISIONS
The resolution, subject to approval by Texas voters, would amend Article XVI of the Texas Constitution by amending Section 67(b)(3) and adding Section 67-a. The resolution would limit employee contributions for TRS members to a maximum of nine percent of compensation. It would also allow the legislature to provide one or more cost-of-living adjustments or supplemental payments as benefit enhancements to eligible annuitants of TRS as long as the retirement system is actuarially sound. The benefits could not be applied to TRS without an accompanying appropriation of the funds sufficient to fully pay for the benefit enhancement.
The resolution would also add a temporary provision to transfer $1.9 billion from the general revenue fund to TRS for the 2024-25 biennium to provide the benefit and funding provisions as provided by SB 10. This temporary provision would expire on January 1, 2056.
The amendment would be submitted to voters for the November 7, 2023, election.
FINDINGS AND CONCLUSIONS
The actuarial review states HJR 2 as engrossed would provide $1.9 billion towards the cost of benefit enhancements outlined in SB 10 as passed by the House.
The review further notes additional changes outlined in SB 10 that will continue to apply after the fiscal year 2024-2025 biennium but are not accounted for in this joint resolution. These ongoing changes include additional employee and employer contributions of 0.75 percent of payroll for each year going forward, and an actuarially determined legacy payment be made by the state, estimated to be $630 million for each year through 2054.
The gain sharing COLA in SB 10 would apply to most annuitants in payment beginning September 2028. The $5,000 supplemental payment in SB 10 would apply to most annuitants in payment aged 70 and older at the time of payment. The increases in member contributions in SB 10 would apply to all active members.
METHODOLOGY AND STANDARDS
The TRS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS 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 TRS 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 Joseph P. Newton, FSA, and Dana Woolfrey, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, May 4, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, May 4, 2023.
GLOSSARY