TO:	Honorable Giovanni Capriglione, Chair, House Committee on Pensions, Investments & Financial Services
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HJR2 by Bonnen (Proposing a constitutional amendment authorizing the legislature to provide one-time or ongoing benefit enhancements to eligible annuitants of the Teacher Retirement System of Texas, including a one-time transfer of funds for that purpose.), As Introduced

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	8.25%	9.00%	0.75%
Employee Contribution	8.25%	9.00%	0.75%
Total Contribution	16.50%	18.00%	1.50%
Normal Cost (% of payroll)	12.23%	13.04%	0.81%
Unfunded Actuarial Accrued Liability (billions)	$54.4	$72.1	$17.7
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 (COLA) authorized by House Bill 600.

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 - 25 years being the preferable target range. TRS statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as no more than 31 years. TRS is currently actuarially sound, with an amortization period of 27 years. Under the resolution, TRS would remain sound, with an amortization period of 31 years, equal to the required threshold.

SYNOPSIS OF PROVISIONS

The resolution would amend Article III of the Texas Constitution by adding Section 51-h. It would allow the legislature to provide a one-time or ongoing benefit enhancement 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 that would be determined to be sufficient to fully pay for the benefit enhancement.

The resolution would also add a temporary provision to transfer $3.45 billion from the general revenue fund to TRS for the two-year period beginning September 1, 2023, for the purpose of providing one-time contributions, legacy payments, and benefit enhancements as provided by House Bill 600 enabling legislation. These funds would be deemed to be available to TRS as of September 1, 2023, regardless of the date the comptroller actually transfers the funds. This temporary provision would expire on January 1, 2025.  The amendment would be submitted to voters for the November 7, 2023, election.

FINDINGS AND CONCLUSIONS

The actuarial review states the changes to the contributions of TRS would include $3.45 billion for fiscal years 2024-2025 as outlined in the House Bill 600 actuarial analysis. This total consists of a $1.689 billion one-time contribution, $0.5 billion for additional state contributions as a percent of payroll, and $1.26 billion in legacy payments. These amounts have not been verified by the PRB.

The review further notes additional changes outlined in House Bill 600 that will continue to apply after the fiscal year 2024-2025 biennium but which 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 House Bill 600 would apply to most annuitants in payment beginning September 2028. The $5,000 supplemental payment in House Bill 600 would apply to most annuitants in payment aged 70 and older at the time of payment. The increases in member contributions in House Bill 600 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, March 17, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 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.