TO:	Honorable Brandon Creighton, Chair, Senate Committee on Education
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	SB9 by Creighton (Relating to the rights, certification, and compensation of public school educators and assistance provided to public schools by the Texas Education Agency related to public school educators and to certain allotments under the Foundation School Program.), As Introduced

ACTUARIAL EFFECTS

The bill would increase the salaries for certain teachers and other specified positions.  The actuarial analysis states that the exact cost of the bill cannot be determined based on the current information available to the Teacher Retirement System of Texas (TRS). It further states that the bill has the potential to give a material salary increase to classroom teachers that would exceed the current payroll growth assumptions.

The analysis also states that the grant program in the bill would provide resources for the employers to pay the current retiree surcharge, so the provision should not impact TRS, as only the source of funding would change, not the amount.

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. Currently, TRS is actuarially sound with an amortization period of 28 years as of February 28, 2023, projected to be 27 years as of August 31, 2023.The actuarial analysis notes significant increases in salary have the potential to increase the funding period past the statutory maximum, and once the salary effects can be determined and a more detailed analysis follows, a lump sum contribution or increase in the contribution rate may be necessary to maintain an amortization period of 31 years or less.

SYNOPSIS OF PROVISIONS

The bill would make changes to multiple sections of the Texas Education Code. There are three main sections of the bill with a potential impact on TRS funding:

Section 8 of the bill would add new Section 21.416 to the Education Code to establish a grant program to pay certain fees related to rehiring retired teachers and add new Section 21.417 to mandate unspecified minimum salary increases for classroom teachers for the 2023-2024 school year.

Section 13 of the bill would amend Section 48.112(c) and (d) of the Education Code to increase pay under the Teacher Incentive Allotment for recognized teachers and would introduce a new tier of recognition.

Section 16 of the bill would repeal Section 825.4092(f) that currently prohibits surcharges related to rehiring retired teachers to be passed down to the retiree.

FINDINGS AND CONCLUSIONS
The actuarial review notes that the actuarial analysis mentions, but does not specify, potential pension costs of the increased salaries. Additionally, the actuarial analysis references Senate Bill 3, 86th Legislature, Regular Session, 2019, which provided a $5,000 salary increase to teachers in 2019, increased the unfunded actuarial liability by $1.3 billion, and added years to the amortization period; however, the actuarial review notes the analysis does not state whether the expected impact of this bill in 2023 would be more or less than Senate Bill 3. The system's actuaries state that it is unclear by how much each member will be impacted, but that the impact could be material.

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 as of August 31, 2022, for valuing the actuarial condition of TRS and updated for investment performance through 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 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, EA, MAAA, and Dana Woolfrey, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, March 16, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 19, 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.