ACTUARIAL EFFECTS
The actuarial analysis states additional allotment amounts would be expected to increase total payroll by approximately $1.5 billion. Assuming this is distributed mostly evenly across the group of teachers, it would increase the unfunded actuarial accrued liability (UAAL) by $1.8 billion.
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 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 no more than 31 years. Currently, TRS is actuarially sound with a projected amortization period of 27 years as of August 31, 2023. The actuarial review states under the bill, the amortization period would be expected to increase to about 28 years on September 1, 2023, assuming the increase in the UAAL is $1.8 billion. However, the precise increase would depend on how the allotment is distributed to each individual teacher.
SYNOPSIS OF PROVISIONS
The bill would make changes to multiple sections of the Texas Education Code. There are four main sections of the bill with a potential impact on TRS funding:
Section 10 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.
Section 18 of the bill would amend Section 48.112(c) and (d) of the Education Code to increase pay under the Teacher Incentive Allotment for classroom teachers with certain designations.
Section 20 of the bill would add Section 48.159 to the Education Code to provide an allotment for classroom teacher salaries for the 2023-2024 school year based on district size.
Section 21 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.
Changes to Sections 21.416 of the Education Code would take effect immediately if the bill received a vote of two-thirds of all the members elected to each house, otherwise they would take effect September 1, 2023. Changes to Section 48.112 and 48.159 of the Education Code would take effect September 1, 2023.
FINDINGS AND CONCLUSIONS
According to the actuarial review, it is unclear to the system's actuary how individual member salaries would change under the bill. If teachers with more service receive the bulk of the allotment, the UAAL will increase by more than $1.8 billion. If teacher with less service receive the bulk of the allotment, the UAAL will increase by less than $1.8 billion.
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 29, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 30, 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.