ACTUARIAL EFFECTS
The actuarial analysis provided by the Teacher Retirement System of Texas (TRS) states the cost-of-living adjustment in Section 1 of Senate Bill (SB) 10 would cost approximately $3.354 billion to implement and the one-time lump sum payments in Section 2 would cost approximately $1.636 billion, for a total cost of about $4.99 billion. In conjunction with House Joint Resolution (HJR) 2 and House Bill (HB 1), the bills provide the appropriations necessary to make the payment and increase the annuity. Thus, SB 10 would not impact the unfunded actuarial accrued liability (UAAL), funded ratio, or funding period of TRS.
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 less than 31 years. TRS is currently actuarially sound, with an amortization period of 27 years. Under the bill, TRS would remain sound.
SYNOPSIS OF PROVISIONS
The bill would amend various provisions of the Texas Government Code to provide a one-time COLA for certain annuitants and provide a supplemental payment for certain annuitants. These provisions are described in further detail below.
One-Time COLA
The bill would provide a one-time COLA for annuitants receiving a monthly death or retirement benefit. This would apply to annuitants receiving either a standard or optional service or disability payment with a retirement, or date of death for a member, that occurred on or before August 31, 2020. The bill specifies how the one-time COLA percentage would apply, as follows:
Six percent for retirees who retired on or before August 31, 2001; 4 percent for retirees who retired after August 31, 2001, but on or before August 31, 2013; 2 percent for retirees who retired after August 31, 2013, but on or before August 31, 2020. The same scale applies based on member's dates of death.
One-Time Supplemental Payment
The bill would also provide a one-time supplemental payment of $7,500 to annuitants aged 75 or older the month before the payment is made, or $2,400 if the annuitant is at least 70 years old but younger than 75 the month before the payment is made. The bill outlines eligibility for the supplemental payment and would exclude disability retirees with less than 10 years of service credit, both active and retiree survivor beneficiaries whose amounts are fixed in statute, and participants in a DROP with regard to payment from their DROP accounts. This provision is contingent on the Legislature appropriating sufficient funds to TRS for the supplemental payment.
Effective dates
The one-time COLA in Section 1 of the bill would take effect January 1, 2024, but only if the constitutional amendment proposed by HJR 2is approved by voters in November 2023. If the proposed constitutional amendment is not approved by the voters, the COLA provisions of the bill would have no effect.
The one-time lump sum payment in Section 2 of the bill would be guaranteed regardless of the constitutional amendment and would be effective immediately if it receives a vote of two-thirds of all members elected to each house. If the bill passes but does not receive two thirds vote, it would instead take effect September 1, 2023.
FINDINGS AND CONCLUSIONS
The COLA would apply to most annuitants in payment as of September 2020. The one-time supplemental payments would apply to most annuitants in payment aged 70 and older the month before the supplemental payment is made.
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 as of 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 26, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, May 26, 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).