COST ESTIMATEBased on the February 28, 2023, Actuarial Valuation projected forward to August 31, 2023.
|Teacher Retirement System of Texas (TRS)
|Unfunded Actuarial Accrued Liability (millions)
|Immediate Contribution Necessary (millions)
|Amortization Period (years)
In the above chart, partial funding assumes only the $7,500 supplemental payment is fully funded through appropriations. Complete funding assumes both the supplemental payment and the 2 or 4 percent cost-of-living adjustment (COLA) are both fully funded.ACTUARIAL EFFECTS
The bill would make changes to the benefits of TRS by providing a one-time 2 or 4 percent COLA to certain members and a one-time lump sum payment of $7,500 to retired members aged 75 or older. The actuarial review states the lump sum payment is contingent on the legislature providing the necessary funding through a supplemental payment to TRS. The bill does not explicitly provide a similar contingency provision regarding fully funding the one-time COLA.
If the bill does not provide funding for the COLA but does provide funding for the lump sum, the TRS analysis estimates the benefit would increase the unfunded actuarial accrued liability (UAAL) by $3.3 billion and increase the amortization period to 31 years. If funding is appropriated for both the COLA and the lump sum payment, there would be no cost for 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 - 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. Under the bill, TRS would remain sound, with an amortization period of 31 years equal to the required threshold, assuming partial funding of the bill's provisions. Assuming all costs are completely offset by additional appropriations, the TRS amortization period would remain the same, at 27 years. SYNOPSIS OF PROVISIONS
The bill would implement a COLA for most annuitants of TRS who retired on or before December 31, 2021. The monthly benefit would increase by 2 percent for eligible members who retired on or after September 1, 2013 and 4 percent for eligible members who retired before that date.
The bill would also provide a one-time lump sum payment of $7,500 to annuitants who are 75 years or older by the month before the payment would be made. The bill further states that this lump sum payment will be funded by appropriations granted by the legislature. TRS could not provide the $7,500 payments if the appropriations are not made. The payments would be required to be made before February 2024. FINDINGS AND CONCLUSIONS
The TRS analysis states the ad-hoc annuity increase would cost $3.323 billion and the lump sum payment would cost $1.394 billion. The bill states the lump sum payment would be covered by appropriations from the legislature so it would have no impact on the funding of TRS. The analysis adds it is unclear if the same appropriations would be granted to TRS for the ad-hoc annuity increases. If the legislature does also provide appropriations for the ad-hoc increases, the bill would have no impact on the funding for TRS.
The actuarial review states the COLA would apply to all annuitants in payment with exceptions for beneficiaries and disabled retirees with annuities fixed by statute and payments from deferred retirement option plan (DROP) accounts. The supplemental payment would apply to all annuitants in payment with exceptions for beneficiaries and disabled retirees with annuities fixed by statute, payments from DROP accounts, and disability retirees with less than 10 years of service credit.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 Staff 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 13, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 17, 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.