TO:	Honorable Joan Huffman, Chair, Senate Committee on Finance
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	SB1207 by Menéndez (Relating to the retirement system in certain municipalities for firefighters and police officers.), As Introduced

COST ESTIMATE
The bill would make various changes to the San Antonio Fire and Police Pension Fund (SAFPPF).

Based on the January 1, 2022, Actuarial Valuation

San Antonio Fire and Police Pension Fund	Current	Proposed	Difference
Normal Cost (% of payroll)	23.65%	23.82%	0.17%
Unfunded Actuarial Accrued Liability (millions)	$495.90	$510.70	$14.80
Funded Ratio	88.56%	88.25%	-0.31%
Amortization Period (years)	13.57	14.37	0.8

ACTUARIAL EFFECTS

According to the SAFPPF actuarial analysis, the bill would increase the unfunded actuarially accrued liability (UAAL) by $14.8 million, which would increase the system's amortization period from 13.57 to 14.37 years.  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 to 25 years being the preferable target range. Under certain circumstances systems with funding periods over 30 years are required by statute to prepare a Funding Soundness Restoration Plan (FSRP) to make changes to the pension plan to put the system on a path to eventually achieve full funding.

SAFPPF is projected to remain actuarially sound since the amortization period would remain below 15 years if the bill took effect.  In addition, the actuarial analysis shows the total current contributions of 36.96 percent would still remain higher than the actuarially determined contribution of 34.26 percent, assuming the benefit change takes effect. 

SYNOPSIS OF PROVISIONS

The bill would amend Vernon's Texas Civil Statutes to make changes to the San Antonio Fire and Police Pension Fund.   The bill would increase the minimum benefit payable, from 50 percent of average salary to 75 percent of average salary, to the beneficiary of a participant who dies prior to retirement not in the line of duty. The changes would apply to future beneficiaries as well as retroactively apply to survivors of any pre-retirement not in the line of duty death on or after September 1, 2005, but payable prospectively only.

The bill would also make a variety of clarifying and technical changes including provisions related to service credit purchase for military service, calculation and administration of disability retirement and death benefits, coordination with federal statute, the system board's authority, and fund administration.

FINDINGS AND CONCLUSIONS

The actuarial review notes that the bill would impact benefits of surviving beneficiaries of non-line-of-duty deaths after September 1, 2005, with their payments changing prospectively only. The analysis included the effect of increased benefits to such beneficiaries as of December 31, 2021, who would benefit from the bill because they are in payment of annuities worth less than 75 percent of the member's average pay.

METHODOLOGY AND STANDARDS

The SAFPPF analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the SAFPPF actuarial valuations for January 1, 2022. 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 SAFPPF 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 Malichi Waterman, FCA, EA, MAAA, Segal, March 10, 2022.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 14, 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.