TO:	Honorable Dan Patrick, Lieutenant Governor, Senate
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	SB1245 by Huffman (Relating to contributions to, benefits from, and the administration of the Judicial Retirement System of Texas Plan Two.), As Passed 2nd House

COST ESTIMATE

Based on the February 28, 2023, Actuarial Valuation projected forward to August 31, 2023.

Judicial Retirement System - Plan II (JRS II)	Current	Proposed	Difference
Employer Contribution (% of payroll)	15.66%	15.66%	0.00%
Future Employee Contribution (% of payroll)	9.38%	6.00%	-3.38%
Total Contribution (% of payroll)	25.04%	21.66%	-3.38%
Long Term Total Normal Cost (% of payroll)	26.81%	9.82%	-16.99%
Long Term Employer Normal Cost (% of payroll)	17.43%	3.82%	-13.61%
Contribution Rate to Fund by 8/31/2054 (% of payroll)	23.63%	15.14%	-8.49%
Unfunded Actuarial Accrued Liability (UAAL) (millions)	$95.20	$95.20	$0.00
Funded Ratio	85.80%	85.80%	0.00%
Amortization Period	Infinite	28 years	N/A
Actuarial Soundness	Unsound	Sound	N/A

ACTUARIAL EFFECTS

The actuarial review states the aggregate employee contribution would decrease from 9.38 percent to 6 percent over approximately 32 years as incoming members replace retiring and terminating members. The total normal cost of the plan would also decrease from 26.81 percent of payroll to 9.82 percent over that same time period. While the changes in the bill would not have an impact on the current unfunded actuarial accrued liability (UAAL), they would impact how long it would take to amortize the UAAL. Currently, JRS II is projected to never pay off its liabilities based on current assumptions and methods. If the provisions of the bill were implemented, JRS II would be projected to fully fund its liabilities in 28 years.

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. JRS II statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as less than 31 years. JRS II is currently actuarially unsound, with an infinite amortization period. The projected funding period would decrease to 28 years and JRS II would be actuarially sound if the provisions of the bill are implemented.

SYNOPSIS OF PROVISIONS

The bill would amend the Government Code establishing a cash balance tier for members who join the system on or after September 1, 2024. Each member's individual account would accumulate with member contributions of six percent of pay and a guaranteed four percent annual interest rate, with potential additional gain sharing equal to half of the average five-year investment returns above four percent, up to a maximum three percent. Upon retirement, each member would receive a state match of 150 percent of the member's accumulated contributions with interest. 

The bill would also make conforming changes to JRS II governing statutes. Cash balance members would not be affected by certain sections of Chapters 838, 839, and 840 of the Government Code that apply to eligibility and benefits for members receiving annuities under the existing benefit tiers and establishing, reestablishing, or purchasing service credit.

The state would make contributions for military service at the same rate as they would for the member at the time the service is established from the same fund from which the member receives compensation or did when the member last received compensation. Members would be eligible to retire at age 60 with at least 8 years of credited service (YCS) or age 50 with at least 12 YCS.

The bill would create optional forms of payment members can select upon retirement, which would allow the member to designate a beneficiary and select one of five annuity options.

The bill would also enable a retired member who had been separated from judicial service for at least twelve months to elect to rejoin the retirement system upon resumption of full-time judicial service. The member's annuity would be recomputed to include the member's additional service credit earned upon their retirement. If the member selected an optional retirement annuity at the time of their original retirement, their number of months of payments would be reduced by the number of months which the annuity was paid prior to them resuming service. This resumption of service benefit could only be implemented if JRS II is actuarially sound. This resumption of service provision would expire on September 1, 2025.


FINDINGS AND CONCLUSIONS

The actuarial review notes several significant impacts to the system and members. Benefits payable would be reduced compared to the current design. The reduction can best be seen in the employer normal cost, which would decrease from 17.43 percent of pay to 3.82 percent. The changes in the benefits would result in the system being projected to become fully funded by 2051, whereas currently the system is projected to deplete all assets by 2067.

METHODOLOGY AND STANDARDS

The JRS II analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the JRS II actuarial valuations for February 28, 2023, projected forward to August 31, 2023.

According to the PRB actuaries, 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 JRS II 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 Ryan Falls, FSA, EA, MAAA, and Dana Woolfrey, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, March 31, 2023.
Actuarial Review by Marcia Dush, FSA, EA, MAAA, Board Actuary and David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 31, 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.