TO:	Honorable Joan Huffman, Chair, Senate Committee on Finance
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	SB1444 by Zaffirini (Relating to the public retirement systems for employees of certain municipalities.), As Introduced

COST ESTIMATE

Based on the December 31, 2022, Actuarial Valuation

City of Austin Employees' Retirement System (COAERS)	Current	Proposed	Difference
Employer Contribution (% of payroll)	19.00%	20.47%	1.47%
Employee Contribution (% of payroll)	8.00%	10.00%	2.00%
Total Contribution (% of payroll)	27.00%	30.47%	3.47%
Normal Cost (% of payroll)	17.39%	17.94%	0.55%
Unfunded Actuarial Accrued Liability (millions)	$1,901	$1,896	-$5
Funded Ratio	64.10%	64.20%	0.10%
Amortization Period (years)	33	30	-3

The employer contribution rate after the bill is approximated for the 2024 calendar year based on the conversion of legacy liability fixed dollar contribution to a percentage of payroll. The bill phase-in of the contribution rate increase results in the employer contribution rate increasing approximately 1.47 percent of projected payroll in 2024 instead of 2.48 percent. City contributions could change depending on results of the risk sharing valuation study as proposed by the bill.

ACTUARIAL EFFECTS

The bill would make significant changes to the financing structure of the City of Austin Employees' Retirement System (COAERS). It would increase employee contributions, establish a payment schedule to eliminate the legacy liability, and add an actuarially determined contribution (ADC) for the employer. The city contributions for fiscal year 2024 would increase by $12.3 million.

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 state law, certain systems with funding periods over 30 years are required 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.  Under the provisions of the bill, COAERS would become actuarially sound, with an amortization period of 30 years beginning January 1, 2024. Moving to an ADC structure would also ensure the fund remains sound in future years.

SYNOPSIS OF PROVISIONS

The bill would amend Vernon's Texas Civil Statutes to make changes to the City of Austin Employees Retirement System.

Financing changes
The bill would establish a statutory funding policy for COAERS, consisting of an increase in member contributions from 8 percent to 9 percent in calendar year 2024 and 9 to 10 percent starting in calendar year 2025, and an ADC rate from the city. The member contribution rate could be increased with a majority vote of all voting active-contributory members. The city contribution rate would consist of two parts. First, the bill would establish a specified dollar payment that would pay off the existing UAAL (as of December 31, 2022, risk sharing valuation), known as the legacy liability, over 30 annual installments. The payments for the first two years would be the result of a phase-in of approximately half of the contribution increase and grow at a rate of three percent thereafter. The second part would be comprised of the employer's normal cost combined with a layered amortization component designed to eliminate any unexpected future changes in the unfunded liability. These annual layers of unexpected changes in the UAAL would each have their own amortization schedule which would be tied to the remaining period of the legacy liability until that period reaches 20 years. After reaching 20 years, the layers would be amortized over a generally 20-year closed period and liability gain layers would be amortized over the period of the largest loss layer. The sum of the amortization payments would then be converted to a percentage of projected payroll.

Contribution Corridor
The actuarially determined portion of the employer contribution rate would be subject to a minimum and maximum corridor of plus or minus five percent of the projected corridor midpoint. If the estimated city contribution rate should exceed the corridor maximum, the city contribution rate would be the corridor maximum. Additionally, the member contribution rate would be increased by the difference between the estimated city contribution and the corridor maximum, up to two percent. If the estimated city contribution rate is greater than the corridor maximum, the city and the board must enter into discussions for additional funding solutions. If the estimated city contribution rate fell below the corridor midpoint, the city would contribute the corridor midpoint percentage if the funded ratio was less than 90 percent, or it would contribute the estimated city contribution rate if the funded ratio was 90 percent or greater. The city contribution rate cannot be below the minimum corridor rate.

Benefits
The bill would not make changes to the retirement benefits earned by members but would make changes to ancillary benefit features such as the ability to purchase service credits. Members would be able to purchase service for time spent in active military duty only at retirement and would be required to pay 100 percent of the actuarial premium as opposed to being able to purchase credit at any time and only paying 25 percent of the actuarial premium. The bill would also change the purchasing of non-contributory and supplemental service from being allowed at any time to only being allowed at retirement. The interest rate for purchase of forfeited service would also be amended to the assumed rate of return on investments in effect on the date of purchase.

Board Composition and authority
The bill would require that citizen trustees have experience in securities investment, pension administration, pension law, or governmental finance. It would also remove one active-contributory member and replace that seat with the city's director of finance or their designee. It also specifies that one term for the active-contributory trustees would begin January 1, 2024, and the other two would begin on January 1 of the following even-numbered year.

Actuarial studies and oversight requirements
The bill would require the system's actuary to perform an experience study at least once every five years and notify the city beforehand. The city would be authorized to have an actuary prepare a separate experience study, review the system's experience study, or accept the system's experience study, with specific time requirements for each option. If the employer contribution rate from the city's experience study is different from the rate in the system's study by more than two percent of payroll, then the actuaries would have 20 days to reconcile the difference. If the actuaries cannot reconcile their differences to 2 percent or lower, a third actuary will be hired by the city from three options presented by the system to explain the differences between the assumptions of the system and city's actuaries. The third-party actuary's findings and the experience studies must be presented to the system board. If the system board adopts actuarial assumptions or methods that are counter to the third-party actuary's fundings, they must provide a formal letter to the city and the PRB explaining the rationale of their decision. The system's actuary and executive director must be available upon request of the city or PRB to present the rationale in person.

FINDINGS AND CONCLUSIONS
The actuarial analysis states most of the changes to the benefits of COAERS would not impact the actuarial liabilities measured by the actuarial valuation. However, there are two changes that would impact the liabilities and normal cost. Increasing the member contribution rate to 10 percent does not directly impact the benefits paid, but it would if a member decides to terminate employment and elects to take a refund of their member contributions. This would also impact the death benefit payable on behalf of an active member who is not eligible for retirement at the time of death. The other impact to liabilities and normal cost would be the change to financing sick leave conversions. Under the bill, the city would finance the remaining actuarial cost of any unused sick leave conversions by adding an assumption to the actuarial valuation about the frequency of the purchases and the average amount of additional service received due to the conversion.

All active members in the system as of January 1, 2024, would pay higher contribution rates with slight changes to ancillary benefit features.

METHODOLOGY AND STANDARDS
The COAERS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the COAERS actuarial valuations for December 31, 2022.

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 COAERS 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 Lewis Ward and R. Ryan Falls, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, March 23, 2023.
Actuarial Review by Marcia Dush, FSA, MAAA, EA, Board Actuary, and David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 25, 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.