BILL ANALYSIS

H.B. 4736

By: Bonnen

Pensions, Investments & Financial Services

Committee Report (Unamended)

BACKGROUND AND PURPOSE

The bill author has informed the committee that the Texas Emergency Services Retirement System (TESRS) is a state agency that administers a pension system for emergency services departments, such as volunteer fire departments, across Texas and that the TESRS state board of trustees determines the minimum, and may determine a maximum, contribution for each member of a participating department at a rate the board determines necessary to make the pension system actuarially sound. Current law requires the state to contribute the amount necessary to make the pension system actuarially sound each year but prohibits the state's contribution from exceeding one-third of the total of all contributions by governing bodies in a particular year. The bill author has informed the committee that because of this funding structure TESRS is unlikely to ever pay off its unfunded liabilities and that TESRS is the last remaining statewide pension system that is not actuarially sound. H.B. 4736 seeks to address this issue by providing for a statutory framework for the state to provide a certain actuarially determined contribution in order to cover the normal cost of benefits accrued in a given year and pay down the unfunded liabilities over a 30-year period.

CRIMINAL JUSTICE IMPACT

It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.

RULEMAKING AUTHORITY

It is the committee's opinion that rulemaking authority is expressly granted to the Texas Emergency Services Retirement System state board of trustees in SECTION 6 of this bill.

ANALYSIS

H.B. 4736 amends the Government Code to authorize the rules adopted by the Texas Emergency Services Retirement System (TESRS) state board of trustees authorizing an optional annuity increase or supplemental payments to include procedures for the governing body of a participating department to request the approval of the TESRS state board of trustees to make a supplemental payment or increase an annuity under the rules and prohibit the governing body from making a supplemental payment or increasing an annuity under the rules without approval from the state board. The bill prohibits state contributions from being used to fund any option elected under a rule adopted by the state board to make a supplemental payment or increase an annuity.

H.B. 4736, for purposes of provisions governing TESRS, replaces "actuarially sound pension system" with "actuarially sound" and revises the definition of the term as circumstances under which the amount of contributions to the pension system is sufficient to cover the normal cost of and amortize the unfunded actuarial accrued liability of the pension system in a period that does not exceed the later of 15 years after the date of the actuarial valuation on which the determination of whether the retirement system is actuarially sound is made or September 1, 2055, instead of a period that does not exceed 30 years as provided by current law.

H.B. 4736 replaces the circumstances which must be included with respect to the requirement for the state board to determine the meaning of "significant change" for purposes of the requirement that the state board submit a report to the governor, the lieutenant governor, the speaker of the house of representatives, the Legislative Budget Board (LBB), and the State Pension Review Board if as a result of an event or action, there is a significant change to the actuarial valuation of the pension system's assets or liabilities, including the extent to which the system's liabilities are unfunded. The bill relaces such circumstances from circumstances in which there is an increase in the time required to amortize the unfunded liabilities of TESRS to a period that exceeds 30 years, assuming a maximum state contribution, to circumstances in which there is such an increase such that that TESRS would not be actuarially sound.

H.B. 4736 requires the governing body of a political subdivision associated with the participating department who elects to provide an optional supplemental payment or annuity increase to contribute the money necessary to cover the costs of all increased benefits provided, as required by provisions requiring the governing body of a participating department that elects an option to fund all increased benefits that are provided to its retirees and beneficiaries of TESRS under the option. The state board may adopt rules for the regular payment of such required money.

H.B. 4736, with respect to the requirement for the state to contribute the amount necessary to make TESRS actuarially sound each year, removes the prohibition against such contribution exceeding one-third of the total for all contributions by governing bodies in a particular year and instead requires the state to make an actuarially determined payment in the amount necessary to amortize the legacy liability of TESRS by not later than the fiscal year ending August 31, 2055. The bill requires the actuary for TESRS to biennially determine an actuarially determined contribution amount that is consistent with actuarial standards of practice and the following principles:

· closed layered amortization of liability layers to ensure that the amortization period for each liability layer begins 12 months after the date the liability layer is first recognized;

· each liability layer is assigned an amortization period;

· each liability loss layer is amortized over a period of 15 years or until September 1, 2055, whichever is later; and

· each liability gain layer is amortized over the following period:

o if there is a liability loss layer, a period equal to the remaining amortization period of the largest remaining liability loss layer, and the two layers must be treated as one layer such that if the payoff year of the liability loss layer is accelerated or extended, the payoff year of the liability gain layer is also accelerated or extended; or

o if there is no liability loss layer, a period of 15 years beginning the first day of the fiscal year beginning 12 months after the liability gain layer is first recognized or until September 1, 2055, whichever is later.

The bill adds a temporary provision, set to expire September 1, 2057, requiring TESRS, before each regular legislative session, to provide the LBB with the amount necessary to make the required actuarially determined payment and requiring the director of the LBB, under the direction of the LBB, to include that payment in the general appropriations bill prepared for introduction at each regular legislative session.

H.B. 4736 defines the following terms for purposes of provisions governing TESRS:

· "amortization period" as:

o if amortizing a liability loss layer, the period necessary to fully pay the liability loss layer;

o if amortizing a liability gain layer, the period described by a provision added by the bill relating to state contributions; or

o if referring to the amortization period of all liability layers of the pension system, the number of years incorporated in a weighted average amortization factor for the sum of all liability layers as determined in each biennial actuarial valuation of assets and liabilities of the system;

· "legacy liability" as the total unfunded actuarial accrued liability of the pension system determined as of August 31, 2024, using an assumed rate of investment return of seven percent, and, for each calendar year following 2024, that total adjusted as follows:

o reduced by the contribution amount made under provisions relating to state contributions for the calendar year allocated to the amortization of the legacy liability; and

o adjusted by the assumed rate of investment return of seven percent;

· "liability gain layer" as a liability layer that decreases the unfunded actuarial accrued liability of the pension system;

· "liability layer" as the legacy liability or for each fiscal year after August 31, 2024, the amount by which the pension system's unfunded actuarial accrued liability increases or decreases in a fiscal year, as applicable, due to the unanticipated change in revenue caused by factors, other than changes to a benefit formula, as determined in the actuarial valuation analyzing that fiscal year;

· "liability loss layer" as a liability layer that increases the unfunded actuarial accrued liability; for the purposes of TESRS, the legacy liability is a liability loss layer; and

· "unfunded actuarial accrued liability" as, as determined in an actuarial valuation, the difference between the actuarial accrued liability and the actuarial value of assets, where the liability is determined using an expected rate of investment return not greater than seven percent, or if greater than seven percent, the average of the rates used by the Employees Retirement System of Texas and the Teacher Retirement System of Texas in the most recently published actuarial valuations preceding the actuarial valuation in which the unfunded actuarial accrued liability is being determined.

EFFECTIVE DATE

On passage, or, if the bill does not receive the necessary vote, September 1, 2025.