ACTUARIAL EFFECTS
According to the actuarial analysis, the bill would be expected to increase salaries above expectations in fiscal year 2026 by $1.5 billion based on information provided by the Legislative Budget Board (LBB), with additional amounts each year going forward growing more than 10 percent per year, including a 40 percent increase from fiscal year 2027 to fiscal year 2028 and another 22 percent increase from fiscal year 2029 to 2030. These salary increases would increase the unfunded actuarial accrued liability (UAAL) for the Teacher Retirement System of Texas (TRS) by $4.3 billion and increase the pattern of future salary increases. This combination would be expected to increase the projected funding period to 35 years following the passage of this bill.
The actuarial review states under the current Pension Review Board (PRB) Pension Funding Guidelines, funding should be adequate to amortize the UAAL over a period which should not exceed 30 years as of September 1, 2025, and not to exceed 15 years after September 1, 2040. TRS statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as no more than 31 years.
This bill does not make modifications to benefit or contribution levels. TRS is currently actuarially sound, with an amortization period of 28 years.
SYNOPSIS OF PROVISIONS
The bill would make several changes to statute related to public school finance, including several changes that would have a potential impact on TRS pension funding.
The bill would increase the basic and other allotment amounts in the Texas Education Code, increasing compensation for certain TRS members.
FINDINGS AND CONCLUSIONS
According to the actuarial analysis, although this bill does not explicitly change the benefit provisions of TRS, the benefits paid from, and contributions paid into TRS are based on the salaries of the individual active members and thus a significant change to the salary levels would have an impact to the financial position of the pension fund.
The actuarial analysis states the bill would allow for additional funding that would materially increase the salary levels for active TRS members, and this in turn would increase the benefits owed to those members once they retire. The actual cost of the bill would depend on how the salary increases are distributed. If teachers with more service receive a higher portion of the allotment, then the UAAL will likely increase by more than the estimated $4.3 billion. However, if shorter service or lower paid teachers end up with a higher portion, the UAAL increase could be slightly less.
The actuarial review notes the bill would also increase the system's funding period by seven years based on current contribution levels. This increase could be mitigated with additional contributions of 0.45 percent of pay beginning in fiscal year 2026.
METHODOLOGY AND STANDARDS
The TRS analysis relies on the participant data, benefit structure and actuarial assumptions and methods used in the TRS actuarial valuation for August 31, 2024
, with the exception of the salary scale. Based on projected annual payroll increases through 2030 under the bill as provided by the LBB, GRS increased the salary scale assumption by 0.45 percent per year. The analysis also relies on financial information as of February 28, 2025.
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, EA, MAAA, GRS, April 28, 2025.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, April 28, 2025.
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 a period that should not exceed 30 years as of September 1, 2025, and not to exceed 15 years after September 1, 2040.
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.