The bill would make multiple changes to Houston Firefighters Relief and Retirement Fund (HFRRF), including changes to normal retirement age, deferred retirement option plan (DROP) eligibility and participation, and actuarial assumptions and methods.
The actuarial analysis showed an increase in the unfunded actuarial accrued liability (UAAL) of over $78 million with an increase in the normal cost of 1.35 percent. The actuarially determined contribution (ADC) rate would decrease by 0.09 percent in 2026 but increase by 7.81 percent in 2027. The ADC rate would continue to be higher under the provisions of the bill than current measures through at least 2036.
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. Under state law, systems with funding periods over 30 years for too long 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.
The actuarial review notes the July 1, 2024, actuarial valuation shows eight liability layers with a remaining amortization period of 5.208 years and one liability layer with an amortization period of 30 years. This current arrangement meets the PRB Pension Funding Guidelines. Since the bill would reset all amortization periods to 15 years, which is the 2040 target in the PRB Pension Funding Guidelines, the funding period would remain within the guidelines as well as statutory funding requirements under Section 802.2015, Texas Government Code.
SYNOPSIS OF PROVISIONS
The bill would change several benefits for members of HFRRF.
Previously members who were hired on or after July 1, 2017, could retire at the age at which the member's age plus service exceeded 70 years. The bill would change normal retirement age to the earlier of 20 years of service or age 50 with 10 years of service for all members.
The bill would expand the members eligible to participate in a DROP by allowing members hired or rehired on or after July 1, 2017, to participate. The bill would also enhance the DROP interest rate from 65 percent of the five-year average system returns to 75 percent. For DROP participants who had less than 20 years of service on July 1, 2017, the bill would increase the monthly annuity received after exiting DROP with 1 percent annual increases up to a maximum total increase of 10 percent. It would also slightly increase the DROP interest rate for all members.
The bill would provide an optional deferred vested pension benefit for members who terminate employment with at least 10 but less than 20 years of service.
The bill would also change the assumptions and methods used to calculate and amortize unfunded liabilities, including changing the actuarial cost method from ultimate entry age normal to entry age normal, changing the liability loss layer to 15 years, and allowing the system to extend prior amortization periods to 15 years.
FINDINGS AND CONCLUSIONS
The bill would impact all members, with the greatest effect for members hired after July 1, 2017.
The analysis provided a 10-year projection of annual cost to the retirement system. This projection shows a reduction in the expected ADC rate in 2026, but an increase in all subsequent years ranging from 6.13 percent to 14.01 percent.
METHODOLOGY AND STANDARDS
The HFRRF analysis relies on the participant data, financial information, benefit structure, and actuarial assumptions and methods used in the HFRRF actuarial valuations for July 1, 2024, with the exception of three main differences. The cost method was changed from ultimate entry age normal to entry age normal; the expected DROP crediting rate was set to the assumed investment return, multiplied by 75 percent and increased by 0.10 percent; and a new assumption was made related to the increased deferred vested pension benefit.
According to the PRB actuary, the assumptions and methods are reasonable for this analysis, but the DROP crediting rate assumption is questionable. In the 88th Texas legislative session, using stochastic analysis, another actuary had estimated the DROP crediting rate using the same provisions should have increased an additional 0.56 percent to account for the change from geometric to arithmetic average. During the last five years, the system's DROP crediting rate would have been 44 basis points higher due to this change. By using only 10 basis points to account for the change to arithmetic calculation, the system is likely underestimating the liability.
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 HFRRF 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 Michael A. Ribble, FSA, EA, MAAA, FCA, Gallagher Benefit Services, April 8, 2025.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, April 29, 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 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.
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.
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.
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.