According to the Teacher Retirement System (TRS), if a level headcount is maintained, it would not have an impact on expected funding progress for the system because TRS' actuarial valuation already assumes a level headcount.
The actuarial analysis notes that even a small adjustment such as a decrease in the projected covered payroll growth could be enough for TRS to no longer be actuarially sound according to the statutory definition. TRS' analysis also notes that it is possible an increase in the contribution rate may be necessary in the future if payroll does not grow as currently projected following the passage of this bill.
The actuarial review states that under the current Pension Review Board (PRB) Pension Funding Guidelines, funding should be adequate to amortize the unfunded actuarial accrued liability (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 an amortization period that does not exceed 30 years by one or more years. The 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 create an education savings account program which would provide funding for approved education-related expenses of children participating in the program.
FINDINGS AND CONCLUSIONS
The actuarial review states that active TRS members have increased from 918,545 in fiscal year 2021 to 928,418 in fiscal year 2022 to 953,295 in fiscal year 2023 to 970,874 in fiscal year 2024. Due to the increasing TRS headcount, there is capacity for some outflow of teacher employment from public schools to private schools without causing a reduction in active TRS members. The headcount will ultimately depend on Texas' population growth. According to the TRS actuary, as long as the state continues to gain in population, then the more likely outcome would be closer to a level headcount as opposed to a declining headcount.
The actuarial analysis notes that a 1 percent per year decline in active population would increase the funding period to 35 years and take 12 years for the UAAL to stop growing and begin to decline.
The TRS analysis relies on the participant data, financial information, benefit structure, and actuarial assumptions and methods used in the TRS actuarial valuation for August 31, 2024.
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, January 27, 2025.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, January 27, 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 PRB 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 (it 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.