ACTUARIAL EFFECTS
According to the actuarial analysis, the bill would be expected to increase salaries above expectations in fiscal year 2026 by $2.1 billion based on information provided by the Legislative Budget Board (LBB), with additional amounts each year going forward growing more than 7 percent per year, which would increase the unfunded actuarial accrued liability (UAAL) by $5.7 billion, but also 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, assuming the increase to the UAAL is $5.7 billion.
The actuarial review states under the current 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. The Teacher Retirement System of Texas (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 increase pay under the Teacher Incentive Allotment for classroom teachers with certain designations.
The bill would also add a Teacher Retention Allotment for classroom teachers with certain amounts of teaching experience, depending on district size.
The bill, with the exception of changes to Section 48.112 and the addition of Section 48.158, would take effect immediately if the bill received a vote of two-thirds of all members elected to each house, otherwise the bill would take effect September 1, 2025. Section 48.112 and Section 48.158 would take effect September 1, 2025.
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, at least over the short term.
The actuarial analysis states the bill would allow for additional funding that would materially increase the salary levels for certain teachers, and this in turn would increase the value owed to those members once they retire. The actual cost of the bill would depend on how the actual 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 $5.7 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 0.3 percent of pay beginning in fiscal year 2026.
METHODOLOGY AND STANDARDS
The TRS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS actuarial valuations for August 31, 2024
, with the exception of the salary scale. Based on projected annual payroll increases through fiscal year 2030 under the bill as provided by the LBB, GRS increased the salary scale assumption by 0.25 percent per year.
According to the PRB 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 Newton, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, 2/20/2025.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, 2/20/2025.
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 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.
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.