ACTUARIAL EFFECTS
The actuarial review states 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. The Texas Emergency Services Retirement System (TESRS) pension fund is currently actuarially unsound, with an infinite amortization period. Under the bill, TESRS would become actuarially sound, with a projected 30-year funding period as of August 31, 2025.

 
SYNOPSIS OF PROVISIONS
The bill would amend the Government Code to remove the statutory limit on state contributions, currently set as one third of the total of all contributions by TESRS' participating entities. The state would be required to fund an actuarially determined contribution (ADC) each biennium through September 1, 2055, as the sum of three components less contributions made by the participating entities: a 30-year amortization of the August 31, 2024, UAAL calculated with an expected annual investment return of 7.0 percent; the normal cost; and actuarial gains/losses occurring after August 31, 2024, amortized over 15 years or until September 1, 2055, whichever is later.

The bill would require future actuarial accrued liabilities to be calculated using a 7.0 percent expected annual investment return unless the average expected investment return for the Teacher Retirement System and the Employees Retirement System of Texas is higher than 7.0 percent, in which case TESRS may use the average expected return of those two systems. The bill would ensure that no state contributions are used to fund any future benefit increases.

FINDINGS AND CONCLUSIONS
The actuarial analysis states that the UAAL would increase by $7.1 million due to lowering the expected investment return rate, and that the state's annual contribution would increase from $1.3 million to $3.3 million for the period beginning September 1, 2025.
 
METHODOLOGY AND STANDARDS
The TESRS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TESRS actuarial valuation for August 31, 2024, except for the expected investment return assumption. The expected investment return assumption was set to 7.0 percent as required by the bill.
 
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 TESRS 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 Mark R. Fenlaw, FSA, Rebecca B. Morris, ASA, Rudd and Wisdom, Inc, March 21, 2025.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 25, 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.
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.