LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE, 77th Regular Session May 3, 2001 TO: Honorable Teel Bivins, Chair, Senate Committee on Education FROM: John Keel, Director, Legislative Budget Board IN RE: HB3343 by Sadler (Relating to benefits, including group benefits coverage, for certain participants of the Teacher Retirement System of Texas and employees of certain charter schools.), Committee Report 2nd House, Substituted ************************************************************************** * Estimated Two-year Net Impact to General Revenue Related Funds for * * HB3343, Committee Report 2nd House, Substituted: negative impact * * of $(1,673,759,000) through the biennium ending August 31, 2003. * * * * The bill would make no appropriation but could provide the legal * * basis for an appropriation of funds to implement the provisions of * * the bill. * ************************************************************************** General Revenue-Related Funds, Five-Year Impact: **************************************************** * Fiscal Year Probable Net Positive/(Negative) * * Impact to General Revenue Related * * Funds * * 2002 $(537,655,000) * * 2003 (1,136,104,000) * * 2004 (1,176,697,000) * * 2005 (1,211,653,000) * * 2006 (1,243,777,000) * **************************************************** All Funds, Five-Year Impact: *********************************************************************** *Fiscal Probable Probable Probable Probable Change in * * Year Savings/ Savings/ Savings/ Savings/ Number of * * (Cost) from (Cost) from (Cost) from (Cost) from State * * General Other Funds General General Employees * * Revenue for startup Revenue Revenue from FY 2001 * * Fund for 0997 Fund for Fund for * * startup TRS-Care CHIP * * 0001 contrib 0001 * * 0001 * * 2002 $0 140.0 * * $(53,000, $(22,000, $(95,521, * * 000) 000) 000) * * 2003 0 0 140.0 * * (101,252,(10,900,000) * * 000) * * 2004 0 0 140.0 * * (107,300,(12,600,000) * * 000) * * 2005 0 0 140.0 * * (113,800,(14,600,000) * * 000) * * 2006 0 0 140.0 * * (120,600,(16,800,000) * * 000) * *********************************************************************** ***************************************************** * Fiscal Year Probable Savings/(Cost) from * * Foundation School Fund * * 0193 * * 2002 $(389,134,000) * * 2003 (1,023,952,000) * * 2004 (1,056,797,000) * * 2005 (1,083,253,000) * * 2006 (1,106,377,000) * ***************************************************** Fiscal Analysis The bill, as substituted, creates a statewide health insurance program for school districts, regional education service centers and charter schools, references certain adjustments to the Foundation School Program Chapter 42 Tier 2 guaranteed yield and Chapter 41 equalized wealth level, increases the benefits provided to Teachers Retirement System (TRS) retirees, and creates a retiree health insurance account within the pension trust fund. The bill also increases funding for the TRS-Care health care program for retirees. Enactment of the bill's provisions related to the active and retiree health insurance programs is contingent upon passage of a constitutional amendment related to the use of the state's contributions to the retirement system for health care benefits. Statewide Health Insurance Program The bill creates the Texas School Employees Uniform Group Benefits Program to provide health insurance and other benefits to employees of the public school districts, regional education service centers, and charter schools. The program would be administered by the Teacher Retirement System (TRS) and offer five levels of health coverage ranging from the first tier basic plan to the fifth tier standard plan, which would be comparable to the benefits offered by the Employees Retirement System to state employees. Plan participation would begin in fiscal year 2003, and participation by the districts and other entities would be optional. Only an entity that joins the plan is eligible for the state contributions provided through the school finance formulas. The bill includes provisions for providing coverage to children of employees who meet the income eligibility guidelines for the Children's Health Insurance Program (CHIP). Since district participation in a statewide plan will make these children ineligible for federal funding of CHIP benefits, the bill requires the state to provide coverage that offers the same benefits as the CHIP program does, and with the state contributing 80 percent of the cost. State Group Insurance Contributions and School Finance State funding for group insurance contributions would be provided through Foundation School Program formula adjustments -- an increase in the Tier 2 Guaranteed Yield and the Equalized Wealth Level -- for school districts that choose to participate in the Texas School Employees Uniform Group Benefits Program. For fiscal year 2002, participating school districts can use 80 percent of additional revenue for non-recurring expenses, including capital outlay, or debt service. For fiscal year 2003 and thereafter, school districts that participate in the program would be required to use 80 percent to provide group insurance coverage as specified in the bill. Participating school districts that receive insufficient revenue through the formula adjustments would be provided enough revenue to reach the per employee amount specified in the General Appropriations Act for each fiscal year. All of that revenue must be used to provide group insurance contributions. For fiscal year 2002, the school finance aspects of the bill would provide all districts the complete benefit of the increase in the guaranteed yield (we assume an increase to $26.26 - $24.99 in current law) less any increase they would receive from other formula changes. As a result, school districts eligible for Tier 2 state aid would receive the benefit of the higher Tier 2 guaranteed yield. All other school districts would experience an increase in their total revenue per weighted student that is comparable to the state aid increase provided to Tier 2 eligible districts. For fiscal year 2003, all districts would be insured some increase in "flexible state aid" as described above, but tied to a guaranteed yield of $27.60. School districts that do not participate in the group insurance program would be eligible for funding under different formula levels and would be subject to a different salary schedule. The Texas Education Agency (TEA) would establish dual school finance systems and dual salary schedules. Employees of participating charter schools and regional education service centers would receive the equivalent amount specified in the General Appropriations Act as their school district employee counterparts. TRS Pension Benefits The bill increases the current multiplier used in calculating the TRS retirement benefit for future retirees from 2.20 to 2.25 percent, and increases the annuities of retirees by the corresponding amount. Annuitants who retired before August 31, 2000 would receive a cost-of-living adjustment of 6.0 percent. Retiree Health Insurance Account The bill establishes a 401(h) account within the retirement trust fund to pay for retiree health insurance costs. The 401(h) account would pay retiree health care claims first. Once those expenses exceed the amount available in the 401(h) account, the existing TRS-Care program would provide benefits. For fiscal years 2003 through 2010, 2.0 percent of the state's current 6.0 percent retirement contribution would be deposited into the 401(h) account. In addition, active employees would contribute 0.25 percent of their salary into the 401(h) account instead of into the TRS-Care program, as currently required. TRS-Care Funding The current TRS-Care program for retirees is continued under the provisions of this bill, and will pay claims that exceed the amounts available in the 401(h) account. The state's current contribution of 0.5 percent of active member's salary would be increased to 1.0 percent. Methodology Statewide Health Insurance Plan Once the program is operational, it is assumed that the administrative costs, estimated by TRS at four-five percent of claims, will be covered by the annual state, district, and employee contributions. However, for fiscal year 2002, the Teacher Retirement System will incur costs for designing and implementing the health insurance program. TRS estimates these costs could be as much as $75,000,000. Part of this cost could be funded with the remaining balances from the $10 annual fee assessed on school district employees from 1993-1996, estimated to be $22,000,000. The remaining amount is assumed to come from General Revenue. TRS estimates that 140 employees would be needed for administering the plan, with 40 of those employees being placed at the 20 regional education service centers. CHIP It is assumed that the CHIP-lookalike program will be another tier of coverage, offered only to the children of employees who meet the income eligibility guidelines of the CHIP program. The annual per child cost of providing CHIP benefits is estimated to be $1,356 in fiscal year 2003, increasing to $1,800 in fiscal year 2006 based on an assumed increase in health care costs of 10% annually. The bill requires the state to contribute 80 percent of the cost, and there are currently an estimated 15,500 children of school district employees enrolled in the CHIP program. The state is currently financing 28 percent of the cost of those CHIP enrollees, so the net cost to the state is the difference (52 percent). If the number of enrolled children increases by five percent each year, the resulting cost to the state will be $10,900,000 in fiscal year 2003, increasing to $16,800,000 in fiscal year 2006, from General Revenue. This estimate assumes that all districts will join the statewide plan. To the extent that some districts do not join, the cost will be reduced. State Group Insurance Contributions and School Finance For fiscal year 2002, school funding formula adjustments (we assume a Tier 2 guaranteed yield of $26.26 and equalized wealth level of $300,000) would result in a cost to the general revenue fund of $386.6 million. In fiscal year 2003, the formula adjustments (we assume a Tier 2 guaranteed yield of $27.60 and equalized wealth level of $305,000) together with hold harmless funding ensuring at least $1,500 per employee, would result in a cost to the general revenue fund of about $1,014.2 million. The total cost for the 2002-2003 biennium is estimated to be $1.4 billion for these components. To continue the same level of hold harmless funding, and maintain the formula adjustments applied to fiscal year 2003, for the next three fiscal years would cost $1.047 billion in fiscal year 2004, $ 1.073 billion in fiscal year 2005, and $1.097 billion in fiscal year 2006. For purposes of this fiscal note, we assume all school districts would participate in the group insurance program. If some districts chose not to participate and TEA had to implement dual school finance systems and dual salary schedules, TEA would need two additional full-time employees and enhancements to the Foundation School Program payment system. The increased cost to TEA would be $750,000 in 2002 and $125,000 each year after. Pension Benefit Changes and Retiree Health Account While there will be an actuarial impact from the changes to the pension plan provisions, there will be no significant fiscal impact. The redirection of 2.0 percent of the state' contribution will generate additional funds for providing health care, ranging from $353.2 million in fiscal year 2003 to $397.3 million in fiscal year 2006, however there will be no net change in the state's total contribution. TRS-Care Funding The increase in the state's contribution to the TRS-Care retiree health program from 0.5 to 1.0 percent is estimated to cost $95,520,621 in fiscal year 2002, and increasing to $120,600,000 in fiscal year 2006, based on projected payroll growth of 6.0 percent. This analysis assumes that the supplemental funding provided in both the Senate and House versions of the appropriations bill, $85.5 million in fiscal year 2002 and $166.7 million in fiscal year 2003, is left in the appropriations bill. Local Government Impact Districts, service centers, and charter schools that join the statewide plan would be required to contribute 80 percent of their current level of expenditures for employee health insurance, and that amount must be sufficient to fully cover the employee cost of the first tier basic plan when combined with the state's contribution. If the entity's current level of effort combined with state funding exceed the cost of the first tier plan, the excess can be spent only on benefits and employee compensation. Districts would be able to retain other 20% of the gain from formula changes for purposes other than health insurance. School districts would receive additional Foundation School Program revenue as indicated above. Source Agencies: LBB Staff: JK, CT, PF, RN, SC