HB 274 would amend the Texas Government Code in order to grant the Board of Trustees of the Teacher Retirement System of Texas (TRS) the ability to authorize a Supplemental Payment (13^th check) to annuitants of the System.  The Board would only be able to authorize the Supplemental Payment if the funding period of the System is less than 31 years.  If this bill did not receive the vote necessary for immediate effect, it would take effect September 1, 2009.

The current total contribution rate is 12.98% for TRS, which is comprised of 6.40% member contributions and 6.58% employer contributions.  According to the February 28, 2009 update of the August 31, 2008 actuarial valuation for TRS, in order for the TRS funding period to be the statutory benchmark of 30 years, the State’s contribution rate would need to increase to 11.25% of pay if the members’ rate is to remain 6.40% of pay. A state contribution rate of 11.25% of pay is above the constitutional maximum of 10.00%.  If the member rate and the State’s rate are to increase so that the 30 year contribution requirements are shared equally, the State and member contribution rate would need to be increased to 9.07% each.  These rates would be expected to increase again before the next biennium (in the absence of a recovery).

According to the actuarial analysis, when the Supplemental Payment was authorized by the 2007 Legislature, the Board was given the authority to increase the member contribution rate to as much as 6.58% of pay in order to facilitate a Supplemental Payment.  The analysis argues that current statutes could provide the Board with the authority for increasing the member contribution rate to facilitate future Supplemental Payments, though this is unclear .

According to the actuarial analysis, the bill by itself does not authorize the payment of any benefits but only grants the Board the ability to authorize the payments rather than requiring the Legislature to authorize the payment.  Because this bill does not authorize any payment of benefits, it is the plan’s actuaries opinion that the changes in the bill would have no material impact to the actuarial liabilities of TRS.

While the bill does not impact the current liabilities of TRS, the plan’s actuaries believe it is important to point out that the bill does put the Board of Trustees in a new role with regards to the benefits of the System.  In the past any benefit improvements or additional payments to the annuitants of TRS were directly authorized by the Legislature.  This bill would give the Board of Trustees the authority to grant additional benefits to annuitants.  This new responsibility will bring additional pressure to the Board from the retiree groups seeking to receive the Supplemental Payments.  The pressure could come in many forms, from the decision to grant a Supplemental Payment even though it would require an increase in the active member contribution rate, to the pressure to invest the assets of TRS more aggressively in order to generate returns that will allow the granting of the supplemental payments in the future.

The sole actuarial requirement placed on the authorization of a Supplemental Payment is that the funding period be less than 31 years. A fund could be considered actuarially sound using only the funding period, but still be in poor health- the funded ratio (assets/liabilities) could be very low, there could be deferred losses, and various other reasons to consider a system poorly funded. Supplemental payments under these circumstances could significantly weaken the fund's long term actuarial soundness, even though it had an acceptable funding period at the time the payments were made.

The actuarial analysis and calculations are based on the member data of TRS as of August 31, 2008, the actuarial value of assets updated as of February 28, 2009, and the actuarial assumptions and methods in use as of August 31, 2008 for valuing the actuarial condition of TRS.  Finally, the analysis is based on all other provisions of TRS in effect as of August 31, 2008.  The calculations are based upon assumptions regarding future events, which may or may not materialize.  The actual results could deviate significantly from the projections provided in the analysis depending on actual plan experience.  According to the PRB actuary, the actuarial assumptions, methods and procedures appear to be reasonable.  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.

SOURCES:  

Actuarial Analysis by W. Michael Carter, FSA, Lewis Ward, Joseph P. Newton, FSA, Gabriel Roeder Smith & Company, Consultants and Actuaries, April 21, 2009.

Actuarial Review by Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board, April 21, 2009

GLOSSARY OF ACTUARIAL TERMS:

Normal Cost-- the current cost as a percentage of payroll that is necessary to pre-fund pension benefits adequately during the course of an employee's career.

Unfunded Liability-- the amount of total liabilities that are not covered by the total assets of a retirement system.  Both liabilities and assets are measured on an actuarial basis using certain assumptions including average annual salary increases, the investment return of the retirement fund, and the demographics of retirement system members.

Amortization Period-- the number of years required to pay-off the unfunded liability.  Public retirement systems have found that amortization periods ranging from 20 to 40 years are acceptable.  State law prohibits changes in TRS, ERS, or JRS II benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.