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No significant fiscal implication to the State is anticipated.
Based on the projected August 31, 2015 actuarial valuation, the ERS actuary estimates the bill would decrease the unfunded actuarial accrued liability (UAAL) by $49.3 million, from $8,078.9 million to $8,029.6 million; and that it would increase the funded ratio of assets to liabilities from 76.4 percent to 76.5 percent. The contribution rate needed to fund the normal cost and amortize the UAAL as a level percentage of payroll over 31 years would increase from 19.11 percent to 19.75 percent.
The change in the actuarially sound contribution rate is due to an increase in the projected normal cost from 11.58 percent to 12.26 percent, which was slightly offset by a decrease to the rate required to amortize the unfunded liability over 31 years, from 7.53 percent to 7.49 percent. As the member contribution rate increases, the amount of contribution refunds expected to be paid to members upon termination would also increases. Significant increases in the member contribution rate could also result in an increased number of members electing to take a refund of their contributions when compared to historical experience. Since the normal cost rate is based on the present value of all benefits that ERS is expected to pay out to plan members after their employment ceases, the normal cost rate would increase as a result of the proposed increase in the member contribution rate.
The total contribution rate of 17.50 percent under the bill is sufficient to cover the normal cost but is insufficient to pay down the existing UAAL. Therefore, the funding period would remain infinite. Note that this analysis is isolated to the provisions of this legislation and changes to either the benefit plan or to state contributions would shift the analysis.
No fiscal implication to units of local government is anticipated.
This bill is substantively the same as when we reported on it in its original chamber. We continue to remain neutral. The second chamber sponsor is Senator Huffman.
Original chamber analysis
Chapter 815 of the Government Code currently requires non-legislative members to contribute 6.9 percent in fiscal year 2015 and 7.2 percent in fiscal year 2016 of their payroll to the Employee Retirement System (ERS).
This bill would increase a non-legislative member's ERS contribution rate to 9.5 percent in both fiscal years and beyond. The member contribution rate would be reduced beyond fiscal year 2017 if the state contribution rate is less than 9.5 percent.
Texas' trillions of dollars in unfunded pension liabilities are a result of over-promised and underfunded government-run retirement plans. While increasing member contribution rates signifies a positive step in reforming the broken pension system, this bill will not substantially resolve the Employee Retirement System's actuarial soundness (or lack thereof). We remain neutral on HB 9.
For an extensive and in-depth policy analysis of public pension reform, interested parties may wish to read the report provided by the Texas Public Policy Foundation. Click here to view the report by TPPF's James Quintero.