Actuarial Fiscal Note
Date Requested:February 02, 2024
Time Requested:01:36 PM |
| Agency: |
Consolidated Public Retirement Board |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 2998 |
Introduced |
HB5087 |
|
|---|
| CBD Subject: |
Education (K12) |
|---|
|
Retirement Systems Impacted by Legislation:
TRS 2600
FUND(S):
Special Fund
Sources of Revenue:
Creates New Expense
Legislation creates:
TRS
Actuarial Note Summary
Impact this measure will have on the liabilities and contributions associated with the retirement system(s).
HB 5087 would allow TRS Tier 2 members, that is, TRS members hired for the first time on or after July 1, 2015, to convert unused sick leave or annual leave into additional benefit service credits. As written, the Bill has conflicting language. It is our understanding that the Bill intends to have a conversion rate equal to ½ the rate of the TRS Tier 1 members. That is, for TRS Tier 2 members, the total number of days of unused leave could be converted into additional years of benefit service, where an additional year of benefit service would be based on 20 days per month times the average number of months in a contract year. To be consistent with our understanding, §5-16-13 (f) of the Bill should be modified to read as follows:
“… accrued annual and sick leave of an employee participating in the plan be applied, on the basis of one day's retirement service credit for each one day of accrued annual and sick leave, toward an increase in the employee's retirement benefits with those days constituting additional credited service in computation of the benefits under the Teachers Retirement System.”
West Virginia Statute §18-7A-28e, “WV 2005 Pension Reform”, prohibits TRS active member benefit increases or the creation of new benefits for TRS active members until the restriction sunsets on July 1, 2034. Therefore, HB 5087 would violate “WV 2005 Pension Reform”; however, the bill has language that overrides the “WV 2005 Pension Reform” restrictions.
Measured as of July 1, 2023, HB 5087 would increase the actuarial accrued liability for TRS by approximately $7.8 million. Projecting this liability increase forward to July 1, 2024 and amortizing over 10 years on a level dollar basis would increase the annual required employer contribution for TRS by approximately $1.2 million, or 0.06% of FY 2025 TRS payroll .
Moreover, HB 5087 would increase the TRS employer normal cost by about $1.8 million per year, or 0.09% of FY 2025 TRS payroll. Therefore, measured as of July 1, 2023, the total FY 2025 TRS annual employer contribution would increase by approximately $3.0 million, or 0.15% of TRS payroll, due to HB 5087.
As of July 1, 2024, TRS Tier 2 active members are expected to represent about 47% of the total active population count. In the future as members leave active status, they will be replaced by TRS Tier 2 members. By Fiscal Year 2054 it is estimated that TRS Tier 2 active members will represent about 99.5% of the total active population. That is, by FY 2054 the active population for TRS will consist almost entirely of TRS Tier 2 active members, which would mean that almost the entire active population of the plan would be reflecting the cost associated with the provisions of HB 5087.
After FY 2025, the actuarial cost associated with HB 5087 is expected to increase each year as TRS payroll increases and the cost of HB 5087, expressed as a percentage of payroll, trends upward.
As of July 1, 2054, HB 5087 is expected to increase the TRS annual employer cost by $9.0 million or 0.25% of TRS payroll for FY 2054.
It is important to note that the actuarial costs displayed in this actuarial/fiscal note are based on a middle-of-the-road future path, where all the assumptions are met with no experience gains or losses in the future. The actual cost from HB 5087 may be different from the expected path results presented in this actuarial/fiscal note.
Fiscal Detail of Actuarial Impact
Impact on current benefit costs, prior service benefit costs and ongoing contribution requirements following full implementation.
| Impact On |
Following Full Implementation |
| Increase in Unfunded Actuarial Accrued Liability |
Initial Impact on Annual Contribution Requirement of System(s) |
Contribution Increase as a Percentage of Annual Payroll |
| Total Annual Costs |
$7,800,000.00 |
$3,000,000.00 |
0.15 % |
| Normal Cost of System |
N/A |
$1,800,000.00 |
0.09 % |
| Past Service Liabilities |
$7,800,000.00 |
$1,200,000.00 |
0.06 % |
Fiscal Year Past Service
Amortization Period Ends |
N/A |
2034 |
N/A |
Explanation of above Actuarial estimates:
HB 5087 would increase the actuarial accrued liability for TRS by approximately $7.8 million, calculated as of July 1, 2023. Projecting this liability increase to July 1, 2024 and amortizing over 10 years on a level dollar basis would increase the annual required employer contribution for TRS by approximately $1.2 million, or 0.06% of FY 2025 TRS payroll .
Moreover, HB 5087 would increase the TRS employer normal cost by about $1.8 million per year, or 0.09% of FY 2025 TRS payroll. Therefore, as of July 1, 2023, the total FY 2025 TRS annual employer contribution would increase by approximately $3.0 million, or 0.15% of TRS payroll, due to HB 5087.
Analysis of Impact on Public Pension Policy:
Measured as of July 1, 2023, HB 5087 would increase the actuarial accrued liability for TRS by approximately $7.8 million. Projecting this liability increase forward to July 1, 2024 and amortizing over 10 years on a level dollar basis would increase the annual required employer contribution for TRS by approximately $1.2 million, or 0.06% of FY 2025 TRS payroll .
Moreover, HB 5087 would increase the TRS employer normal cost by about $1.8 million per year, or 0.09% of FY 2025 TRS payroll. Therefore, measured as of July 1, 2023, the total FY 2025 TRS annual employer contribution would increase by approximately $3.0 million, or 0.15% of TRS payroll, due to HB 5087.
After FY 2025, the actuarial cost associated with HB 5087 is expected to increase each year as TRS payroll increases and the cost of HB 5087, expressed as a percentage of payroll, trends upward.
As of July 1, 2054, HB 5087 is expected to increase the TRS annual employer cost by $9.0 million or 0.25% of TRS payroll for FY 2054.
It is important to note that the actuarial costs displayed in this actuarial/fiscal note are based on a middle-of-the-road future path, where all the assumptions are met with no experience gains or losses in the future. The actual cost from HB 5087 may be different from the expected path results presented in this actuarial/fiscal note.
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
HB 5087 would allow TRS Tier 2 members, that is, TRS members hired for the first time on or after July 1, 2015, to convert unused sick leave or annual leave into additional benefit service credits. As written, the Bill has conflicting language. It is our understanding that the Bill intends to have a conversion rate equal to ½ the rate of the TRS Tier 1 members. That is, for TRS Tier 2 members, the total number of days of unused leave could be converted into additional years of benefit service, where an additional year of benefit service would be based on 20 days per month times the average number of months in a contract year. To be consistent with our understanding, §5-16-13 (f) of the Bill should be modified to read as follows:
“… accrued annual and sick leave of an employee participating in the plan be applied, on the basis of one day's retirement service credit for each one day of accrued annual and sick leave, toward an increase in the employee's retirement benefits with those days constituting additional credited service in computation of the benefits under the Teachers Retirement System.”
West Virginia Statute §18-7A-28e, “WV 2005 Pension Reform”, prohibits TRS active member benefit increases or the creation of new benefits for TRS active members until the restriction sunsets on July 1, 2034. Therefore, HB 5087 would violate “WV 2005 Pension Reform”; however, the bill has language that overrides the “WV 2005 Pension Reform” restrictions.
Measured as of July 1, 2023, HB 5087 would increase the actuarial accrued liability for TRS by approximately $7.8 million. Projecting this liability increase forward to July 1, 2024 and amortizing over 10 years on a level dollar basis would increase the annual required employer contribution for TRS by approximately $1.2 million, or 0.06% of FY 2025 TRS payroll.
Moreover, HB 5087 would increase the TRS employer normal cost by about $1.8 million per year, or 0.09% of FY 2025 TRS payroll. Therefore, measured as of July 1, 2023, the total FY 2025 TRS annual employer contribution would increase by approximately $3.0 million, or 0.15% of TRS payroll, due to HB 5087.
As of July 1, 2024, TRS Tier 2 active members are expected to represent about 47% of the total active population count. In the future as members leave active status, they will be replaced by TRS Tier 2 members. By Fiscal Year 2054 it is estimated that TRS Tier 2 active members will represent about 99.5% of the total active population. That is, by FY 2054 the active population for TRS will consist almost entirely of TRS Tier 2 active members, which would mean that almost the entire active population of the plan would be reflecting the cost associated with the provisions of HB 5087.
After FY 2025, the actuarial cost associated with HB 5087 is expected to increase each year as TRS payroll increases and the cost of HB 5087, expressed as a percentage of payroll, trends upward.
As of July 1, 2054, HB 5087 is expected to increase the TRS annual employer cost by $9.0 million or 0.25% of TRS payroll for FY 2054.
It is important to note that the actuarial costs displayed in this actuarial/fiscal note are based on a middle-of-the-road future path, where all the assumptions are met with no experience gains or losses in the future. The actual cost from HB 5087 may be different from the expected path results presented in this actuarial/fiscal note.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2024
Increase/Decrease
(use"-") |
2025
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
0 |
3,025,000 |
9,000,000 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
25,000 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
3,000,000 |
9,000,000 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above Fiscal Note estimates (include possible long-range effect):
In addition to the increase in the TRS annual employer cost of $3.0 million, or 0.15% of payroll for FY 2025, there is a one-time $25,000 expense to setup the administrative software to allow TRS Tier 2 members to convert unused leave into additional benefit service.
As of July 1, 2024, TRS Tier 2 active members are expected to represent about 47% of the total active population count. In the future as members leave active status, they will be replaced by TRS Tier 2 members. By Fiscal Year 2054 it is estimated that TRS Tier 2 active members will represent about 99.5% of the total active population. That is, by FY 2054 the active population for TRS will consist almost entirely of TRS Tier 2 active members, which would mean that almost the entire active population of the plan would be reflecting the cost associated with the provisions of HB 5087.
After FY 2025, the actuarial cost associated with HB 5087 is expected to increase each year as TRS payroll increases and the cost of HB 5087, expressed as a percentage of payroll, trends upward.
As of July 1, 2054, HB 5087 is expected to increase the TRS annual employer cost by $9.0 million or 0.25% of TRS payroll for FY 2054.
It is important to note that the actuarial costs displayed in this actuarial/fiscal note are based on a middle-of-the-road future path, where all the assumptions are met with no experience gains or losses in the future. The actual cost from HB 5087 may be different from the expected path results presented in this actuarial/fiscal note.
To estimate the TRS annual employer cost for FY 2054, two deterministic asset/liability projections were used, one without the plan provisions of HB 5087 and the other with the plan provisions of HB 5087.
For the deterministic projections used in this actuarial/fiscal note, the new entrant profile was developed based on an analysis of recent new hires in TRS.
The projection assumptions and the valuation assumptions are the same and are equal to the assumptions from the TRS July 1, 2023 funding valuation report, except for the projection with the plan provisions from HB 5087, where the TRS Tier 2 Unused Leave Load equals ½ the Unused Leave Load from the TRS Tier 1 counterparts.
The data and plan provisions used in the projections are the same data and plan provisions used in the TRS July 1, 2023 funding valuation report, except for the projection with the plan provisions from HB 5087, where the TRS Tier 2 members are allowed to convert unused leave into additional benefit service at a rate equal to ½ the rate of their TRS Tier 1 counterparts.
The gain/loss amortization policy used in the projections is:
(1) Prior to July 1, 2034, include gains or losses in the TRS unfunded actuarial accrued liability (UAAL) and amortize the UAAL by June 30, 2034 using a level dollar amount.
(2) After June 30, 2034, each gain or loss, determined annually as of June 30th, has a separate amortization base to be amortized over a 15-year period based on a level dollar amortization amount.
Note, item (2) above is not currently part of the TRS UAAL amortization policy, however, this potential TRS gain/loss amortization policy is reasonable. The actual TRS gain/loss amortization policy after June 30, 2034 may be different from the assumed gain/loss amortization policy displayed in (2) above.
Memorandum
This Actuarial/Fiscal Note is being submitted by the Consolidated Public Retirement Board. It has been reviewed by the CPRB Actuary. Both the Board and the CPRB Actuary are available upon request for questions.
For the appropriate actuarial disclosures, see the July 1, 2023 funding valuation report for TRS, expected to be published in March 2024.
In particular, future actuarial measurements may differ significantly from current measurements due to System experience differing from that anticipated by the economic and demographic assumptions, changes expected as part of the natural operation of the methodology used for these measurements, and changes in system provisions or applicable law or regulations. An analysis of the potential range of such future differences is beyond the scope of the request addressed here.
Regarding Actuarial Standards of Practice 51, the risk assessment for TRS may be affected by the addition of the Tier 2 conversion option to the extent that the higher contributions necessitated by its addition may not be covered.
Actuarial Standard of Practice No. 56 provides guidance to actuaries when performing actuarial services with respect to designing, developing, selecting, modifying, using, reviewing, or evaluating models. The CPRB uses third-party software in the performance of annual actuarial valuations and projections.
Kenneth Woodson Jr., the CPRB Board Actuary, is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. He meets the Qualification Standards of the American Academy of Actuaries to render the actuarial opinions contained in this Actuarial/Fiscal Note.
Person submitting Fiscal Note: Kenneth M. Woodson Jr.
Email Address: kenneth.m.woodson@wv.gov