OVERVIEW: LEGISLATIVE APPROPRIATIONS REQUEST Joint Budget Hearing. September 15, 2014

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1 OVERVIEW: LEGISLATIVE APPROPRIATIONS REQUEST Joint Budget Hearing September 15,

2 ERS supports state employees and retirees, and agencies, by offering competitive benefits at a reasonable cost. 2

3 Accomplishments biennium ERS achieved above-average investment returns. Investment returns in FY13 totaled 10.07%. To date, FY14 returns are even stronger, at 14.58%. Retirement contributions increased for all employees, and retirement benefits were modified for new employees, lowering plan costs. ERS administered quality health care benefits while maintaining lower-than-average costs, compared to similar employer-based plans nationwide. 3

4 Benefits to the State Retirement and insurance benefits support the State s goal to recruit, retain and reward a high-quality workforce. As one of the largest and fastest-growing states, Texas relies on a diverse and comprehensive workforce, with positions ranging from state troopers to Child Protective Services caseworkers. Retirees contribute to the economic growth and prosperity of the State. 96% of ERS retirees live and spend in Texas. $1.8 billion in annuity payments went to 92,000 retirees in Texas in FY13. ERS funds are invested in Texas. About 30% of ERS equity investments are in companies with Texas headquarters or that employ more than 200 Texas workers. 4

5 Appropriations Request 5

6 Baseline Assumptions Assumes no payroll growth Employee and Elected Class Retirement Trust Fund 6 7.5% state contribution each year Member contribution of 7.2% in FY16 and 7.5% in FY17 Law Enforcement and Custodial Officer Supplement Retirement Fund 0.5% state contribution per year 0.5% member contribution per year Court fees of approximately 1.2% Judicial Retirement System Plan % state contribution each year Member contribution of 7.2% in FY16 and 7.5% in FY17

7 Baseline Assumptions (continued) Judicial Retirement System Plan 1 Closed plan for judicial officers who assumed office before September 1, 1985 Benefits paid by direct appropriation from General Revenue Texas Employees Group Benefits Program (GBP) health benefits Member only 100% contribution paid by the State Dependents 50% contribution paid by the State Continuation of 1% agency contribution No benefit changes 7

8 Exceptional Item 1 Actuarially Sound Contribution (ASC) ERS Retirement Trust Fund $350.2 million GR/GRD ($538.4 million All Funds) The request assumes continuation of 0.5% agency contribution. Texas Government Code Sec requires funding of an actuarially sound contribution rate. The projected ASC rate is 19.79%. With only 74 for every $1.00 of earned benefits at current funding levels, the fund will be depleted by 2052; approving actuarially sound funding levels will make the trust actuarially sound by The ASC rate may change based on the 2014 actuarial valuation of the trust fund. 8

9 ERS Retirement Trust Fund Impact of base and exceptional funding Additional funding changes the course of the plan. 9

10 Trust Fund Depletion Where Will You Be in 2052? Example: State employee hired June 2012, currently 25 years old 10

11 Trust Fund Depletion Where Will You Be in 2052? Example: State employee hired June 2004, currently 35 years old 11

12 Cost of Delayed Funding For every two years the plan is out of balance, the unfunded liability grows by $1 billion. Current funding provides an inadequate base to leverage future investment earnings. Lack of opportunity to earn compounded investment earnings significantly increases the portion of benefits that must be funded directly by the State. As of August 31, 2013, the unfunded liability is $7.2 billion. Changes to Governmental Accounting Standards Board (GASB) regulations will increase the reported liability to $14.2 billion if funding is not received above baseline levels Fiscal Year Annual Liability Increase Cumulative Liability Increase 2014 $400 M + = $400 M 2015 $400 M + = $800 M 2016 $500 M + = $1.3 B 2017 $500 M + = $1.8 B 2018 $600 M + = $2.4 B

13 Impact of Compounded Investment Earnings The power to minimize employer contributions 2053 Member Contributions Today Employer Contributions Investment Earnings Member Contributions Employer Contributions Assuming baseline funding only Member Contributions Investment earnings are about two-thirds of trust fund revenue Investment Earnings Employer Contributions 13 Assuming funding at actuarially sound level

14 ERS Retirement Trust Fund Impact of base and exceptional funding levels 25 Impact of funding levels on GASB liability B 17.7B 3.7B GASB Liability in Billions B 13.8B 7.6B 5 Status Quo State 10% ASC

15 Options to Balance the Trust Fund Increase Revenue Appropriate the full ASC rate to ERS Trust Fund Increase member contributions. Adjust the annual membership fee. Decrease Costs Reduce employee benefits through plan design change. 15 These options are not mutually exclusive; any combination of these and other options could be used to achieve actuarial soundness.

16 Exceptional Item 2 Actuarially Sound Contribution LECOS Retirement Fund $27.3 million GR/GRD ($31.0 million All Funds) Texas Government Code Sec requires funding of an actuarially sound contribution rate. The fund provides supplemental retirement benefits to certified peace officers and custodial officers employed by various state agencies The projected ASC rate is 1.96% ERS requests an additional 0.96% state contribution for a total state contribution of 1.46%, plus the continued current member contribution of 0.5%. 16

17 Exceptional Item 3 Actuarially Sound Contribution Judicial Retirement System (JRS) Plan 2 $1.2 million GR/GRD ($2.0 million All Funds) Texas Government Code Sec requires funding of an actuarially sound contribution rate. The projected ASC rate is 24.29%. ERS requests an additional 1.27%, for a total of 16.9%, plus the member contributions. JRS 2 covers state judicial officers who first took office on or after September 1, 1985 The JRS 2 plan was actuarially sound within 13 years as of August 31, 2010, prior to reduced state contributions in FY

18 Exceptional Item 4 Provide insurance benefits to state employees at existing levels $190.5 million GR/GRD ($289.9 million All Funds) Funding is requested to avoid a reduction in employee benefits during the next biennium. The request reflects an increase in funding of 6.9% and assumes: the use of the contingency fund and other non-appropriated revenue sources, $331 million in contingency funding available at the end of FY15, and $100 million in contingency funding available at the end of FY17. 18

19 Rising Health Care Costs The average annual health benefit cost trend is projected to be 8.5% from FY15 through FY17. Three major factors contribute most significantly to cost increases: 19 development of expensive new technologies and medical procedures, rise in chronic diseases due in part to the aging population and the escalating obesity epidemic, increases in the cost and use of pharmaceuticals, particularly compound and specialty drugs.

20 Managing Health Care Cost Trends Five strategies for managing our budget Aggressive contracting Cost management Vigilant approach to emerging cost drivers Focus on encouraging behavior change Low administrative overhead 20

21 Exceptional Item 5 Replenish statutory Contingency Reserve Fund Texas Insurance Code Sec requires ERS to request funds sufficient to maintain a contingency reserve equal to 60 days of claims expenditures. The Texas Employees Group Benefits Program spends roughly $7 million a day on health care. The statutory minimum is estimated to be met by this exceptional item request, along with the funding requested in Exceptional Item 4 and the funding received from: higher education institutions, other employers participating in the program, and members who elect dependent coverage. 21

22 Thank You ERS looks forward to working with the 84 th Texas Legislature to determine how ERS programs can continue to best meet the needs of the State, the active and retired workforce, employers, and Texas residents. 22 TxDOT employee