Mississippi lawmakers can take the best from other successful state pension reforms

Mississippi’s legislative leadership and mayors from cities around the state have made it clear that the rising cost of paying the Public Employees Retirement System’s obligations is taking a toll on public services and state and local budgets—all funded from taxpayers’ pocketbooks. There is increasing momentum in Mississippi to make public pension reforms a major priority. 

While the history of the Public Employees Retirement System ‎(PERS) and the origins of its $26 billion in unfunded pension obligations have been well covered, stakeholders have proposed few recommendations. It would be helpful for Mississippi stakeholders to examine how other states addressed similar public pension challenges, including reducing public pension debt and rising costs to taxpayers and making their pension plans more sustainable in the future.

North Dakota provided new hires with a new defined contribution retirement plan

Like the challenges Mississippi faces, the North Dakota Public Employees Retirement System‎ (NDPERS) would have continued to accrue unfunded liabilities in perpetuity without significant changes and additional funding. Maintaining statutory rates with incremental rate adjustments was insufficient, resulting in the contributions from workers and employers consistently being below what was required to properly fund the pension plan (also known as the actuarially determined contribution rate, or ADEC). In addition to its financial woes, the NDPERS defined benefit (DB) plan was also experiencing massive employee turnover, similar to what Mississippi PERS is seeing.

After a collective effort to identify and solve the problems facing NDPERS, state legislators penned North Dakota House Bill 1040, which addressed the longstanding issue of systematic underfunding by transitioning from fixed contribution rates to an actuarially determined contribution rate. 

Additionally, North Dakota’s legislation offered all future public employees a defined contribution (DC) retirement plan, which was projected to provide a greater retirement benefit for most employees without the risk of runaway costs and debt plaguing the defined benefit pension system. 

The state committed to paying off NDPERS’ existing $1.8 billion debt over 30 years, supplemented by additional cash infusions until the defined benefit plan reached 90% funding—meaning it has money to cover 90% of the pension benefits already promised to workers. 

Modeling forecasts estimated the bill would save the state $2 billion over 30 years compared to the status quo. The pension reform also promised improved retirement benefits for most newly hired employees, significant debt reduction, and eventual budget relief for North Dakota.

Arizona opened a new DC/hybrid choice system for public safety

The need to reform Arizona’s Public Safety Personnel Retirement System‎ (PSPRS) became urgent due to its declining financial health, which resulted in soaring annual pension costs for local governments and state agency employers. The pension system was burdening taxpayers with significant new, unexpected costs. The two primary factors contributing to PSPRS’s financial deterioration were its flawed permanent benefit increase (PBI) mechanism meant to serve as a cost-of-living adjustment (COLA), similar to the Mississippi PERS COLA, and underperforming investment returns that failed to meet overly optimistic expected rates of return.

The 2016 pension reform of Arizona’s PSPRS encompassed various elements affecting current workers, retirees, and future employees. The reform replaced the permanent benefit increase feature for current personnel and retirees with a pragmatic, pre-funded cost-of-living adjustment tied to inflation that protects fixed retirement benefits without adding unnecessary costs to taxpayers. 

To address the growing costs of PSPRS, Arizona’s public pension reform also introduced a new retirement plan design for new employees, offering a choice between a defined contribution plan and a defined benefit-defined contribution hybrid plan, alongside adjustments to pensionable pay caps, benefit multipliers, and retirement age eligibility. 

Arizona also implemented governance reforms, including changes in the PSPRS board composition and fiduciary standards to increase accountability and efficiency. 

Overall, Arizona’s public pension reform has already yielded significant savings for government agencies and taxpayers, reduced future pension liabilities, mitigated market risks, and provided more sustainable retirement options for public safety personnel.

Michigan opened a new DC/hybrid choice system for teachers

Like numerous other public pension systems across the United States, the Michigan Public School Employees’ Retirement System‎ (MPSERS) grappled with an overwhelming burden of unfunded liabilities and the anticipation of escalating contribution rates. The Michigan teachers’ plan was fully funded in 2000, but by the end of June 2016, the plan’s funded ratio had plummeted to below 60% and had a staggering $29.1 billion in unfunded liabilities. 

Various factors caused this pension debt, with two-thirds attributed to investments falling short of overly optimistic expectations over 15 years. Moreover, flawed actuarial assumptions, such as overestimating payroll growth, compounded the problem.  

In response, Michigan initiated a pension reform effort focused on addressing the needs of current and future members and reducing the state’s financial risks. 

The resulting public pension reform introduced an automatically enrolled defined contribution plan for future members with a minimum 4% employer contribution, extendable by up to 3% in matching contributions. Within four years of membership, teachers became fully vested in a 14% DC Plan, ensuring a robust retirement benefit. 

New hires also have the option to choose a hybrid plan within 75 days of employment. For active and retired members, measures like reducing the assumed rate of return to more realistic levels and moving to a contribution rate floor were also implemented to address potential market downturns and increase legislative accountability in funding obligations.

Texas public employees opened a new cash balance pension plan

Over the last two decades, the Employees Retirement System of Texas (ERS), which provides retirement benefits to most state public employees and sworn law enforcement personnel, has declined from full funding to holding $14.7 billion in unfunded pension obligations. 

By 2021, ERS was trending toward complete insolvency within the next 20 to 30 years in the absence of significant legislative changes. Overly optimistic investment return assumptions and underperforming investment returns resulted in over $8 billion in pension debt. Approximately $4.5 billion of this debt stemmed from the state government systematically underfunding its public pension systems through insufficient contribution rates. 

Moreover, a relatively small percentage of Texas workers—less than 14 percent of those hired under age 35—actually worked for the government long enough to receive a full, unreduced retirement benefit. A significant portion, 64 percent of Texas state workers, worked for the government for less than five years and didn’t even qualify for a pension.

Texas Senate Bill 321 employed two key strategies. Firstly, it revamped the retirement plan for newly hired workers by introducing a cash balance pension, reducing taxpayer financial risk over time by guaranteeing a return on investments instead of guaranteed lifetime income. The cash balance approach reflected the successful experiences of Texas’ municipal governments, which had used this type of plan to offer valuable retirement benefits without the compounding costs of pension debt for decades. 

Secondly, the Texas reform addressed funding and contribution policies to rectify two decades of structural underfunding, opting for an ADEC policy and committing supplemental appropriations. With improved funding policies, ERS is now on track to eliminate its debt and funding shortfalls.

The two-step approach of successful state pension reform efforts

Across the various public pension reform efforts mentioned above and pension and retirement plan designs that have emerged from other states over the last decade, a two-step approach has been the foundational organizing principle driving stakeholders to sustainable, long-term solutions. Mississippi should follow suit. 

First, Mississippi lawmakers must establish a plan to fully fund the constitutionally protected retirement benefits guaranteed to workers in the Public Employees Retirement System‎ (PERS), which includes nearly a quarter of Mississippi residents. Second, state lawmakers must create a path to retirement security for all future PERS members. 

Step 1: Establish a plan to tackle unfunded pension benefits as consistently and quickly as possible

The cost of providing PERS pension benefits has never been higher than it is today in the post-Great Recession (2007-2009) financial environment, and allowing PERS’ debt to continue growing will only add to the costs on government employers—and, thus, taxpayers. 

Successful pension reform efforts have limited the impact of rising costs by first focusing on setting the underfunded pension system on a prompt path to full funding through debt segmentation and committing to an actuarially determined contribution rate funding policy. 

Segmenting accrued unfunded liabilities from any gains or losses in future years allows policymakers to set the past debt on a direct and fiscally realistic course to being fully funded and prevents the need to revisit the issue in subsequent legislative sessions. 

Adopting more conservative payroll growth and investment assumptions and a responsible amortization policy for any emerging unfunded liabilities would ensure that the new pension debt accrued in a given year is paid off faster and more consistently. 

Committing to an ADEC funding policy to regulate contribution rates guarantees the funding goals are met regardless of market volatility.

Step 2: Create a path to retirement security for all participants 

In addition to the rising costs associated with the current PERS benefit, analysis of assumptions used by plan actuaries reveals that 81% of new workers (beginning work at age 25) leave before vesting in the plan with eight years of service. Employees who leave the plan before then are unable to receive a PERS benefit and must forfeit contributions their school or the state made on their behalf. For workers starting at the age of 25, 89% leave before 20 years of service, and only 9% remain in the system long enough to receive full pension benefits after 30 years of service. 

The fact is that very few employees entering public employment in Mississippi will take part in the full pension benefit as it is currently offered.

The examples above from North Dakota, Arizona, Michigan, and Texas addressed this issue by modernizing retirement plan design to serve more of their new hires. Although each state adopted unique plan designs, they all achieved the same goals. 

Mississippi policymakers should focus on this approach when considering a new retirement plan for new hires. From the perspective of serving public employees, a successful new tier provides a path to a financially secure retirement for all career and non-career members that is more attractive to the 21st-century employee. 

From taxpayers’ perspective, stabilizing contribution rates for near and long-term budgeting is essential. Reducing Mississippi’s public pension system’s exposure to financial risk and market volatility with responsible debt reduction policies would likely lead to higher contribution rates in the immediate term but will guarantee stakeholders that debt costs are not being passed on to future generations.

Although Mississippi lawmakers attempting to tackle the various challenges facing PERS might find themselves in unfamiliar waters, they should rest assured that those waters are not uncharted. Several other state legislatures have dedicated years to organizing and detailing successful public reform packages that Mississippi lawmakers can take the best of and use to guide how they address the state’s current challenges with PERS.