Mississippi needs to fix the way it pays for public pensions

A recent decision by the board of the Public Employees’ Retirement System of Mississippi (PERS) to increase the employer contribution rate has sparked controversy and frustration among state legislators. The current employer contribution to PERS is 17.4% of a public employee’s pay, but the pension board voted to increase that rate to 22.4%. That difference in rates projects to be an additional $350 million in annual costs for government agencies contributing to the pension system. 

In response to the board’s decision, a bill was considered in the state legislature—House Bill 605—that would have ensured that public pension contribution rates could not be increased unless authorized by the state legislature, giving lawmakers final authority over such increases. It is important to understand the implications of the current pension funding policy, why the board initially made its decision to raise the contribution rates, and why this bill would have been an ill-advised reaction.

In the current Mississippi PERS funding policy, the fixed contribution rate (FCR) is subject to change when one of their key metrics is in “red status.” These metrics include the projected funding ratio in 2047, cash flow as a percentage of assets, and a ratio of actuarially determined contributions (ADCs) to the fixed contribution rate. As long as the funded ratio is above 65%, net cash flow is between negative 5.8% and negative 7.66%, and the ADC/FCR ratio is below 110% of the fixed contribution rate, changes to the fixed contribution rate are typically not made.

However, the latest valuation report reveals that PERS’ projected funded ratio—the money the pension fund has on-hand compared to costs of retiree benefits already promised to workers— 25 years from now, in 2047, is expected to be 48.6%, which is below the system’s already underwhelming funded ratio of 61.3% today. The cash flow as a percentage of assets, defined as the difference between total contributions and benefit payments as a percentage of the beginning year’s market value of assets, was reported at negative 7.8%. The ADC/FCR ratio was 128.7%, meaning all of the key metrics are in “red status.”

This method of periodically checking in on the adequacy of public pension contributions and adjusting once certain metrics start to show in the red is a way to respond to the variable contribution needs of Mississippi’s pension. This is better than no evaluation/adjustment policy, but the current approach is still problematic for the long-term health of PERS going forward. Using any fixed contribution rate, even if it is monitored and adjusted periodically, can lead to significant accrual of public pension debt, which creates costly long-term costs for government employers and taxpayers.

The “red status” indicators used by PERS also anchor it to funding levels below 100%, which sets the system up for perpetual underfunding. The 65% funding benchmark holds Mississippi back from making the level of pension contributions that are necessary to fulfill the retirement promises made, both past and present, to public workers. To keep these pension promises, any funding policy should base annual contributions on achieving 100% funding within a reasonable timeframe (preferably 15 to 20 years, according to the Society of Actuaries).

Conveniently, the rate that will achieve full funding is already calculated each year. It is the aforementioned actuarial defined contribution (ADC), which is adjusted annually based on changes in the plan’s financial condition to show the contribution needed to achieve full funding within the plan’s set amortization period (currently an open 30-year period, meaning it is recalculated on a new 30-year period every year).

If investment returns are lower than expected, the ADC will be adjusted upwards to ensure that the pension plan remains on track to full funding. Rather than relying on a complex “red status” system, waiting for the pension board to make proper adjustments, and counting on the legislature to adhere to shifting funding needs, Mississippi should shift to an actuarially determined contribution funding policy. This would directly address one of the main contributors to the state’s growing public pension debt and would commit the government to actually fund the retirement promises made to public workers. 

Stripping the PERS board from the power to adjust the contribution rate would not solve the problem. Instead, it might exacerbate the issue. What got PERS in trouble in the first place was an unrealistic and unresponsive funding policy. This proposal would make the mechanism for funding Mississippi’s public pension benefits even less responsive to year-to-year needs.

The use of an actuarially determined contribution rate provides several advantages over a fixed contribution rate, including a better commitment to long-term funding, reductions to future pension debt and long-term costs, and increased transparency and accountability. Rather than making the funding of PERS less responsive to needs that may arise, Mississippi lawmakers can ensure a stronger and more sustainable future for their plan with an actuarially determined contribution policy. This is the only way PERS can be put on a path to solvency.