An Update on the Financial Soundness of the Mississippi Public Employees’ Retirement System and Related Legal Issues
Executive Summary
Introduction
In December 2012, the PEER Committee issued Report #564, entitled The Public Employees’ Retirement System of Mississippi: A Review of Selected Issues Related to Financial Soundness. This report includes an update on changes in the system’s actuarial assumptions, as well as its risk management and investment management practices, that took place between December 2012 and December 2013.
Because of the ever-changing legal landscape affecting public pensions, this report also provides an update on results of litigation from other states since December 2012 that address employees’ contractual rights in public retirement systems.
Update on Financial Soundness of PERS
Actuarial Soundness and Sustainability
Actuarial soundness and sustainability are two of the major contributing factors the PEER Committee established as components of financial soundness in its 2012 report on PERS. The focus of these two concepts should be to create a system and actuarial assumption models that are able to be upheld and defended in light of all relevant environmental conditions, including contractual obligations involved and the potential economic consequences of abrogating those obligations.
Update: PERS’s Actuarial Soundness
Over the past year, the PERS Board, with assistance from its staff and other contractual advisors, has endeavored to maintain the actuarial soundness of the plan. The PERS Board reviewed the results of an experience valuation conducted by the independent actuarial consulting firm Cavanaugh Macdonald Consulting, LLC, for the four-year period ended June 30, 2012. Subsequently, the board adopted changes in the actuarial assumption methods for FY 2013, including salary increases, mortality rates, withdrawal rates, disability rates, and retirement rates. The cumulative effect of these assumption changes was a decrease in the unfunded actuarial accrued liability of $226.1 million.
Update: PERS’s Sustainability
The PERS Board of Trustees adopted a revised funding policy in October 2012. This revised funding policy is designed to address the volatility of employer contribution rates within the PERS system by changing the employer contribution rate percentage to a fixed rate of 15.75% of annual compensation. The policy also targets an 80% funding level by 2042, while still reducing the plan’s unfunded actuarial accrued liability. In addition to these effects, the funding policy change will have the effect of creating more long-term sustainability within the PERS system.
Risk Management and Investment Management
Risk management and investment management should provide a long-term framework for the system that will manage the plan’s long-term risk environment in ways that allow it a reasonable opportunity to collect or earn sufficient assets to meet its benefit obligations.
Update: PERS’s Risk Management
PERS’s current strategy for risk management, if successful, will improve the unfunded liability over the next year and should yield a projected funding ratio of 94.3% as of 2043.
Update: PERS’s Investment Management
While a 2013 amendment to MISS. CODE ANN. §25-11-121 (1972) could allow for participation in riskier investment vehicles, PERS should be able to mitigate this risk through application of its newly adopted asset allocation model and established risk management policies.
Recent Legal Actions Involving States’ Attempts to Modify Retirement Benefits for Current Pension Members and Retirees
Legal Risks Associated with Making Changes in PERS
In its 2012 report, the PEER Committee provided information regarding possible legal risks associated with making changes in the current retirement system for retirees and current PERS members. Briefly, the report set out the following principles pertinent to the Mississippi retirement system as administered by PERS:
PEER’s 2012 report provided an in-depth analysis of how courts have applied these principles and further discussed instances wherein courts have chosen to apply different principles in cases involving modifications to state pension systems. This update report provides an overview of significant cases that have been rendered or filed since the 2012 PEER report on PERS.
Update: States’ Modifications of Members’ Contribution Rates, Minimum Years to Retirement, or Value of Service Credit
Several states’ legislative bodies have enacted laws changing their retirement systems’ contribution rates, the number of years to retirement, and the value of service credit. In some instances, employees or unions have objected to the changes and sought judicial relief by asserting that the changes violated state and federal constitutional provisions. In the cases litigated, the contractual rights of employees and retirees have been upheld. Some jurisdictions take a more restrictive view of contractual rights than do others.
Update: States’ Modifications of Cost-of-Living Adjustments
Several litigants have challenged the calculation of cost-of-living adjustments (COLAs). Ongoing Colorado and Washington litigation dealing with COLAs could be of significance to debate in Mississippi.
Analysis of Recent Legal Actions
While the litigation so far resolved is of little interest to Mississippi, ongoing litigation in Oregon and California could have an impact, as these states have historically offered considerable protection to both past and future benefits.
Conclusion
PERS has a prudent and disciplined process that relies on expert actuarial guidance built upon reasonable assumptions and targets for portfolio growth. Continued competent, prudent management gives PEER every indication that PERS is moving toward reducing both the amortization period for the system and reducing the unfunded accrued liability.