The Public Employees’ Retirement System: 2015 Update on Financial Soundness, Delays in Application Processing, and Legal Issues
Executive Summary
Introduction
This report includes an update on the financial performance of Mississippi’s Public Employees’ Retirement System (PERS) and projected funding levels, as well as other issues of note for PERS.
This report also includes a review of the causes and circumstances that could have led to recent delays in the processing of PERS members’ applications for service retirement benefits.
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 2014 that addresses 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
As a result of the most recent experience study conducted by the independent actuarial firm Cavanaugh Macdonald Consulting, LLC, for the four-year period ended June 30, 2014, the PERS Board adopted at its April 2015 board meeting changes to the actuarial assumptions effective July 1, 2015, for future years and elected to use the new assumptions in the calculation of system liabilities for FY 2015. The cumulative effect of these changes for the FY 2015 valuation was a one-time increase to the unfunded actuarial accrued liability of $1.8 billion.
Update: PERS’s Sustainability
The current PERS funding policy is designed to address the past volatility of employer contribution rates within the system by setting 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 will have the effect of creating more long-term sustainability within the 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
As of June 30, 2015, the PERS funding ratio was 60.4%, a decrease from 61.0% as of June 30, 2014. This reduction in the funding ratio is due to the one-time impact of the adoption of actuarial assumption changes recommended in light of the results of the most recent four-year experience study for the period ending June 30, 2014. Actuarial projections provided by Cavanaugh Macdonald show that the PERS Board’s originally adopted model’s funding goals of an 80% minimum funding ratio in 2042 will still be achieved.
Update: PERS’s Investment Management
For Fiscal Year 2015, the PERS plan’s combined investment portfolio experienced a return of 3.5% and the market value of the system’s assets was approximately $24.8 billion.
For Fiscal Year 2015, the PERS Board of Trustees continued to adhere to the asset allocation model put in place in July 2013. This model continues to set investment level targets for the PERS investment portfolio.
Other Issues of Note for PERS
Based on calculations by the PERS actuary as of June 30, 2013, changing from an eight-year vesting period to a four-year vesting period would have had a negligible affect on the system’s funding ratio. As it did in FY 2015, the PERS Board is suggesting that the Legislature return the vesting period to four years.
For Fiscal Year 2015, all employers participating in the PERS plan that issue Generally Accepted Accounting Principles (GAAP) financial statements must comply with the requirements of Governmental Accounting Standards Board Statement No. 68. While the changes outlined in Statement No. 68 will affect the presentation of participating employers’ financial statements, the actual financial position of participating employers will not be affected.
Recent Delays in the Processing of PERS Members’ Applications for Service Retirement
Although PERS recommends that members file for benefits ninety days in advance of their anticipated retirement date, the PERS staff notes that in many cases, and under normal operating conditions, the processing of applications for service retirement benefits may be completed in as short a time as thirty days.
However, from March 2015 through September 2015, the Public Employees’ Retirement System experienced delays in the processing of applications for service retirement benefits. According to PERS estimates, approximately 2,000 applications from that period were affected, experiencing processing times that did not allow for the completion of the applications within the ninety-day period recommended by PERS.
According to PERS staff, as of September 15, 2015, all of the delayed applications for service retirement benefits had been processed. All applicants who completed the retirement process by submitting the required documents have been added to the retirement payroll (with payments retroactive to the initially stated date of retirement).
The recent delays in PERS’s processing of applications for service retirement benefits may be attributed to a combination of three factors noted below:
Recent Legal Actions Involving States’ Attempts to Modify Retirement Benefits for Current Pension Members and Retirees
PEER’s 2012 report (The Public Employees’ Retirement System of Mississippi: A Review of Selected Issues Related to Financial Soundness [Report #564]) set out the following principles pertinent to the Mississippi retirement system as administered by PERS:
Since the 2014 PEER update on PERS, 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, and detailed in this report, the contractual rights of employees and retirees have generally been upheld. Some jurisdictions take a more restrictive view of contractual rights than do others.
Also, several litigants have challenged the calculation of cost-of-living adjustments (COLAs). Jurisdictions have split on the issue of whether COLAs are a constitutionally protected contractual or property right.
While some cases that PEER has reported in the past few years have allowed modification of benefits for system members and employees, the trend seems to favor protecting the benefits of employees. At this point, even COLAs are more likely to be protected when retirees can show that law or regulations created a reasonable expectation that a certain COLA would be payable.
PEER notes that although cases from foreign jurisdictions might not be of particular significance when assessing the constitutionality of possible changes to Mississippi’s PERS, the Committee would suggest that cases from so-called “California Rule” jurisdictions are of particular interest to policymakers, as our state does apply this rule when reviewing claims of constitutionality of pension plan changes.