Executive Director's Message
By Pat Robertson
PERS Study Commission: A Response
January 17, 2012
The Public Employees’ Retirement System of Mississippi (PERS) Study Commission (Commission), created by former Governor Haley Barbour, released its report with recommendations in mid-December. While I may not necessarily agree with the recommendations, responding to these suggestions—or any recommendations related to this 60-year-old retirement system—is the job of the Legislature as the policy-making body for the state of Mississippi and as the intended audience for the Commission’s report. Therefore, I, instead, will attempt to address concerns of our members and retirees generated by the creation of the Commission and the release of its report.
Some have questioned why Governor Barbour would call for a study of the “financial, management, and investment structure of PERS” when I have repeatedly reported that we are financially sound. Governor Barbour formed the Commission after citing concerns about increases in the employer contribution rate as a percentage of public payroll from 2005 (9.75 percent) to 2012 (12.93 percent). These increases were not made lightly or without consideration of their significance. They were made to ensure that PERS remains on sound financial footing and to counteract the effects of downturns in the financial markets that began in 2001 but that hit hardest in 2008 and 2009, a period now being referred to as the Great Recession.
How PERS works and is funded is cyclic in nature and is a fairly simple equation: Contributions plus Investment Income equal Benefits plus Expenses (C+I=B+E). The salaries and fringe benefit costs for public employees— school teachers, professors, police officers, firefighters, librarians, doctors, nurses, health inspectors, tax assessors, social workers, and others—are financed with tax dollars and fees collected from the public, who, in turn, receive the services provided by these employees. The tax dollars that go toward retirement are a part of the total compensation package paid to public employees as a fringe benefit in the form of employer contributions as a percentage of public payroll. Not only do public employers contribute toward their employees’ retirement, each individual public employee must contribute 9 percent of his or her salary, reducing the amount they have to live on today with the understanding that they will receive this deferred compensation at retirement. These contributions are invested and the earnings are used collectively to fund retirement benefits and expenses. In fact, over the past quarter century, PERS’ investment earnings have provided more than 50 percent of revenues used to finance current and future benefits.
When investment earnings are significantly below expected returns, as was the case in 2008 and 2009, upward pressure is put on contribution rates to help offset losses and ensure compliance with governmental accounting standards. PERS invests in a prudent manner to minimize risk; however, PERS has no control over investment markets and cannot guarantee a specific return. The PERS Board of Trustees has no authority to change public employee retirement benefits, which are established by legislation and are considered part of the contractual agreement made between the employer and the employee. As a result, the only mechanism the PERS Board has to offset losses is through contribution rate increases.
The legislation establishing PERS in 1952 granted the PERS Board the authority to set both the employer and employee contribution rates to ensure that PERS was properly funded. The PERS Board was given this authority to ensure proper checks and balances were in place to prevent competing needs from taking priority over funding promised benefits.
The PERS Board has had to use this authority in recent years to increase contribution rates to help reduce the System’s unfunded accrued liability (UAL), which is the amount by which promised benefits to current retirees, beneficiaries, and employees working in public service today exceed accumulated assets on an actuarial basis. Though the optimal funded status considered by many is 80 percent or higher, as of June 30, 2011, PERS had 62.2 percent of the funds required for each dollar owed in liabilities. This lowered funded status is a culmination of various factors including market returns that were less than the 8 percent assumed rate of return in five of the last 11 years and the fact that benefit improvements were granted retroactively through legislation in 1999, when PERS was funded at 85 percent and the period projected to pay off the UAL was less than 10 years.
Today’s employees are now contributing 9 percent—one of the highest rates in the nation for public employees—of their salaries toward retirement, which means today’s employees are funding a significant portion of their future benefits. PERS employers are now contributing 12.93 percent toward retirement, and, unfortunately, the employer contribution rate is slated to increase again effective July 1, 2012, to 14.26 percent, despite 2010 and 2011 investment earnings exceeding expected returns. Without the increase, PERS would not meet the requirements prescribed by the Governmental Accounting Standards Board (GASB).
The PERS Board is very much aware of the effect increasing the employer contribution rate has on the budgets of the employers we serve. In fact, the members of the PERS Board work or worked for those very employers; however, the members of the PERS Board also realize they have an obligation to the public employees to whom benefits have been promised. Failure to ensure adequate funding for these promises would represent a breach of the fiduciary responsibility each of these board members has to every public employee who was required to pay contributions during his or her career.
Our funded status is not ideal; but, despite reports to the contrary, PERS is financially sound. We have sufficient assets on hand to meet our current and future obligations for many years to come. The Legislature has implemented changes to the benefit structure for individuals hired on or after July 1, 2011, which will improve our funded status over time. What is needed most right now is patience, as well as time, to recover from the actuarial losses that have been experienced over the past decade. We also need the continued commitment to funding the promises that have been made.
As of the January 17 publishing of this article, we are not aware of any intent among legislators to act on the recommendations made by the Commission. Should the Legislature want to evaluate the recommendations made by the Commission, we are here to act as a resource and provide whatever information might be requested. However, until such time as contribution rates stabilize or decrease, the public policy debate surrounding public employee retirement benefits will likely continue to be an issue for discussion.
In the meantime, the PERS Board is reviewing its funding policy to see what intermediate steps can be taken toward stabilizing contribution rates as a fixed percent of payroll while increasing the ratio of assets to accrued liabilities. PERS will continue to operate in accordance with accounting standards as prescribed by GASB, and the annual actuarial valuations will continue to be prepared in accordance with the principles of practice prescribed by the Actuarial Standards Board. Additionally, we will continue to conduct actuarial experience studies every two years to ensure the actuarial assumptions—including the assumed rate of return and rates of mortality—adopted by the PERS Board are appropriate.
The promise of a secure retirement benefit is vital in the recruitment and retention of quality employees to serve the public interest. As our state leaders go about the business of deciding public policy relative to pensions, I am confident that they will remember the promises made to the 250,000 individuals who either spend or have spent their careers and lives serving Mississippi and that they will take into consideration that pensions are just one piece of the overall compensation package provided to public employees. I am also confident that our leaders will give any recommendations for changes to PERS thoughtful and careful consideration prior to taking legislative action, remembering the shared responsibility a retirement system is between the employer and the employee.
PERS is more than studies and headlines about funding and sustainability. We are sustainable, and more than that, we are a mainstay…to retirees, to public employees, to all Mississippians.
To read the letter from Board Chairman Bill Benson to Chairman Schloegel, click here.
To read more about the Governor’s Study Commission on PERS, click here.
To read earlier messages from Pat Robertson regarding the PERS Study Commission, click here.