To facilitate the process of evaluating the Mississippi Public Employees Retirement System, PERS, funding policies after the launch of a new Tier 5, the Pension Integrity Project at Reason Foundation provides the following funding analysis. Reforms made to establish a new tier of hybrid benefits (Tier 5) will have a positive impact on returning the state’s pension for public workers to full funding. Significant changes to contributions are still needed, however, or the state could face an insolvent pension and a massive burden on future taxpayers. The Pension Integrity Project offers several policies that could help Mississippi gradually adopt full actuarial funding of PERS, including segmenting the plan’s unfunded liabilities and directing future state budget surpluses to pay down the costly debt.  

Assessing the impact of Tier 5 

Consistent with the findings shared with the legislature during the 2025 Regular Session, Reason Foundation’s PERS modeling shows the positive long-term impact of Tier 5 and how it reduces future liability accrual by around $80 billion by 2074 (Figure 1).

Figure 1. MS PERS post-Tier 5 accrued liability projection 

This slowing of liability accrual is one-half of the assets versus liabilities equation upon which PERS is built. Our modeling shows that combining the new benefits with the current statutory funding policy could bring PERS to full funding at least a full decade sooner if market outcomes match plan expectations (Figure 2). If all assumptions prove 100% accurate each year over the next 50 years, and the legislature did nothing more than what it did during the 2025 Regular Session, PERS would reach 80% funded by 2062 and 100% funded in 2065. This has a significant impact on the overall costs for government employers and taxpayers compared to pre-reform. 

Figure 2. MS PERS post-Tier 5 funding projection

Conversely, this same modeling shows that PERS is still 40 years away from eliminating its unfunded liabilities, which is well above industry standards and will generate a significant level of unnecessary debt-related costs and risks for future taxpayers. Also worthy of concern is the fact that a less-than-ideal investment outcome still results in the eventual exhaustion of PERS assets. PERS is still on a very long and precarious path to achieving full funding (Figure 3). 

Figure 3. MS PERS post-Tier 5 funding projection under stress

PERS’ excessively long path to eliminating pension debt and continued vulnerability to investment underperformance, even after the prudent reforms enacted in Tier 5, is due to employer contribution rates being fixed in statute. This approach has advantages in predictable budgeting, but it also guarantees that any negative investment performance will increase unfunded liabilities and incur substantial costs over the long term. This is why most states have adopted a funding policy based on the actuarially determined contribution (or ADEC) rate that sets a final payment date for pension debt and adjusts contribution rates accordingly each year based on the system’s investment experience. 

Other states have deployed various mechanisms to overcome public pension underfunding, including layering amortization schedules and applying regular supplemental payments. Any plan facing unfunded liabilities will see significant long-term improvements and taxpayer savings from earlier additional funding. For example, Reason’s modeling indicates that an additional $110 million contributed annually over the next four years to PERS would reduce the time required to eliminate the state’s pension debt by about five years. (Figure 4)  

Any additional revenue dedicated to PERS by the legislature will reduce long-term costs, but this alone, without addressing the inflexible nature of the state’s statutory contribution policy, will not be enough to address the system’s vulnerability to market factors. This concept can be illustrated by comparing PERS post-Tier 5, both with and without an additional $110 million appropriated annually over the next four years (Figure 4). Both Mississippi House Bill 1 as is, and with nearly half a billion extra over four years, react the same when either investment assumptions prove accurate each year or when the system experiences recessions similar to those experienced over the last 20 years.  

Figure 4. MS PERS post-Tier 5 + $110 million over 4 years funding projects under stress

Looking at the same supplemental appropriation through the lens of required employer contribution rates, employers may experience some contribution relief if investment expectations prove accurate, but any investment underperformance eliminates those extra appropriations, and PERS would still face significant insolvency risk (Figure 5). The employer rate being fixed under HB1 results in the system moving into pay-as-you-go (pay-go) status, where benefits are no longer paid out of the PERS trust but out of general revenue funds. 

Figure 5. MS PERS post-Tier 5 + $110 million over 4 years contribution projects under stress

Unless legislators aim to appropriate hundreds of millions annually over the next 30 years to supplement the current fixed employer contribution rate, our modeling finds minimal fiscal gain will be achieved through supplemental contributions, both due to the sheer scale of the plan’s liabilities and PERS’ lack of responsiveness to market downturns.  

Post-Tier 5 recommendations 

The enactment of PERS Tier 5 during the 2025 regular session addressed the long-term viability of the retirement benefit. By providing a new Tier 5 benefit for new hires, lawmakers created a more balanced and risk-managed plan going forward, benefiting employees and taxpayers. While this was a necessary and positive step towards long-term sustainability, further actions are needed to address outstanding funding requirements.  

What is ADEC, and why is it the Gold Standard? 

The actuarially determined employer contribution rate, or “ADEC” rate, is the contribution rate required by employers in a given year to fully fund all accrued benefits within a predetermined timeframe.  

The majority of states fund their public pension benefits each year based on ADEC calculations using a 30-year timeframe, although that timeframe is beginning to shrink closer to the Society of Actuaries (SOA) recommended 20 years. Most states also fix the employee contribution rate in statute, resulting in the employer contribution rate  

(more tax dollars) being the only contribution rate that fluctuates in response to investment performance. Contribution rate responsiveness to market performance is key to a sustainable funding policy. The ADEC rate is the responsive mechanism by which public pension debt becomes fully funded over time. 

Currently, the Mississippi PERS employer contribution rate is fixed in statute and scheduled to increase to 19.9% by 2028. Employees will continue to contribute 9% of their salaries. As of November 2024, the ADEC rate for Tiers 1-4 benefits was calculated at 25.92% of payroll using a 30-year timeframe, according to plan actuaries. Upon review, we found the underlying assumptions used to calculate that rate generally align with industry standards. Slower government payroll growth or a lower investment return assumption are examples of assumptions that would increase the ADEC rate. 

Ways to get to ADEC over time  

Based on employer feedback and the scale of the current $26 billion PERS unfunded liability, we suggest members of the House Special Committee on PERS Funding focus on providing ways to bridge the gap between the statutory rates set in HB1 and the ADEC rate calculated annually by PERS actuaries. 

Any effort to achieve the ADEC rate of funding each year will not only better secure PERS, but it will also save taxpayers tremendous amounts of money by avoiding decades of expensive interest on the pension debt. To that end, the following three recommendations can be used as a guide to phasing in an ADEC policy. 

#1. Segment the debt 

Thanks to the legislature’s launch of the new Tier 5 benefit, members can now leverage the layered amortization approach deployed by systems and legislatures throughout the country to segment the PERS unfunded liability in three categories: Initial Legacy Debt, New Legacy Debt, and Tier 5 Debt.  

Each segment of debt comes with its own unique risks and timelines that allow legislators to incorporate different service methods. This layered approach commits the state to maintaining proper funding on any new debts without applying immediate inordinate costs associated with the current $26 billion debt.   

Initial legacy debt: All pension debt associated with tiers 1-4 as of a certain date. 

New legacy debt: All pension debt associated with tiers 1-4 after that certain date. 

Tier 5 debt: All pension debt associated with the defined benefit portion of tier 5. 

By segmenting the various tranches of debt, appropriators can tackle the more expensive long-term debt more consistently while using smaller segments of new debt to slowly transition the system to a modern ADEC funding mechanism.  

Example Segmented ADEC Policy: 

• Initial legacy debt: Amortize on a 50-year, level percent of payroll basis  

• New legacy debt: Amortize on a 50-year, level percent of payroll basis 

• Tier 5 debt: Amortize on a 25-year, level dollar, layered basis  

Applying the example above to a post-Tier 5 launch PERS, we see that the current statutory rate aligns closely with the calculated ADEC rate (Figure 6). The elongated amortization schedule applied to the initial legacy debt provides some consistency for employers managing year-to-year budgets. At the same time, the proposed example tackles new unfunded liabilities quickly enough to avoid expensive compounding interest. 

Figure 6. MS PERS post-HB1 + example ADEC contribution projects

If the same example were then subjected to economic stress, lawmakers would continue to see a need for additional appropriations, albeit on a much smaller scale. 

Figure 7. MS PERS post-HB1 + example ADEC contribution projects under stress

From a funding perspective, two recessions over the next 50 years will place a significant burden on employer contributions. Segmenting the debt does not prevent the funded ratio from falling, as evident in Figure 8, but it does prevent insolvency while maintaining an employer rate below 27% over the next 50 years, as previously shown in Figure 7. 

Figure 8. MS PERS post-HB1 + example ADEC funding projects under stress

In the end, elongating the amortization schedule and capping the employer contribution will always limit the designed effects of an ADEC policy. The lack of revenue from investment returns can only be made up by additional employer contributions or investment gains that not only meet but exceed assumptions.    

#2. Supplement the employer rate with additional appropriations.  

Separate funding sources, like interest generated by special trust funds, have been used to various degrees by legislatures to pay off debt earlier and reduce expensive interest payments. The scope and nature of these supplemental funding sources are typically unique and a result of political and fiscal conditions in the state. From a purely financial perspective, when a public pension is underfunded, any additional funding would be a net positive to the fund. However, not all supplemental funding will have the same effects on an employer’s risk profile or budget. Supplemental funding is most effective when paired with a plan to eventually meet actuarially determined rates; otherwise, the risk remains that the additional amount will not be enough to fulfill pension promises.  

Applying an additional $110 million over the next four years to the statutory rate of 19.9% of payroll as scheduled, the modeling shows only a subtle difference compared to the status quo and Example Segmented ADEC scenarios as shown in Figure 9.   

Figure 9. MS PERS post-HB1 + example ADEC + $110 million/4 years contribution projects

Figure 10. MS PERS post-HB1 + example ADEC + $110 million/4 years projects under stress

The effects of a segmented ADEC policy are most evident when market stress is applied. Figure 10 shows that the only policy that funds all benefits with a long-term employer rate below 30% is the two where the segmented ADEC policy was applied.  

The segmented ADEC policy also ensures there is always an established date when any new unfunded liabilities accrue. Figure 11 shows the effects market stress has on the PERS-funded ratios under the various conditions and policies covered previously.  

Figure 11. MS PERS post-HB1 + example ADEC + $110 million/4 years funding projects under stress

Despite two recessions over the next 50 years, the PERS funding ratio radically decreases without legislative action, but never goes insolvent due to the systematic ADEC funding rates.  

#3. Earmark 25% of future surplus funds to be deposited into the Pension Special Trust Fund to help address pension investment return volatility  

Some states (Louisiana and Connecticut, for example) have set in law that a certain percentage of surplus funds must be allocated toward the reduction of unfunded pension obligations. Others have directed volatile and non-recurring revenue to special funds designed to help pay down pension debt. Earmarking future surplus funds to pay off pension debt is a clear policy that perpetually sets the honoring of pension obligations as one of the state’s highest priorities, while requiring no up-front costs on already cash-strapped government employers. This practice can be capped by only covering any difference between the actuarially determined employer contribution rate and the PERS employer rate set in statute, but lawmakers should know that any amount contributed above ADEC will save taxpayers in the long run and accelerate the pension’s path to full funding.  

Mississippi lawmakers took an important first step in establishing a new, reduced-risk hybrid tier of benefits for new hires in 2025. Now, they need to address the ominous funding shortfall of PERS, or the plan will continue to be at risk of insolvency, and the state’s taxpayers will continue to bear the burden of massive debt-related costs. While this will require a significant commitment of state funds, there are ways to gradually adopt the proper funding policy and secure an affordable retirement benefit for Mississippi public workers into the future. 

The post Mississippi Public Employees Retirement System post-Tier 5 funding stress test and recommendations  appeared first on Reason Foundation.

House Bill 473 by Rep. Julie Emerson (R-39) and House Bill 466 by Rep. Josh Carlson (R-43) would, together, execute a three-step plan aimed at producing a permanent pay increase for Louisiana’s public educators. Without any actuarial review, the legislature concluded that the resulting savings to employers would be enough of a budget windfall to fund a permanent teacher pay raise. However, appropriating $2 billion to the Teachers’ Retirement System of Louisiana (TRSL) without addressing the glaring weaknesses that led to a $8 billion growth in pension debt is akin to bailing out a sinking boat without first plugging the hole. 

The well-intended, though misguided, three-step plan is simple, in concept. Step one, as passed in HB 473, is a question lawmakers will put before voters on the April 2026 ballot. If approved on the ballot, HB 473 would dissolve the Louisiana Education Quality Trust Fund, the Louisiana Quality Education Support Fund, and the Education Excellence Fund (EEF). The beginning Fiscal Year 2025 balances in the three funds, according to the Legislative Fiscal Office, totaled nearly $2 billion, with the Quality Fund equaling $1.45 billion, the Support Fund totaling $36.2 million, and EEF being worth $482 million. Step two would be the reallocation of that $2 billion towards TRSL and its $8 billion unfunded liability. Step three, outlined in HB 466, occurs when the sudden influx of cash into the TRSL trust fund triggers a change in the subsequent actuarially determined annual employer contribution rate. HB 466 ensures employers use funds freed by the resulting rate reduction to fund permanent pay raises. 

In 2023, over half of all funds contributed towards TRSL–15.71% of the required 28.82% contribution–went towards paying down unfunded liabilities, rather than funding teacher benefits. If the voters approve HB 473 in April and the three-step plan is implemented, the 15.17% figure will be reduced to around 12%, resulting in a cost reduction of approximately 3% for hiring new educators in Louisiana. However, those cost savings are unlikely to materialize when the vast majority of the employer rate goes to servicing past debt. This is because contribution rates change annually based on investment returns. This issue was raised indirectly by the legislative auditor’s office in their fiscal note on HB 473 when they warned that the legislation’s “actual impacts will not be known until the time the funds are fully liquidated, their balances transferred to TRSL, and the retirement contribution rate of TRSL is re-amortized.”

Indeed, a $2 billion supplemental contribution to the TRSL fund is expected to immediately lower the required employer contribution rate by about 3% and improve the system’s funded ratio by about 8%. The multi-billion dollar question is, what happens the next time investments underperform actuarial assumptions?

The answer isn’t complicated—but it is costly. The shortfall becomes new pension debt, stretched over 30 years, which means a larger unfunded liability and higher employer contribution rates the very next year. Even a basic economic stress test of TRSL makes clear just how fragile the system becomes under market pressure.

Only by coupling the three-step plan proposed in HB 466 and HB 473 with a modernized TRSL tier for new hires can lawmakers confidently say Louisiana provides sustainable benefits without burdening future generations of taxpayers. All active and retired members of TRSL should feel confident that their retirement benefits are constitutionally protected and guaranteed. That doesn’t mean the state should be relegated to legislative budgeting with a perpetual albatross around its fiscal neck. Other benefit designs that include guaranteed lifetime income and inflation protection options, while better managing risk, could be considered.

Voters will decide in April 2026 if they want to dedicate another $2 billion towards the $8 billion TRSL debt and execute the legislature’s misguided plan for a permanent teacher pay raise. In the meantime, liberal actuarial assumptions, unsuitable benefits, high costs, and limited transparency remain well-known issues with TRSL that lawmakers should address in the next session. Without systemic reform, the extra funding could disappear, and lawmakers will continue to expose taxpayers to cost overruns, thereby preventing the much-needed modernization of retirement benefits for today’s increasingly diverse and mobile public education workforce. This is precisely why Gov. Jeff Landry must reject injecting more taxpayer funds into a structurally unsound system via HB 466 and instead reform the TRSL benefit for new hires. 

The post Taxpayers shouldn’t bail out the Teachers’ Retirement System of Louisiana without reform appeared first on Reason Foundation.

#1 – Dual rulemaking authorities are counterproductive

Dual rulemaking authorities split between the Department of Transportation (Section 5), and the Department of Justice (Section 6) risk undue delays in the testing and deployment of autonomous vehicles in Montana. California’s bifurcated and complex regulatory approach led to years of unnecessary delay for fully driverless operations.

#2 – Dangerous road conditions lack definitions and standards

Section 5 does not provide a clear explanation of the meaning of “demonstrated to be capable of operating safely during dangerous road conditions.” This vagueness leads to the question of how to demonstrate to the Department of Transportation, given the lack of consensus on technical standards.

#3 – Safe first responder interactions are unaddressed

While Section 6 authorizes rulemaking by the Department of Justice, which includes the Highway Patrol, it is silent on specifics. One omitted element relates to first responder interactions with disabled autonomous vehicles in roadways, a policy states are increasingly adopting. Consensus standardization of both interaction protocols and personnel training is crucial to ensure responder interactions are safe.

#4 – Misalignment with consensus technical standards

The definitions of “automated driving system” in Section 3 deviate substantially from the global consensus technical standard for driving automation definitions widely adopted by the U.S. federal government and most states. Only driving automation at Levels 3-5 constitutes “automated driving systems,” while Senate Bill 67 incorrectly includes all forms of sustained driving automation at Levels 1-5.

#5 – Lack of risk-based regulatory scrutiny

Section 4 groups Level 3 automated driving systems—which pose unique and heightened risks—with Level 1 driving automation systems, such as adaptive cruise control, that have been used in consumer vehicles for more than 25 years, reflecting the lack of a risk-based approach.

Bottom line: Senate Bill 67 (as passed by the Senate) does not align with best practices and contains several problematic provisions that should be addressed by amendment to ensure automated driving systems are safely and efficiently deployed on Montana’s public highways.

Full Backgrounder: Senate Bill 67 Amendments Needed to Improve Montana’s Autonomous Vehicles Regulatory Framework

The post Montana’s proposed regulatory framework for autonomous vehicles needs reform appeared first on Reason Foundation.

Coming on the heels of contribution rate changes enacted by the legislature in 2024, the move will add another critical guardrail in officials’ attempt to put PERS—only 56% funded with $26.5 billion in unfunded pension liabilities—on a path to solvency. However, despite the positive changes, poor market conditions still threaten to bankrupt the PERS pension trust fund. Additional reforms will be necessary for the 2026 legislative session.

The legislature began to tackle the PERS unfunded liability challenge in earnest for the first time in 2024 by enacting a new schedule of incremental increases that required employers to slowly contribute more to PERS over time, along with a one-time supplemental appropriation of $110 million of state surplus funds. These “Phase 1” moves were a good start but did not fundamentally alter the financial trajectory of PERS in a significant way. The legislature prudently opted to call for a new retirement benefit tier (known as “Tier 5”) for the 2025 legislative session, which manifested initially in Senate Bill 2339, then became embedded in the final version of House Bill 1, pairing pension reform with a major tax reform that will lower rates significantly.

The pension reform provisions contained within House Bill 1 will offer all new hires on or after March 1, 2026, a new hybrid retirement plan that combines a defined benefit component like previous tiers with a defined contribution component for added mobility:

• New members can retire at age 62 with at least eight years of membership service. Alternatively, they can retire at any age with at least 35 years of creditable service.
• New members are immediately vested in the defined contribution plan.
• All members will continue to contribute 9% of their earned compensation. For new members, 4% will be allocated to the defined benefit plan, and the remaining 5% will be directed to the member’s defined contribution account.
• Employer contributions will be applied to the system’s accrued liability contribution fund.
• The annual retirement allowance will include a member’s annuity equal to 1% of the average compensation for each year of creditable service.​
• For new members, “average compensation” is defined as the average of the eight highest consecutive years of earned compensation or the last 96 consecutive months of earned compensation, whichever is greater.

The Pension Integrity Project at Reason Foundation provided technical assistance to many stakeholders throughout the reform process, including the bill sponsors, legislative leadership in the House and Senate, and many individual legislators. We provided independent actuarial modeling during the process and advised legislative leadership and staff on design concepts.

The new Mississippi PERS Tier 5 hybrid retirement plan is similar to the reform designs enacted by several other governments, all of which have been successful in driving pension sustainability and have been fairly popular with employees:

• The United States moved to a hybrid retirement design for federal workers in 1987 under President Ronald Reagan after Congress passed the Federal Employees’ Retirement System Act of 1986, which blended the Federal Employee Retirement System, defined benefit with the Thrift Savings Plan, defined contribution into one combined benefit. The Thrift Savings Plan’s annual member satisfaction survey in 2024 found that 84% of federal workers were satisfied with their plan.
• All United States Uniformed Services (Department of Defense, United States Coast Guard, National Oceanic and Atmospheric Administration, and United States Public Health Service) moved to a hybrid military retirement plan called the Blended Retirement System, BRS, beginning in 2018. As of January 1, 2024, over 1.3 million members were enrolled in BRS, representing 68% of active members and 46% of Reserve and National Guard personnel.
• The hybrid plan design option has also been the most popular alternative to traditional pensions among state governments that have enacted major plan design reforms, with states like Tennessee, Georgia, Virginia, Pennsylvania, Washington, Oregon, Utah, and Rhode Island all transitioning one or more legacy pension designs to a hybrid approach.

The pension reform in HB1, combined with modest funding improvements enacted in 2024, represents two strong initial phases of reform critical to turning around decades of declining financial health in Mississippi PERS. However, a third (and potentially more) phases of reform remain critical targets for legislative action in 2026, as outlined in the recommendations section below.

How Mississippi got here

At the turn of the century, the Mississippi Public Employee Retirement System, PERS, faced a funding gap of $2.3 billion, with 87.5% of its obligations covered. Since then, the situation has deteriorated significantly, largely due to investment returns falling short of overly optimistic forecasts and a gradual reduction in those expectations to more realistic levels. As a result, PERS now carries an unfunded liability, or pension debt, exceeding $25 billion. 

Figure 1 breaks down the contributors to the pension debt, which include underperforming investments ($5.7 billion) and revised investment assumptions ($7.0 billion). Additionally, negative amortization—when contributions in a given year fail to cover that year’s interest on existing debt—has increased the shortfall by another $4.9 billion. The system’s cost-of-living adjustment (COLA), a fixed 3% annual increase, does not align with actual inflation and has grown to consume a larger share of payouts, further straining finances. Expected salary increases for employees that were never actually granted have slightly reduced the total unfunded liability.

Beyond these financial challenges, structural funding issues persist. As of 2025, PERS is in a tenuous position with costs that are extremely vulnerable to volatility in global investment markets. PERS actuaries have warned that contributions from employers–even at the increased 19.9% rate–are insufficient to pay off debt and fully fund promised pension benefits. According to system estimates, employers would need to contribute an amount equal to 22.4% of payroll to achieve full funding within 30 years. Maintaining the current insufficient statutory contribution rate will result in much slower and likely stagnant progress in eliminating the state’s pension debt, with tens of billions in debt remaining and accruing expensive interest over 50 or more years.

These projected outcomes are far worse if market returns are much lower than plan assumptions, which policymakers must account for. The ultimate cost of the pension system will grow significantly (adding over $13 billion) over the next 30 years if markets return the 6% average expected by market watchers. If the economy and pension system encounter two recessions over the next 30 years (Figure 2), the system is projected to run out of funding, which would force the state into a pay-as-you-go (paygo) funding policy, meaning benefits would need to be paid without the benefit of accrued investment savings. If PERS were to face insolvency, contributions from employers would need to rise above 49% of compensation (well above the current 22.4% requirement), costing taxpayers more than $27 billion in additional contributions over the next 30 years to pay for pension promises.

Explaining the reform

The new PERS tier (“Tier 5”) established in HB1 is a crucial step for Mississippi’s retirement system if it is ever going to recover from decades of underfunding. It reforms the system by enrolling all new hires into a hybrid plan and adjusting some of the other benefits associated with the pension, effectively slowing the growth of liabilities attached to public workers going forward. 

Instead of using all of their 9% contribution for a pension benefit, new hires enrolled in the hybrid Tier 5 benefit will see the same rate split between a pension and a defined contribution (DC) plan. Tier 5 employees will see 4% of their paycheck used to fund the pension portion, and 5% go toward an individual 401(a) account. PERS employers will continue to contribute the statutorily required amount equal to 19.9% of the total payroll, which will still be used to pay for the system’s unfunded liabilities.

The pension portion of the Tier 5 hybrid will secure a guaranteed lifetime benefit about half the size of Tier 4 (using a 1% multiplier in the benefit calculation instead of 2%). The calculation’s final average salary (FAS) portion will also use a member’s eight highest-paid years rather than the current four-year average used in Tier 4. The DC portion will give employees a more flexible benefit that will require no vesting period, be less vulnerable to inflation with returns accruing throughout employment and retirement, and be more portable to other jobs and retirement plans.

Tier 5 also adjusts some of the retirement eligibility requirements for the pension portion of the hybrid. Instead of eligibility beginning at age 60 or at 25 years of service, the pension portion of the new hybrid will be available at age 62 after 30 years of service or age 65 (eight years served minimum) or at any age after 35 years of service.

A final major change for new public hires in Mississippi will be that there will no longer be a guaranteed 3% COLA to insulate pension benefits from inflation. It will be possible for the legislature to grant benefit adjustments on a discretionary basis through legislative action, but COLAs will not be included in the liability and cost projections for Tier 5. While this aspect of HB1 will help mitigate future costs and risks, it also represents a significant shift in benefits offered to new hires, as discussed further below.

Analysis of HB1’s reforms

Mississippi’s pension reform aims to bend the PERS liability curve downward by slowing the growth of pension benefit accruals, making it somewhat easier for funding to catch up eventually. Actuarial modeling prepared by the Pension Integrity Project at Reason Foundation indicates that HB1 will likely achieve this goal if actuarial assumptions such as investment return and payroll growth prove accurate.

Because the Tier 5 hybrid plan reallocates retirement benefits from a defined benefit that serves a fraction of members to a defined contribution benefit (which cannot accrue a liability and cannot create unexpected costs), the growth of liabilities is expected to slow. Additionally, suspending costly COLA benefits for new hires has reduced the impact on the accrual of PERS benefits going forward.

Reason modeling of PERS shows a distinct long-term impact (Figure 3). Applying the new Tier 5 reform will ultimately reduce liability accrual by more than $80 billion by 2074.

This slowing of liability accrual gives Mississippi a better chance of achieving full funding. Reason modeling shows that the new benefit and funding structure could bring PERS to full funding at least a full decade sooner if market outcomes match plan expectations (Figure 4). This would have a significant impact on the overall costs for government employers and taxpayers.

Reduced liabilities and the much-improved trajectory of PERS funding will likely generate significant savings over the long run. Looking at both projected unfunded liabilities and all employer contributions to the plan, this reform is projected to save $6.5 billion over the next 30 years and over $17 billion over the next 50 years. Importantly, the risk-reducing features of the reform go a long way in managing these costs under less-than-ideal market scenarios. According to Reason’s modeling, this reform would save more than $30 billion if PERS were to experience multiple recessions and returns below the current 7% expectation over the next 50 years.

Mississippi policymakers should be warned that, while this reform does reduce long-term costs, it is not projected to reduce the chances of PERS becoming insolvent and exhausting all assets. Figure 5 shows the projected funded ratio of the reformed system, both under a scenario of 7% annual returns and one that involves two recessions and returns below expectations (6%). Comparing these outcomes to the pre-reformed system (Figure 2), a less-than-ideal investment outcome still results in plummeting and eventual exhaustion of funding. HB1 has not eliminated the danger of insolvency facing PERS, which must be addressed in future reforms.

Assessing the Tier 5 benefit

Another advantage to Mississippi’s Tier 5 reform is that it will offer a retirement benefit that better reflects the evolving needs of new hires today. Pensions tend to reward lifetime employees or those who stick around their entire career. This type of employee is increasingly rare in both the private and public sectors. According to Reason’s analysis, PERS expects most new hires to have left by year five, years before the pension’s steep eight-year vesting requirement. That means the current pension offers little to most of the state’s new workers.

Retirement plans must adapt to meet the needs of today’s employees. Hybrid plans balance risk between employers and employees while offering more flexibility than traditional pensions. Employers benefit from reduced financial exposure, while employees—who often change jobs before qualifying for a full pension—gain some portability and access to market-driven growth. Unlike Tier 4, which requires workers to leave their contributions in the plan with minimal interest or withdraw them—often forfeiting employer contributions—a hybrid plan allows employees to take the defined contribution (DC) portion with them when they move to a new job.

New employees will enjoy more than just the benefits of modernized flexibility in the Tier 5 hybrid. The DC element of the hybrid is expected to improve retirement benefit outcomes for most new hires. Figure 6 compares the estimated value of the PERS DB plan, the new Tier 5 hybrid, and a pure DC plan. To compare the value of one plan type to another, the analysis calculates the amount that could be generated in annual annuity payments (meaning guaranteed lifetime benefits) for someone hired at age 32 at increasing years of service. 

The analysis shows that the new Tier 5 benefit actually outpaces the retirement value generated by the state’s pension until year 30, at which point the pension provides a slight advantage. Keeping in mind that very few newly hired members (less than 10%) stay in their position for 30 years, it is clear that the HB1 Tier 5 hybrid actually provides a greater benefit for the vast majority of PERS members. 

This analysis also includes the accrued annual lifetime benefits that an employee could earn from a pure DC plan with 9% employee and 5% employer contributions. The advantages of a DC plan of this type would further improve the retirement offerings to public workers. Mississippi policymakers should consider granting a full DC plan as an option to new hires.

A pure DC option could also address one of the primary concerns expressed about the Tier 5 hybrid. Since no COLA benefit will be provided for the DB portion of the hybrid, new public employee hires will see part of their retirement reduced over time from year-to-year inflation. The DC element of the hybrid will grow with market returns, providing at least some cushion from the loss of COLA benefits. Still, having no COLA will represent a significant recalibration of expectations from legacy to new hires in Mississippi. To further alleviate this concern, lawmakers should give employees the ability to select a full DC plan instead of the new hybrid, which would eliminate any concerns about managing a fixed lifetime benefit with no protection from inflation

Completing the reform to prevent MSPERS insolvency — framing a 2026 policy agenda

The new Tier 5 benefit design included in HB1 is a necessary and critical step in addressing the state’s growing pension challenges. The new Tier 5 plan design alone will not solve the PERS underfunding crisis, however, and state lawmakers need to continue to seek an additional Phase 3 of reforms in 2026 to avoid insolvency and secure PERS for future generations.

Recommendation 1: Fix the broken PERS’ funding policy

Pension Integrity Project modeling of PERS indicates that while the hybrid plan for new hires will improve the system’s trajectory, the system will remain at risk of insolvency under recession scenarios. The main culprit threatening the state’s pension funding will continue to be its rigid contribution policy with rates set in statute rather than adjusting each year to achieve a payoff goal. The current approach represents a failed pension funding policy, as it:

• Is the primary reason PERS remains underfunded today and is structurally underfunding PERS every single year;
• Has no relation to actuarial calculations nor is it set to achieve full funding;
• Pretends that 19.9% has some objective meaning other than being the rate policymakers today would prefer to pay into the PERS system; and 
• Sacrifices long-term funding needs for year-to-year cost stability. 

Looking to the next legislative session, policymakers should pursue reforms to establish a more reflexive annual contribution that will avoid the long-standing systematic underfunding issues that have thrust the state into the current pension debt quagmire. Using an actuarially determined employer contribution (ADEC) is considered the gold standard policy for responsibly funding pension benefits. Still, there are many incremental steps in between that would improve the state’s current statutory approach. Any effort to accelerate the growth of the system’s assets–for example, a supplementary contribution or any type of contribution increase–will not only better secure PERS, but it will also end up saving taxpayers tremendous amounts of money by avoiding decades of expensive interest on the burdensome pension debt.

Recommendation 2: Adopt an optional defined contribution (DC) retirement plan

The new hybrid plan is a notable step toward meeting the flexibility needs of the modern workforce, but state policymakers missed out on a major opportunity to make PERS more valuable to a broader set of potential new hires. 

With the creation of individual 401(a) plans for the DC side of the hybrid in Tier 5, it would be easy for PERS to now offer a full DC retirement plan option for those who want to take advantage of this type of retirement plan. Offering an option to have all contributions go to a DC plan would expand the system’s ability to serve more unique employee situations and would do so while actually reducing the risk of runaway costs even more than the new hybrid approach. Several state-run retirement plans have enjoyed success in offering a full DC option, and Mississippi’s lawmakers should prioritize this in the 2026 session.

Conclusion

Through several years of study and coalition building, and with the assistance of the Pension Integrity Project, Mississippi policymakers have enacted a reform that will greatly improve the long-term viability of its retirement plan for public workers. The reformed Tier 5 benefit for new public employee hires will establish a more balanced and risk-managed plan that works better for most employees and the taxpayers who fund the system in the end. The reform is a clear, positive step in improving the system’s long-term solvency and will improve the chances of achieving crucial long-term funding goals. However, it should be clear to policymakers that the work in Mississippi is not done, as PERS remains very much at risk in the face of a volatile and unpredictable future. 

To complete the state’s path toward a comprehensive reform, lawmakers must next address longstanding funding issues with changes to the annual contribution policy. They should also set up an optional DC plan for public employees, improving the retirement benefits for most of those beginning employment. These steps would better secure PERS for future generations and reduce expensive debts that have created massive unexpected costs for Mississippi taxpayers.

Additional resources

• Mississippi PERS Data & Modeling: Pension Integrity Project Dashboard
• Commentary: A New & Necessary Approach to Mississippi’s Pension
• Commentary: Mississippi PERS’ $25 Billion Problem
• Commentary: Mississippi’s Low Pension Contributions Cause S&P Global to Downgrade Its Credit Outlook
• Commentary: Modernizing PERS to Serve Mississippi’s Public Workforce
• Commentary: Mississippi Municipalities Should Brace for Higher Pension Contributions
• Commentary: Mississippi Needs to Fix the Way It Pays for Public Pensions
• Commentary: Mississippi Lawmakers Can Take the Best from Other Successful State Pension Reforms

Full Explainer: Does the hybrid plan established in HB1 meet the objectives for good pension reform?

The post Mississippi adopts hybrid retirement design in major pension reform appeared first on Reason Foundation.

Mississippi has a $25 billion problem.  

The state-run retirement system has only about half of what experts project we will need to pay retirees. We say “we” because it’s not just about retirees.

In fact, every single employee and retiree in the Mississippi Public Employee Retirement System today will get the benefits they were promised. A unanimous vote of the Legislature couldn’t change that. Courts across the country, including in Mississippi, have held they are a legally enforceable contract – a promise.

It is precisely because of that fact – that current benefits can’t be changed – that this is everyone’s issue.  This is a Republican issue. This is a Democratic issue. This is a government employee issue. This is a taxpayer issue.  This is an issue for every Mississippian, even if you think you don’t care about it.

Quite simply, an increasing share of state and local tax dollars will be funneled into the retirement system to meet those promised benefits. If you’re a conservative, think about what this unchecked retirement fund shortfall means for taxes. If you’re a liberal, think about what it means for state dollars you’d rather see focused on things like healthcare or education. If you are a city or state employee, think about what this means for your prospects for salary increases.  

The sooner we begin to face the challenges and adjust for the future, the less painful the solutions will be. That’s why when political leadership steps up to the plate to begin tackling this – as they did in the 2024 legislative session – they deserve serious consideration, not fear-mongering and politics. It’s a real problem that needs sober consideration and consensus, or we will all end up with an even bigger problem.

Over the last few weeks, we have run a series of articles talking about the causes, challenges, assumptions, and solutions before us, including:

• Investment growth is far less predictable than it once was, and state employment patterns have changed significantly, just as they have in the private sector. Both have significant impacts on our future financial picture, and a couple of major shocks to the investment markets could be catastrophic. 
• The state can’t keep offering the current set of benefits to new hires. While current employees and retirees will get their full benefits, future state employees will need a new program that promises less, offers more flexibility, and recognizes new career path trends.
• The 2024 legislation stabilized the system for the moment, but the larger issues require considerable attention, tough decisions, and, quite frankly, money.
• State and local governments and school districts are going to have to pay more into the system.

Fixing PERS for sustainability won’t be easy, but neither is this insurmountable. Reasonable solutions are within reach.  

The good news is that we can do this. Other states have met this challenge. Some states are prudently dedicating budget surpluses to offset rising state and local obligations. But what won’t work is fear and hyperbole.  Only with rational, transparent consideration can we build a consensus among all players to address the fiscal needs of the system.

The post Mississippi PERS’ $25 billion problem appeared first on Reason Foundation.

The Mississippi Public Employees Retirement System, PERS, needs more money to meet its promises to active and retired public workers long-term. Mississippi Senate Bill 3231, adopted during the 2024 Regular Session, signaled the legislature’s intention to eliminate this problem by introducing a new “Tier 5” of retirement benefits for future public employees. 

S.B. 3231 was a good first step—but it’s only a first step. There is a lot of work to do and tough decisions to face. The Pension Integrity Project at Reason Foundation has gathered best practices from half a dozen major state-level public pension reform efforts to compile a comprehensive Tier 5 reform package, titled the “Choice” proposal, for lawmakers to consider. 

The “Choice” proposal provides competitive and fiscally sustainable retirement options for new hires. It is paired with a plan to fully fund all earned and accruing benefits of current PERS members and retirees that will remain untouched. Reason’s analysis of this proposed reform demonstrates that, while it will require a significant government budget commitment, it will ultimately save the state, and therefore taxpayers, $14 to $21 billion over the next 30 years.

With a fundamental commitment to honoring promises to current and retired members while also eliminating unfunded liabilities, the Reason Foundation’s Tier 5 “Choice” proposal encompasses several elements organized into three primary categories:

Commit to proper annual pension funding

The first category focuses on updating funding policies.  PERS should move away from a fixed contribution rate set in statute and instead adopt an actuarially determined employer contribution (ADEC) policy that adjusts the amount of money state and local governments must pay for their employees’ retirement benefits annually based on calculations by plan actuaries for the existing Tiers 1-4. During their November meeting, the PERS board voted to recommend that the legislature fund Tiers 1-4 benefits at the ADEC rate, which is currently 25.92% of the payroll. The “Choice“ proposal is different from the PERS board recommendation in that it also introduces an equal cost-sharing policy for the new hires entering the future Tier 5. This policy distributes the cost of the pension plan and any future increases or decreases to that cost equally between employees and employers.

Pay off debt

The second category emphasizes the importance of quickly addressing unfunded liabilities to avoid higher costs in the long term. Upon passage, the “Choice” proposal entails implementing amortization policies to pay off Tiers 1-4 pension debt over 25 years. Any new unfunded liabilities attributed to Tiers 1-4 will be paid off on a preset schedule over 15 years going forward, while a 10-year policy will be used for Tier 5. The “Choice” proposal’s ADEC rate is based on this multi-tier amortization schedule and is different from the ADEC rate that PERS currently reports, which is based on a simple 30-year schedule. 

Introduce a choice of modern retirement options for new hires

The third category aims to offer prospective public employees a choice between a new PERS-defined contribution (DC) retirement plan and a new PERS Tier 5 defined benefit (DB) plan. Starting July 1, 2026, all new hires would be enrolled either in a 401(a)-retirement plan with a 5% employer contribution and a 7-9% employee contribution, or they would choose a risk-managed Tier 5 pension plan. This pension would feature a responsive, automatic cost-of-living adjustment (COLA) tied to inflation and the financial health of the system. Because most new hires are better served by the DC option in this proposal—as most employees will leave the plan before the pension’s vesting requirement is met (see part 1 in this series)—Reason Foundation proposes to set the DC option as the default for those who make no selection between the two.

Reason Foundation’s actuarial modeling of PERS shows that the proposed Tier 5 “Choice” recommendations would fully fund all accrued benefits of current PERS members and retirees while preventing the same debt issues from inflicting financial stress on future generations.

The graphs below highlight the differences between the status quo, Reason Foundation’s “Choice” proposal, and a separate “Hybrid-for-All” benefit for new Tier 5 members that was reviewed by PERS (which blends a small DB pension with a small DC plan). 

Stakeholders can see the long-term value of providing Tier 5 choice to the state’s workforce (to stop digging the unfunded liability hole deeper) and sound pension funding policy (to fully fill the current funding hole) by evaluating actuarial forecasts of how PERS will perform under each proposal, using stress testing to simulate long-term market volatility. 

Instead of a decline in funding health that would come about by maintaining the status quo, Figure 1 shows that the “Choice” proposal and the Hybrid-for-All options would steer PERS toward substantial progress in reducing and eventually eliminating unfunded liabilities by 2048 under a 7% investment return scenario. The graph also demonstrates the value of recognizing and fully funding the cost of PERS benefits now versus kicking the financial can down the road.

Given the numerous warnings from PERS investment consultants and the global investment market’s inherent volatility and unpredictability, any PERS reform must be resilient to potential stress. Figure 2 shows that a reformed PERS is projected to still achieve full funding by 2053, under a Dodd-Frank-style triple recession stress test over 50 years, but only through the implementation of the “Choice” proposal. In stark contrast, under today’s fixed contribution approach, PERS risks running out of funds and resorting to a “pay-as-you-go” (PAYGO) system, where benefits are paid monthly out of the state’s general fund, by as early as 2041.

Here’s the hard truth: Implementing these badly needed reforms will necessitate a significant short-term financial commitment from local and state budgets. Without it, as Figure 2 shows,  PERS is likely to quite easily descend into insolvency under reasonable market stress conditions. That’s because, under the current funding policy, the legislature writes into law the amount it wants to pay into PERS each year, regardless of the amount actuaries calculate, which is mathematically necessary each year to fully fund benefits and avoid underfunding and long-term insolvency. 

Figure 3 shows what the financial commitment to fully fund PERS benefits looks like under the various proposals if all actuarial assumptions, like investment returns and payroll growth, prove accurate each year. As expected, fixing the rate in statute will fix the cost for employers, but it also ensures that PERS goes insolvent (Figure 2), even if significant benefit changes are adopted through a fifth tier. If the legislature commits to actuarially based funding, the status quo, “Hybrid-for-All,” and “Choice” proposals all would require annual contributions equal to between 25% to 29% of pay for the next 20 years, at which point annual costs will drop between 1-5%, depending on the level of benefit being offered.

A scenario with three recessions could increase annual employer contributions to 43% of payroll, with the timing depending on the proposal option (see Figure 4). The effects of actuarially determined funding are also clear, as maintaining a fixed contribution rate will ensure the system will start requiring general fund appropriations to pay for monthly benefit checks by 2045, which would impose annual costs four times higher than the reform proposals in perpetuity.

The value of ADEC funding is also clear. For the increases in the actuarially determined rate over the next 30 years, employers will pass on a more manageable situation to future generations. However, the application of these reforms would require a major budget commitment. In the past, Louisiana, North Dakota, and New Jersey have taken proactive measures to assist local municipalities and employers in managing the rising costs of pension contributions.

Mississippi lawmakers will need to address unfunded pension liabilities sooner or later, so the most comprehensive evaluation of these reforms’ impact involves a 50-year aggregation of contributions and whatever pension debt will remain at the end of that timeframe. 

Right now, PERS is on a path toward insolvency. Reason Foundation’s comprehensive Tier 5 ”Choice” proposal offers a viable solution to these challenges by modernizing funding policies, accelerating the payoff of unfunded liabilities, and providing future employees with sustainable retirement options that better fit their career and retirement savings. While all workable solutions will involve spending more money to pay down existing pension debt, failure to adopt these necessary reforms will result in even higher costs to the state. Lawmakers must address these issues promptly to secure the financial health of PERS, protect the retirement security of current and future employees, and ensure the long-term fiscal stability of Mississippi. 

The post A new and necessary approach for Mississippi’s public pension appeared first on Reason Foundation.

In 2001, the Mississippi Public Employee Retirement System, PERS, had an unfunded liability of $2.3 billion and sat at 87.5% funded. Today, PERS is $25.5 billion in debt and has only 56.1% of what is needed to meet long-term obligations.

Leading up to and during the 2024 regular legislative session, PERS administrators and Mississippi lawmakers responded to these challenges with different ideas, ultimately choosing a holding pattern for the time being while legislative leaders take a deeper dive into the issue.

However, without a holistic funding solution and a new pension tier for future hires, PERS will continue to fester in members’ minds, mayors’ budgets, and taxpayers’ pocketbooks.

At the heart of the matter is what has plagued nearly all public pensions for the last two decades. Pension systems like PERS are built on a financial model that uses assumptions, such as future investment returns and how long members will live, to determine how much needs to be saved today to honor obligations to members decades later. If the return assumption is lowered, the amount needed to save today will increase.

As the PERS board, like nearly every public pension plan in the U.S., gradually reduced the system’s rate of return assumption, the need for higher contributions became more acute.

PERS assumed an 8% investment return for much of the 20th century without any real funding issues, save for the occasional unfunded pension benefit increase. But after a dot-com bubble, great recession, and pandemic lockdown, major state public pension systems like PERS adjusted expectations in response to shifting global investment markets.

PERS now relies on a 7% return on its investment assumption, putting it slightly above the national average of 6.91%.

PERS Board of Trustees proposal

The PERS Board of Trustees resolved before the 2023 legislative session to increase the employer contribution rate from 17.4% to 22.4%—the largest such increase on taxpayers and local employers since 2005. The rate increase on state agencies would have amounted to an additional $265 million per year toward their employees’ retirement, while local governmental entities were responsible for the remaining $80 million annually.

In addition to the increase in annual costs, the PERS board officially recommended the legislature approve a new Tier 5 for any member who joins the system on or after July 1, 2025.

According to the board’s recommendation, this new tier would have a four-year vesting period, as opposed to the current eight. It would stipulate that any future cost-of-living adjustment (COLA) be capped at 3%, granted only at the discretion of the PERS board and tied to inflation and the plan’s funding level. New tier members would also have a 7% employee contribution rate, rather than the current 9%, due to removing a guaranteed COLA from the base benefit.

2024 legislative response to PERS recommendations

At the beginning of the 2024 regular session, mayors and city budget writers from around Mississippi descended onto Jackson to voice their strong opposition to the PERS rate increase, stating that such an increase would directly lead to staff cuts and/or property tax increases.

Legislators reacted quickly, introducing measures that limited the board’s ability to dictate rate increases to employers. To their credit, House and Senate leadership quickly realized that stopping the rate increase entirely would be detrimental to the system. By the end of the 2024 session, the legislature had effectively revised the PERS contribution rate to phase in the board’s contribution recommendations.

An additional supplemental state contribution of $110 million ensured that the rate increase’s impact on local budgets would be minimal. Along with the additional funding, the legislature also mandated that all PERS board meetings and materials be made public for all future meetings. In the end, the issue of a new benefit tier was effectively paused to allow for more deliberation among stakeholders.

Where things stand with PERS heading into 2025

Now that both the PERS board and the legislature have responded and the 2024 legislative session set new contribution rates, it is now possible to see where PERS sits going into the next year.

Folding in the revised employer contribution rate and a supplemental $110 million cash infusion from the 2024 Regular Session, the Pension Integrity Project PERS model shows the system’s funded ratio flattening in the short term but continuing to fall, even if all current assumptions prove accurate. (Figure 1) This indicates that even with the updated contribution rates and supplemental payment, PERS is still not on course to eliminate the expensive debt that will be imposed on future taxpayers.

If the system, as it is post-2024 regular session, were to experience two recessions over the next 30 years (Figure 2), PERS is projected to go insolvent, meaning the plan’s assets will be exhausted, and pension benefits will have to start coming directly from state and local budgets. This outcome would be devastating, as it would explode annual costs well beyond anything experienced up to this point.

Lawmakers and PERS administrators have both acknowledged that the status quo is not sustainable. A new Tier 5 design and funding policy will be needed by the end of the 2025 legislative session.

The Tier 5 recommendations published by the PERS board in December 2023 are the only set of recommendations out to date, and they address another major challenge facing effective reform: the PERS 3% compounding COLA.

Unfortunately, the PERS Tier 5 matches that reform with a contribution reduction that effectively negates the gains of the COLA reform, pushing the new tier to essentially the same outcome compared to the status quo when all assumptions are met. Figure 3 illustrates how little of an impact such a reform would have on PERS, while Figure 4 demonstrates the impact the proposed change would have on unfunded liabilities over the next 30 years.

The PERS Tier 5 recommendation also does little to help the system weather global financial storms going forward. If the system were to experience two recessions, neither the status quo resulting from the 2024 regular session nor the PERS Tier 5 recommendation would prevent dramatic rate increases and benefit cuts.

Figure 5 shows the funded status of PERS if the system experiences the same two recession patterns over the next 30 years as pension systems have experienced over the last 30 years, while Figure 6 shows the same phenomenon from the perspective of unfunded liabilities.

Path forward for PERS

These findings should not surprise anyone following the PERS issue during the 2024 regular session. PERS administrators and legislative leaders have all repeatedly stressed the need for a new Tier 5 PERS benefit for future employees.

A successful new tier for public employees is the best path toward a financially secure retirement for all members. Stabilizing contribution rates is important for taxpayer budgeting, but this must be accomplished through a sturdy plan to eliminate pension debt, not by pushing the growing funding problems down the road.

This approach will require a commitment to higher costs today to avoid imposing higher costs on future taxpayers.

Without a proper funding policy to secure retired and active member benefits, however, any new Tier 5 will do little to stop the PERS unfunded liability from continuing to grow.

Mississippi lawmakers, though facing unfamiliar challenges with PERS, can draw on successful reform examples from other states to navigate these issues effectively or risk the burden falling directly on the shoulders of taxpayers for generations.

This involves updating outdated actuarial policies, implementing a financial plan to eliminate underfunding, fully funding promised benefits, and providing new, beneficial options for future employees. This comprehensive method has already assisted other states and can be a sustainable solution for all stakeholders Mississippi PERS stakeholders.

The post PERS’ state of play after the 2024 Mississippi legislative session appeared first on Reason Foundation.

Over the last decade, Public Employees’ Retirement System of Mississippi (PERS) data has shown a significant increase in the rate at which public employees are quitting, with most moving to another career within the first five years of taking their government job. Understanding and addressing the evolving needs of new hires is crucial for PERS, not only for its financial sustainability but also for its ability to continue to provide adequate retirement benefits for its members.

An evaluation of current PERS retention rates suggests that policymakers have an opportunity to move away from the one-size-fits-all retirement benefit currently offered and that only a fraction of employees will ultimately receive and toward providing retirement benefit options that can accommodate the needs of both career and non-career employees.

To properly value and fund a public pension benefit like PERS, the assumptions actuaries use—such as the rate at which new hires will leave (or withdraw from) the system—must be accurate, or else unfunded liabilities accrue. The withdrawal rates assumption helps estimate the expected number of separations from active members due to resignation or dismissal.

Over the last decade, PERS actuaries have responded to major national shifts in retention rates by adjusting the system’s withdrawal assumptions upwards because the actual number of withdrawals has consistently exceeded expectations since 2014, particularly among younger employees. In 2014, 22% of new male hires and 25% of new female hires were expected to leave after the first year of employment. By 2023, these figures had surged to 42% and 45%, respectively.

Based on the withdrawal rates used by PERS for 2014 and 2023, Pension Integrity Project analysis shows that 70% of new members entering at age 30 will leave within five years of service, compared to 40% in 2014. Even members who join the system later in their careers are exiting earlier than before, with only a 50% probability of a member entering at age 50 remaining after the first five years of service.

Expanding the analysis to include other large plans covering public employees, such as the Wisconsin Retirement System,Wisconsin RS, Louisiana State Employees’ Retirement System, Louisiana SERS, and Employees Retirement System of Texas, Texas ERS, reveals a similar trend.

In Louisiana SERS, only 31.8% of new public employees are expected to remain after five years of service, compared to 35.8% in Texas ERS. Even a well-funded plan like Wisconsin RS sees nearly half of new members leave the system after the first five years.

On average, the probability of staying beyond five years of service for a member joining at age 30 is well below 50%. Typically, eligibility for retirement begins at age 55. However, fewer than 30% of members remain by this time.

Compared to other state-run pension systems, the Mississippi Public Employees’ Retirement System, PERS, exhibits a notably high rate of early turnover among its members and imposes one of the longest vesting period requirements among similar pension systems, set at eight years for new members hired after July 1, 2007. Consequently, around 80% of new members are anticipated to leave the plan before reaching the vesting period. When PERS members terminate their employment before vesting, they are eligible only for a refund of their own contributions plus a credited interest of 2%. They do not receive any employer contributions made on their behalf. Therefore, only about one-fifth of PERS members are estimated to ultimately receive pension benefits.

The overall trend—and the more important part of the story for policymakers to consider—is that PERS’ current challenge with serving new hires reflects a national pattern of behavioral shifts among public workers. All these plans face nearly the same retention challenge even as they continue offering these traditional pensions, raising doubts about the effectiveness of pensions as a vehicle for recruiting and retaining employees.

In fact, the results of these withdrawal patterns suggest that policymakers should not operate under the assumption that pensions have a unique ability to attract new workers. Seeing that workforce behavior has significantly shifted all over the country and how pensions have had no perceivable impact on stemming that shift, lawmakers in Mississippi should reevaluate what they are aiming to achieve with PERS.

Additionally, they should be concerned with how poorly the current plan serves the vast majority of hired people. It is clearly time to explore additional alternative options for new hires that will foster adequate savings for retirement, even if their tenure with PERS is only a few years.

The post Modernizing PERS to serve Mississippi’s public workforce appeared first on Reason Foundation.

While the $2 billion infusion contained in Louisiana House Bill 7 (H.B. 7), which passed and was sent to the governor, may seem appealing on the surface, actuarial modeling suggests that any pension investment underperformance in the short to medium term would erase the expected employer contribution savings and make the pension system worse off unless such a move were paired with meaningful reforms. 

Currently reporting $8.5 billion in debt, the Teachers’ Retirement System of Louisiana (TRSL) is clearly in dire need of more money to generate the investment returns needed to fully fund benefits and protect retirees from inflation over the long term. The goal underlying this accounting move is the assumption that the $2 billion worth of debt that gets erased by H.B. 7 will provide local employers with a lower contribution requirement. According to the guidelines established in Louisiana House Bill 5 (H.B. 5, which was also passed and sent to the governor), the difference will be used for educator pay raises. In the end, the effect is a taxpayer-funded supplemental contribution that will immediately lower the employer’s contribution rate. Still, this move comes with a tradeoff—it undermines the financial resilience of Louisiana’s largest public pension system.  

Contributing more taxpayer money without addressing the root causes of the state’s multi-billion-dollar pension problem is akin to attempting to bail out a leaking boat without first fixing the hole. According to TRSL modeling done by the Pension Integrity Project at Reason Foundation, any negative market performance in the short to medium term will likely erase the employer contribution savings expected by H.B. 7 and its $2 billion taxpayer supplemental payment. 

A great way to visualize how little progress H.B. 7 alone will make in resolving the state’s oldest and most expensive debt is by looking at the legislation’s impact on TRSL over the next 30 years in both ideal and underperforming markets.  

Figure 1 below, generated by Reason Foundation’s modeling of TRSL, shows how the $2 billion supplemental payment to the Teachers’ Retirement System of Louisiana is expected to increase the funded ratio, or percentage of funds on hand, versus what’s expected, from 77.2% to 82.8%. But, because the bill does nothing to address the actual source of the system’s growing debt, the pension system will remain vulnerable to market outcomes.

For example, TRSL continues to operate under a return assumption that is above the national average. Until policymakers adopt safer assumptions, the probability of experiencing more unfunded liabilities remains high. 

Figure 1: The Impact of House Bill 7 on the Teachers’ Retirement System‘s Funding 

According to the 2024 TRSL valuation, for the year ending June 30, 2024, the system’s actuarial rate of return of 7.01% was less than the 7.25% expectation, resulting in a new $63,905,843 unfunded liability that will be amortized over 20 years. While the $2 billion from HB 7 does help the system recover from this and previous market-driven funding shortfalls, it does not address the glaring vulnerability to returns below the system’s lofty investment assumption.  

The core shortcoming of H.B. 7 is its disregard for the effective way the Teachers’ Retirement System of Louisiana currently responds to investment underperformance. Although not cheap to employers and taxpayers currently, TRSL employers are committed to funding their constitutionally protected public pension benefits according to what system actuaries determine is needed year to year—also referenced to as the actuarially determined contribution rate (ADEC). The rate adjustments are automatic under the current ADEC policy and used by employers and the state to fund TRSL benefits. Employers see their required contributions rise and fall from year to year according to the system’s needs.  

Figure 2 shows how House Bill 7 will allow for a lower employer rate compared to the status quo. However, these rates, even with the $2 billion applied, will necessarily rise well above current levels if the system were to experience a recession. Maintaining an above-average investment assumption under House Bill 5 and its plan to reallocate the Teachers’ Retirement System of Louisiana’s employer contributions to pay raises will only exasperate TRSL vulnerabilities and likely lead to local employer rates increasing when investments underperform. A good way to visualize that aspect of the legislation is by forecasting the employer contribution rate under underperforming conditions.  

Figure 2: The Impact of House Bill 7 on TRSL Employer Contribution Rates 

The supplemental payment established in House Bill 7 clearly reduces annual costs in the short term, which policymakers hope to use—through House Bill 5—to increase teacher salaries. The problem with this approach is that any dip in the market will squeeze local school districts and property taxpayers on both the employee and employer sides. When investments underperform, taxpayers will be left 100% financially responsible. 

There is no question that an extra $2 billion contribution to a public pension system that is $8.5 billion in debt is going to have an immediate, clear, and positive impact on the health and status of the system. However, policymakers, stakeholders, and taxpayers should be aware of the strategic mistake it will be to not address the systemic issues that created the $8.5 billion TRSL debt and its current sky-high cost.

Figure 3 illustrates how ineffective $2 billion alone will be if TRSL continues to underperform. If the system experiences a single recession in the short- to medium-term, H.B. 7 could increase costs, remove any prospects for a future cost-of-living increase for retirees, and prevent the state and the system from making any meaningful progress on improving the teacher pension’s funding over 30 years. 

The Teachers’ Retirement System of Louisiana could realistically be just as underfunded in 2055 as it is today. 

Figure 3: TRSL Unfunded Liability (Market Value) 

Simply injecting public funds into any of the state’s multi-billion-dollar indebted pension systems alone isn’t a good idea for taxpayers on its own terms unless it actually buys better than slightly less cost for a few years. Rerouting any funds away from servicing a billion-dollar debt will result in the proverbial can being kicked down the road. That’s what the modeling shows as the most likely scenario for TRSL and its participating school districts. 

All the most successful state pension reforms in the United States started with fixing the broken pension and then increasing spending to service what is usually every state’s most expensive debt. Successful, sustainable, and resilient pension reform has an order of operations, and Louisiana lawmakers should be aware that H.B. 7 and H.B. 5 do not currently represent the best process to achieve a long-term resolution to the state’s long-term public pension problem.

The post Louisiana legislature wants to use education-related funds to pay for teacher pensions without fixing core problem  appeared first on Reason Foundation.

Contrasted with publicly traded equities, private equity funds have higher fees, lower regulation, and more restrictions on selling shares. Private equity funds lack clear return and risk metrics, making it difficult to assess performance before investments are redeemed, often a decade or more after the initial investment. These difficulties imply a responsibility for trustees and investment officers to ensure that: (a) private equity provides something not attainable with publicly traded stocks and bonds, and (b) investing in private equity is prudent and consistent with plan officials’ fiduciary obligations.

The recent rise in market interest rates after years at depressed levels creates new challenges, especially for existing holdings. Higher interest rates make it more difficult for private equity portfolio companies to service their often-significant debt. High interest rates also decrease the discounted present value of each dollar of future profits, lowering the value of portfolio companies.

All these factors should give investors pause. Higher interest rates, the increasing use of nontraditional transactions to return investor funds, and an ever more crowded field of investors are signs that the highly touted extraordinary returns in the past may not continue. In his 2012 letter to Berkshire Hathaway shareholders, Warren Buffett talks about “extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices” in warning that “[w]hat the wise man does in the beginning, the fool does in the end.”

Read the full brief: Is private equity a public financial hazard? Answering questions on the impact of private equity investments on public pensions

The post Is private equity a public financial hazard? appeared first on Reason Foundation.

Actuarial Assumptions Historically Distort Benefit Cost and Contribution Requirements 

A Joint Legislative Committee report indicated that the delay in reducing the PERS return assumption from 7.55% to 7.0% has worsened the impact of underperforming returns by delaying needed contribution increases. In response to Mississippi’s rising public pension debt and inadequate employer contribution rates, S&P Global Ratings recently shifted the state’s credit outlook from stable to negative. 

Recommendation: Adopt better governance, funding policy, risk assessments, and actuarial assumptions.  

The Longer PERS Goes Underfunded, the More Expensive the Solution Will Be for Taxpayers 

PERS faces a $25.5 billion shortfall largely due to unfunded benefit increases, investment underperformance, and insufficient employer contributions. Akin to paying off high-interest credit card debt, increasing contributions now and reducing the time needed to restore PERS to full funding would save Mississippi taxpayers and governments billions in interest payments. 

Recommendation: Establish a plan to pay off PERS’ unfunded liability as quickly as possible. 

Fewer PERS Members Receive a Full Benefit Than Ever 

Eighty percent of new workers starting at age 30 are expected to leave before vesting with eight years of service and will not even receive a PERS pension. Employees who leave the plan before then must forfeit contributions their school or state made on their behalf. Of the same group, 88% leave before 20 years of service. Less than 10% will remain in the system for a full 30-year career to receive full PERS pension benefits.

Recommendation: Provide additional benefit options to better meet the diverse needs of public employees. 

Bottom Line

Mississippi PERS has never been more expensive for taxpayers. Other states have shown that successful pension reform means adopting more conservative assumptions, establishing a long-term funding strategy, and finding better ways to serve public employees.  

Full Backgrounder: Delaying PERS Reform Increases Cost to Taxpayers

The post Delaying Mississippi PERS reform will increase cost to taxpayers appeared first on Reason Foundation.

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. 

The post Mississippi lawmakers can take the best from other successful state pension reforms appeared first on Reason Foundation.

Closing one of the best defined-contribution plans in the country to reopen the shuttered Oklahoma Public Employees Retirement System defined benefit pension plan would unwind important reforms and expose taxpayers to potentially massive hidden costs.

• Closing the OPERS defined benefit pension to new hires and adopting other prudent policy changes dramatically improved the financial solvency of the legacy OPERS pension in the last decade. OPERS was 66% funded in 2010, in the wake of the Great Recession, but—after major sacrifices by employees and employers—stands fully funded today.
• House Bill 2854 would move the state away from the retirement design that has been integral to this success and bring back a system that exposes taxpayers to the same risk of unfunded liabilities that prompted the closing of that pension almost a decade ago.

Transferring defined-contribution account balances to OPERS at the current discount rate would create major immediate risks.

• HB 2854 would allow current Pathfinder defined-contribution plan participants to transfer their account balances over to OPERS to fund an actuarially equivalent pension benefit, but their previously earned service would be transferred using a relatively high discount rate of 6.5%.
• Such transfers would create the risk of a pension-obligation-bond-like situation where any downturn in market performance or lowering of return rate assumptions would quickly create unfunded liabilities in the newly reopened—and currently fully-funded—OPERS system.

House Bill 2854 has not received a rigorous actuarial analysis or stress testing, nor scrutiny from legislative finance committees, leaving important questions for taxpayers unanswered.

• Public pension systems operate over generations, but Oklahoma legislators have only been presented with minimal administrative cost projections based on an assumption that the proposed new pension benefit would do the impossible: get 100% of its assumptions 100% right, 100% of the time.
• Major retirement plan design changes necessitate long-term actuarial analysis and stress testing to ensure financial risks to governments are transparent and clearly understood beforehand.

Bottom Line: Changes of the magnitude being proposed should receive rigorous actuarial and risk analyses that ensure future generations’ interests are protected.

Full Backgrounder: House Bill 2854 Threatens Oklahoma’s Pension Progress

The post House Bill 2854 threatens Oklahoma’s pension progress appeared first on Reason Foundation.

As proposed, the measures effectively offer bonus payments rather than true inflation protections for retired public workers. The following analysis reviews how the three measures stand up next to the Reason Foundation Pension Integrity Project’s Best Practices for Cost-of-Living Adjustment (COLA) Designs in Public Pension Systems while also providing insight into how Pennsylvania policymakers can truly address long-term inflation for retired, active, and future public employees. 

Why is the Pennsylvania COLA such a challenge?

To first understand how lawmakers found themselves in their current situation, let’s look at the most prominent claim in support of the three COLA bills being actively considered: House Bill 1415 (HB 1415), House Bill 1416 (HB 1416), and Senate Bill 864 (SB 864). Most of Pennsylvania’s public retirees have not received a cost-of-living adjustment in nearly two decades.

Members of the Pennsylvania State Employees Retirement System, or SERS, last received a benefit adjustment of anywhere between 2.27% and 25% in 2002, while members of the Public School Employees’ Retirement System, PSERS, saw similar adjustments in 2004. During the summer hearings of HB 1415 and HB 1416, legislators from across the political spectrum voiced real concerns about the average public retiree’s ability to navigate these times of historic inflation. 

SERS and PSERS offer guaranteed fixed pension benefits for life but not a cost-of-living adjustment, which is not abnormal among public pension systems.

PSERS administrators said, “COLAs are not a guaranteed part of your PSERS pension benefit. [Members] are guaranteed a pension benefit based on a formula outlined in the Retirement Code that does not include an automatic COLA.”

This benefit was not a part of the agreement made with the state’s public workers, and no funding has been saved to pay for it. Therefore, the Pennsylvania legislature would have to use taxpayer money to pay for it ad hoc. 

Adding more unplanned retirement benefit adjustments like this adds more liabilities and risks unexpected cost increases to already underfunded pension systems. Since the legislature issued the last COLA, SERS has gone from fully funded to 62% funded, and PSERS has moved from 96% funded down to 68% funded. In 2017, the legislature implemented significant pension reforms that included a commission to examine fees paid to asset managers and lower assumed rates of return, which is crucial for long-term financial stability.

Employees and taxpayers also benefited from lawmakers opening two new pension tiers to prevent future generations from bearing the burden of rising public pension debt. With the ongoing challenges in paying for the base pension benefits of these systems, the legislature has rejected previous calls for cost-of-living adjustments.

What do Pennsylvania’s recent COLA bills propose?

Pennsylvania Senate Bill 864, House Bill 1415, and HB 1416 would all provide an ad hoc cost-of-living adjustment. The amount of the supplemental annuity varies by the retirees’ retirement date. HB 1415 would provide increases starting at 10% for those retiring in the 2000-2001 fiscal year (FY) and increasing by .5% for each previous year of retirement, with a maximum increase of 20% for those retiring before FY 1982. HB 1416 and SB 864 are designed similarly, with increases starting at 15% and increasing to 24.5%. 

All three measures add to the estimated unfunded actuarial accrued liability (UAAL) and generate a cost that must be paid through increased employer contributions on a level dollar basis over a 10-year period beginning July 1, 2024. Senate Bill 864 differs from the House bills in that it applies only to PSERS retirees. 

The Pennsylvania Independent Fiscal Office published an actuarial impact note for each of the two House bills with the following findings:

House Bill 1415:

• For SERS, unfunded actuarial liabilities would increase by $265.3 million and decrease the current funded ratio by .33%, from 69.35% to 69.02%. The employer contribution rate would increase by .53%, from 34.12% to 34.65% of covered payroll.
• For PSERS, unfunded actuarial liabilities would increase by $583.6 million and decrease the funded ratio by .31%, from 63.18% to 62.87%. The employer contribution rate would increase by .58%, from 34.73% to 35.30% of covered payroll.

HB 1416:

• For SERS, unfunded actuarial liabilities would increase by $371.0 million and decrease the current funded ratio by .46%, from 69.35% to 68.89%. The employer contribution rate would increase by .74%, from 34.12% to 34.86% of covered payroll.
• For PSERS, unfunded actuarial liabilities would increase by $821.1 million and decrease the funded ratio by .44%, from 63.18% to 62.74%. The employer contribution rate would increase by .81%, from 34.73% to 35.54% of covered payroll.

The actuarial fiscal note included statements that the legislature should exercise caution before increasing benefits under the two bills, given the current funded ratios of the two systems, particularly with regard to recent challenges with investment returns. The bills could put the public pension systems in a negative cash flow position, and certain classes of PSERS employees have “shared-risk” contributions that could be impacted.

An actuarial impact note on SB 864 has not been released as of the date of this analysis. Additionally, the legislative memoranda describing HB 1416 includes a statement from the sponsor that another bill will be introduced to provide an automatic recurring COLA based on the Consumer Price Index for All Urban Consumers (CPI-U) for PSERS and SERS starting in 2024 and every three years after that. The Pension Integrity Project has not yet reviewed this companion COLA legislation.

How do Pennsylvania’s proposed bills stack up to best practices in COLA design?

When ad hoc COLA benefits are issued irregularly or sporadically, stories of retirees suffering in times of inflation create an urgency to act. However, determining the best course of action can be challenging, often leading to expediency as the deciding factor. By reviewing Pennsylvania’s current cost-of-living adjustment effort through the Gold Standard in Pension System Design framework, policymakers and stakeholders can gain a clearer view of the value presented by the current COLA measures.

Best Practice: Participants Receive Continuous COLA Benefit Education

Retirees should have a firm understanding of their pension plan’s COLA benefits to better manage their retirement assets and income most effectively. The ad hoc nature of the proposed PSERS and SERS cost-of-living adjustment benefits is inconsistent with predictable inflation protection expectations and leaves retirees with no long-term assurances to examine or learn about. The bills do not meet best practices in this area.

Best Practice: Adjustments Are Pre-Funded as Part of a Retirement Plan’s Normal Cost

Pre-funding COLA benefits ensures the consistent delivery of inflation protection to retirees and avoids transferring unfunded liabilities to future generations of taxpayers. The proposed bills do not meet gold standards in this category. While the General Assembly has ultimate discretion to award COLA increases under the current ad hoc approach, the resulting cost creates new unfunded actuarial liabilities that must be amortized over future years. All three of the proposed measures require the resulting unfunded actuarial accrued liability (UAAL) to be paid for by increased employer contributions, amortizing the UAAL on a level dollar basis over a 10-year period beginning July 1, 2024.

A better approach is to pre-fund COLA benefits in the normal cost component of the systems’ actuarial funding methods, and this should occur for at least one full year before a COLA is allowed to be granted to ensure that COLA benefits are fully prefunded.

Best Practice: COLA Benefit Objectives Are Clearly Defined

Public pension plan sponsors that integrate a formal COLA benefit policy into the overall objectives of a retirement plan provide retirees with clarity, set transparent expectations, and guide future policymakers facing changing circumstances.

Pennsylvania statutes governing PSERS and SERS do not include a formal statement of purpose or objectives for providing COLA benefits. The Pennsylvania General Assembly, however, has provided ad hoc supplemental annuities in the past. No COLA benefit has been provided since a supplemental increase was awarded to certain retirees retiring in FY 2001 and before. The absence of a formal statement regarding COLA benefits for PSERS and SERS contributes to the past and current practice of making such awards only on an ad hoc and unpredictable basis.

Best Practice: COLA Benefit Eligibility, Amount, and Procedures Are Transparent

Clearly specifying eligibility, applicable benefits, and payment dates protects the value of benefits while avoiding costly and arbitrary cost increases. The current and prior attempts to issue an ad hoc COLA benefit clearly identify eligibility and amount of the COLA awards. 

Best Practice: Objective Inflation Benchmarks Determine COLA Benefit Amount

Cost-of-living adjustments should reflect an objective inflation benchmark to provide a more predictable amount of inflation protection and equitable distribution of benefits for similarly situated retirees. The ad hoc approach to providing COLA benefits for PSERS and SERS does not reflect adherence to an objective inflation benchmark as the basis for determining the amounts provided.

Each historical supplemental annuity and the current amounts under consideration are disconnected from inflation benchmarks. There is no policy statement clarifying the basis upon which amounts are being set. Policymakers in the General Assembly are left to make these important benefit-increase decisions without consistent underlying measurements, data, or goals.

Best Practice: COLA Benefits Adjust Under a Ceiling   

For best practices, limiting COLA benefits distinguishes between normal inflation and periods of high inflation that are more difficult to predict, providing for more sustainable COLA funding approaches.

Using an ad hoc approach to providing COLA benefits provides some control over funding impacts on PSERS and SERS. However, no limit is established as a matter of benefit policy under any of the proposed measures, save for the maximum increase amount set on the ad hoc increase itself. This creates the possibility of increases being made in an amount or when such increases are not affordable.

Bottom Line

None of the three Pennsylvania bills—SB 864, HB 1415, and HB 1416—establishes a cost-of-living adjustment that aligns with best practices.

The historical ad hoc nature of COLA benefits for PSERS and SERS does allow the General Assembly discretion to make or not make such awards as it deems appropriate. However, the result would be another level of unfunded liabilities that must be paid for. 

If the General Assembly makes a policy judgment to move forward with these bills, a better approach would be to fund the cost immediately rather than pay for it over time with money from future taxpayers. Further, to break the cycle of continuing down this same road for future retirees, consideration should be given to establishing a policy that either supports or rejects a regular COLA benefit that is automatic and recurring, pre-funded, and also subject to change if necessary. 

While the intentions behind the SB 864, HB 1415, and HB 1416 supplemental annuity increases are understandable, and it is desirable to protect retirement income security for retired public employees, the current poor funding condition of PSERS (68% funded) and SERS (62% funded) should give lawmakers pause in taking these actions without first evaluating how the costs of these supplemental benefits fits within the core retirement benefit and other funding priorities for Pennsylvania.

Does Pennsylvania’s House Bill 1416 Meet Cost-of-Living Adjustment Design Gold Standards?

The post Pennsylvania’s proposed pension bills don’t meet best practices for cost-of-living adjustments appeared first on Reason Foundation.

Proposition 9 (2023) would amend the Texas Constitution by introducing a new section granting the Texas legislature the authority to enact laws allowing for cost-of-living adjustments and supplemental payments to eligible annuitants of the Teacher Retirement System of Texas (TRS).

In the 2023 legislative session, the Texas legislature passed Senate Bill 10, which outlined the process of appropriating and distributing this adjustment and additional payments to eligible retirees who retired before Dec. 31, 2021.

The amendment, now up for popular vote via Prop. 9, includes a temporary provision that mandates a one-time transfer of funds to the Teacher Retirement System of Texas to provide a cost-of-living adjustment, with strict limitations on the use of these funds. The temporary provision would expire on Sept. 1, 2025.

Texas voters will decide on the proposed constitutional amendment in the Nov. 7, 2023, election. Prop. 9 requires a simple majority of voter support to pass.

Fiscal Impact of Texas Prop. 9

The Texas Legislative Budget Board concluded that the proposed cost-of-living adjustment outlined in Senate Bill 10 and authorized by Prop. 9 would have no fiscal impact because the legislature funded a lump-sum payment of $3.35 billion to the TRS Pension Trust Fund from General Revenue for the state’s 2024 fiscal year. The payment was calculated by TRS actuaries using the current financial and demographic assumptions, including projected investment returns, and is meant to ensure that the issuance of the cost-of-living adjustment does not affect the actuarial soundness of the fund.

The Teacher Retirement System of Texas, however, currently has $63 billion in unfunded pension liabilities, according to administrators.  Because investment returns constitute a significant portion of the system’s annual revenue, the accuracy and timing of these investment returns will ultimately determine whether the lump sum payment is sufficient to prevent the fund from adding to its debt and becoming actuarially unsound.

Arguments in Favor of Prop. 9

Arguments in favor of Prop. 9 come from a variety of labor groups, advocates of public education, and representatives of retired personnel who frame the issue as reflective of Texas residents’ support for public educators, including, according to Ballotpedia, the Texas AFL-CIO, Raise Your Hand Texas, Texas Association of School Administrators, Texas Association of School Boards, Texas Elementary Principals and Supervisors Association, and more.

The Texas Retired Teachers Association (TRTA) notes that TRS retirees have not received cost-of-living adjustments since 2004. Opponents note retirees have received some one-time bonus checks issued in recent years instead of a COLA, but teachers’ advocates claim this method hurts retirees’ purchasing power since inflation occurs over time.

Unlike other public employees around the state, most retired educators in Texas do not participate in Social Security, making the TRS pension benefit their primary source of retirement income. The Texas affiliate of the American Federation of Teachers (Texas AFT), the state’s largest union of public sector educators, has mostly expressed support of Senate Bill 10 and Prop. 9.  Texas AFT materials point out that consumer prices have increased by almost 60% since 2004 and say Prop. 9 would support retirees who have not received an adjustment to their TRS annuity over that period to help them keep up with inflation.

After the the State Senate’s unanimous passage of SB 10, Texas Lt. Gov. Dan Patrick (R) said, “Texas retired educators have given so much for our students and for the future of Texas. It is only right that the state help give back to them.” Texas Gov. Greg Abbott signed SB 10 into law.

Arguments Against Prop. 9

Although no formal opposition was registered during the legislature’s consideration of Senate Bill 10 or Texas House Joint Resolution 2 (HJR 2, 2023) which placed the issue on the November ballot, there are three main concerns.

First, the state legislature’s ability to grant any cost-of-living adjustment to TRS participants is predicated on the pension system demonstrating that it will still be on a 30-year track to full funding after the COLA is implemented. Investment performance greatly influences the annual amounts needed to pay off TRS’ current $63 billion debt. Given that the lump-sum amount tied to Prop. 9 is based on plan assumptions, any short-term investment underperformance could cause TRS to exceed its 30-year amortization maximum, increase the system’s unfunded liabilities, necessitate more taxpayer-backed funding to cover the debt and make future COLAs less likely.

The second concern was most clearly on display in messages to members during the hearing of SB10 and HJR2, from Texas-AFT, who described legislators’ efforts as “not providing retirees with a ’COLA’ that reflects the actual increases in the cost-of-living.” Union members also raised concerns about the lack of structural changes to allow for ongoing COLA increases as inflation continues to rise.

Finally, with TRS and taxpayers responsible for $63 billion in unfunded pension benefits, some stakeholders voiced the imprudence of enhancing benefits in a structurally underfunded pension system. While other major pension systems like the Employees Retirement System of Texas (ERS) are funded based on dynamic rates set by plan actuaries that reflect the fund’s real-world experience, TRS contributions remain hard-coded in state statute and require legislation to adjust. Since investment returns comprise nearly two-thirds of all revenue flowing into public pension systems, and the amount appropriated to fund the Prop. 9 TRS COLA is based on the system’s 7% investment return assumption, having an unresponsive funding policy will make it more likely that the system will again exceed the state’s 30-year amortization limit and add to the $68 billion unfunded liability in down years.

Additional Discussion

In the fundamental sense, a cost-of-living adjustment is simply a feature of a defined-benefit pension plan that systematically increases annuity payments so retirees can maintain the value of their earned retirement benefits. As a feature of the benefit, COLAs are most effective when they are funded as part of the normal costs of the benefit and distributed according to specified conditions.

Despite teachers’ groups raising concerns over the impact of inflation on retirees, the COLA authorized in Prop. 9 does not reflect the actual inflation rate experienced by retirees and, thus, is not a true cost-of-living adjustment. Given that Texas enjoyed a budget surplus in 2023 that was the size of some smaller states’ entire budgets, the push by state leaders to use surplus funds to support retired educators came as no surprise. In 2019, the legislature considered a similar proposal but opted instead to issue an additional annuity payment to retirees, commonly referred to as a “13th check.” As even proponents of Prop. 9 have highlighted, granting a one-time benefit increase or issuing an extra annuity payment does not solve the long-term systemic challenge inflation poses to retirees. 

Unlike other similar pension funds around the country, the TRS benefit that members signed up for when they began working with their public employers has never included a guaranteed cost-of-living adjustment as part of the benefit. The TRS benefit is, at its core, a contractual agreement between the state and the employee. An educator works for the participating employer, and in exchange for meeting established tenure requirements, the employer provides a predetermined pension benefit established in state law, called a “defined benefit.” Thus, it is important to recognize that while TRS retirees may desire a cost-of-living adjustment, they are not owed one. If a COLA feature is not included as an element of the defined benefit, which is the case with Texas TRS, retirees are implicitly agreeing they are responsible for planning for inflation risks.

This is important because a defined benefit pension plan with a cost-of-living adjustment feature costs much more than one without a COLA feature, which usually translates into higher employer and employee contributions throughout an employee’s career. Any ad hoc increases to current benefits come with the associated risks of higher costs on future budgets and taxpayers. Essentially, a cost-of-living adjustment was never paid for by TRS retirees or their employers while they were working. As a result, Prop. 9 is effectively asking today’s taxpayers to cover an unplanned benefit increase for already retired teachers.

Lastly, none of the estimates circulated on the potential costs associated with the proposed cost-of-living adjustment include scenarios where investment returns come in lower than the Teacher Retirement System’s expected 7% rate of return. Any shortfall below this expected rate of investment return would increase the state’s $63 billion in unfunded pension liabilities, which would ultimately be passed on to future taxpayers.

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Open Enrollment Goes Hand in Hand with Education Savings Accounts

• Open enrollment allows K-12 students to attend any public school with available seats, regardless of where they live.
• Data shows most families use open enrollment to attend public schools that are higher performing than their residentially assigned schools.
• Research from Arizona, Ohio, Colorado, and California finds public school districts, including small rural districts, use open enrollment to bolster enrollment, especially when facing declining local populations.
• Texas is one of 26 states that still allow public schools to charge tuition to transfer students. Some Texas districts currently charge transfer students up to $9,000 per year, putting those public schools out of reach for low- and middle-income families. Public schools should be tuition-free for all students, including transfer students.
• States such as Florida, Arizona, and Wisconsin have implemented transparency requirements so parents can easily find available spots and school districts can only reject students for legitimate reasons, like a lack of capacity.

$63 Billion in TRS Debt Squeezes Local Governments and School Districts

• According to the Teacher Retirement System of Texas (TRS), the market value of its current unfunded pension liabilities is more than $63 billion, a situation that is getting worse every year because of the way the legislature is structurally underfunding earned benefits.
• Unlike the Employees Retirement System of Texas after SB321 (2021), TRS contributions, post-SB12 (2019), are still set by law—not actuarially determined—and will be insufficient to keep up as the system adjusts outdated economic assumptions.
• Although plan actuaries claim that TRS will be fully funded in 2048, they caution this would only happen in the unlikely case that several dozen assumptions are met every year, including hitting a 7% annual investment return on assets—higher than the normal rate of return for public pension plans. 
• If investment returns do not consistently meet or exceed investment performance assumptions, TRS is guaranteed to slip further into debt without additional taxpayer dollars at both the state and local levels.

Texas special session on education: Prioritize open enrollment and TRS reforms

The post Texas legislature should prioritize open enrollment and TRS reform in special session appeared first on Reason Foundation.

Under the leadership of Sen. Joan Huffman (R-Houston) and Rep. Greg Bonnen (R-League City), Senate Bill 1245 (SB 1245) passed unanimously in the Senate and 144-1 in the House. The bipartisan bill signed by Texas Gov. Greg Abbott pays off $95 million of unfunded pension liabilities and opens a new cash balance retirement plan for all future judges. The plan is designed to offer strong retirement guarantees for the judges while avoiding additional unfunded pension liabilities moving forward.

During the 2021 legislative session, the Texas legislature took similar actions, passing Sen. Huffman’s Senate Bill 321 (SB 321) to align the retirement benefits offered to new Employees Retirement System of Texas (ERS) members with the retirement benefits long offered to most local government employees across the state. At the heart of SB 321 was addressing the ongoing runaway costs involved in the legacy pension plan, growing public pension debt, and a concern about the retirement security of today’s public employees, who more frequently move jobs and need mobile retirement options. ERS had $14.7 billion in public pension debt before the law was passed. SB 321’s pension reform opened a new cash balance retirement plan that future employees will use. This helps put the ERS’ existing unfunded liabilities on a path to be fully paid off over the next several decades.

The holistic approach outlined in SB 321, and carried over to the recent Senate Bill 1245, will save Texas taxpayers billions in the long run, primarily by reducing costly interest payments on public pension debt. Although only a couple of years have passed since SB 321 was implemented, the financial position of ERS has improved, and the feedback from ERS administrators has been very positive.

This latest move in SB 1245 to align the retirement plan for newly hired judges with that for state and local public employees demonstrates the bipartisan effort to improve the sustainability of the state’s retirement systems. Lawmakers must still address the largest major statewide pension system—the Teacher Retirement System of Texas (TRS), with its seemingly shrinking benefits and ever-growing unfunded liabilities. TRS currently has over $51 billion in public pension debt.

The restructuring of Texas’ statewide public pension systems began as an effort to address unexpected cost increases that were applying significant pressure on state and local government budgets. Also on policymakers’ minds were the needs of active and retired members who saw their take-home pay become stagnant or effectively reduced due to required pension contribution increases and inflation. Members and employers of the other cash balance retirement plans, like the Texas County and District Retirement System, TCDRS, and Texas Municipal Retirement System, TMRS, had long benefited from the guaranteed return on contributions provided by their public employers* and the increased portability of their retirement benefits. Future Judicial Retirement System of Texas Plan (JRS II) members will now enjoy those same benefits.

Texas legislators and public employers are responding to the evolving demographics of society and the changing landscape of how we work and retire. With increased life expectancies and a diverse and mobile workforce, it is essential to adapt public retirement systems to meet the needs of workers and taxpayers. Texas’ shift to a cash balance approach to retirement savings acknowledges these changes and helps ensure retirement benefits are sustainable for taxpayers and current and future generations of judges and public employees. By embracing the need for flexibility and adaptability in retirement planning, Texas is setting a forward-thinking example on public pension policy.

The Texas legislature deserves praise for passing multiple pension reforms that take meaningful steps to ensure the state’s largest debts are being reduced. But the state’s most intractable public pension challenge—addressing the Teacher Retirement System’s $51 billion of debt and unsustainable fiscal path—remains.  

Calls from TRS members for increased benefits may have never been louder. In April, members of the Texas chapter of the American Federation of Teachers described the $5 billion earmarked for cost-of-living increases to deal with inflation and TRS pension bonuses as “crumbs” and called on legislators to find a long-term solution to the unique challenges facing TRS and its members.

Hopefully, Texas lawmakers pursue another bipartisan approach that provides retirement solutions and mobility that benefit teachers, protects taxpayers from future public pension debt, and pays down the system’s massive existing debt.

*Correction: This piece originally referred to state contributions but has been changed to contributions provided by public employers to clarify local governments also make contributions to cash balance plans.

The post Texas legislature continues bipartisan push to modernize public retirement benefits appeared first on Reason Foundation.

Having passed some trendsetting reforms to the state’s public pension system, Montana’s policymakers and public pensioners can count the state’s 2023 legislative session a success, especially for public safety pension beneficiaries.

The legislative reforms came in two phases; one focused on Montana’s public pension fiduciaries, and the other focused on the technical funding mechanism used to pay for pension promises made to public safety members.

Together the measures strengthen the commitment made to active and retired public workers by the state to properly manage the assets currently held on behalf of members and their taxpayer underwriters and fully fund all accrued pension benefits in a way that doesn’t burden future generations.  

Keeping Politics Out of Public Pension Decisions 

Montana’s legislative effort comes at an opportune time, as the nature of pension investments continues to evolve into an increasingly private and opaque market. Public pension systems and other public trusts no longer rely on vanilla investment portfolios of stocks and bonds. To catch up on previously unfunded liabilities and try to meet overly optimistic investment return assumptions, Montana’s pension systems are increasingly relying on alternative investments, like private equity and hedge funds.    

Since 2000, asset allocations within Montana’s public pension investment portfolios have moved from 90% fixed-income assets and large U.S. equities to now having one-third of investments comprised of private equity, real estate, and other alternatives. 

This trend toward these private market assets, mostly governed by limited partnership arrangements, has helped foster conditions for activists to leverage public dollars to push their ideologies or political agendas. The most direct example of this activism is proxy voting advisors using politically-inspired benchmark guidelines to vote on a public pension system’s directly held shares.

A less direct tactic is used by general investment partners like BlackRock and State Street, who sometimes take the funds committed by their limited partners to purchase massive amounts of stock in companies and then pressure the management of those companies to comply with their political goals. However, as some general partners begin to focus more on constant, direct management engagement over very public shareholder resolution battles, the need to clarify the role of a public fiduciary in this investment environment could not have been clearer.

Although it is reasonable and prudent for pension administrators to expand or contract the fund’s investments in various assets over time, the shift to private assets presents a new risk for policymakers and pension fund stakeholders—politicizing pension fund investments. 

House Bill 228 was a major update to the rules governing the fiduciaries responsible for Montana’s public pension systems. The measure struck a balance between the flexibility that fiduciaries need to execute their long-term investment strategies and the need for taxpayers and beneficiaries to know their public pension contributions are not being used as leverage by any financial activist. By clarifying that a fiduciary’s duty is based on pecuniary factors only, House Bill 228 provides public fiduciaries the cover to turn away investments that lack quantifiable evidence for their investment claims.  

As some major asset managers and general partners like Black Rock and State Street continue to commit public pension dollars to political causes, Montana’s pensioners can rest assured that their retirement nest egg is being managed responsibly.  

Pension Contribution Policy Challenges 

Pension funding has long been a challenge for Montana’s lawmakers. Due to an inflexible method of determining annual payments, the state has fallen short of its pension obligations in 13 of the last 20 years. During an August 2020 hearing of the Legislative Finance Committee, actuaries for the Montana Public Employees’ Retirement System pointed out that “states are getting away from the old statutory funding method” and that “an actuary’s dream (pension) funding policy” is a system that adjusts “to keep up with how the plan is doing.”

A month later, in a forecast for the 2023 fiscal year, the Legislative Fiscal Division’s report warned that “[C}urrent [pension] funding policies leave the systems [Montana’s Teachers’ Retirement System and PERS] heavily reliant on investment earnings and unable to adjust contributions to maintain an actuarially sound basis in times of significant financial declines.”  

Fortunately for Montana taxpayers, state legislators partially heeded those warnings during the 2023 regular session by adopting House Bill 569. The measure commits the state to follow plan actuary recommendations when contributing to fully fund the retirement benefits of the Highway Patrol Officers’ Retirement System, the Sheriffs’ Retirement System, and the Game Wardens’ And Peace Officers’ Retirement System within 25 years. 

Unfortunately, given the scale of PERS and constraints on local budgets, the legislature’s effort to provide taxpayers and PERS beneficiaries with the same peace of mind through the passage of House Bill 226 failed in the State Senate despite receiving bipartisan support in the House. 

Historically, Montana’s state-sponsored public pension systems have suffered from the limitations of the current funding policy, but none at the scale of PERS. System actuaries and legislative watchdogs have long warned legislators of the outdated funding mechanisms supporting the state’s public pensioners. The direst warnings came during conversations about the long-term solvency of PERS.  

Committing to Fully Funding Montana’s Public Safety Retirement Benefits 

State policymakers must fund pension benefits at the rate that system actuaries determine is needed annually to avoid underfunding newly earned benefits and make up for billions worth of previously unfunded benefits. The cost can fluctuate significantly depending on investment return rate assumptions and actual market outcomes, which can challenge annual budgets. However, years of continued underfunding of retirement benefits cannot be an option, as this only generates more unnecessary long-term costs for the state and taxpayers.  

House Bill 569 reflected that reality and has set Montana on a path that not only funds all earned benefits by the state’s public safety officers but ensures any future benefits would be systematically funded within a decade. The measure should serve as a model for the state’s other pensions struggling with growing unfunded liabilities and expenses. 

Backgrounder: Actuarially determined contributions would reverse Montana’s pension debt trends

Public Employee and Teachers Funding Challenges Remain 

The state’s two largest pension systems in Montana, TRS and PERS, should follow this example by fixing the outdated funding mechanism administrators and legislative analysts warned will drive costs higher and weaken these systems’ long-term solvency.

Without the basic reforms in the unsuccessful House Bill 226, both retirement systems will remain in a precarious position navigating the increasingly private and volatile global investment market. The cost of bridging the 20% gap between teacher and public employee system assets and liabilities will be commensurate, requiring a partnership between the state and local employers, among other stakeholders with real skin in the game. This is why policymakers cannot look at funding policy alone. 

Montana’s Default Pension Benefit Is Not Working for the Modern Workforce 

Using the Public Employee Retirement System’s assumptions, the Pension Integrity Project estimates that 70% of all new PERS members starting in their early 20s will find other positions outside of Montana public service within five years. This raises questions about whether the PERS-Defined Benefit (PERS-DB) pension is the best option for this group. Only 9% of employees hired in their early 20s stay employed for the 30 years required to earn an unreduced PERS-DB retirement. This suggests that the current default pensions for all public workers have only served a fraction of the workers at an ever-rising cost to taxpayers. 

As of the 2022 PERS valuation, a new public employee that enters the PERS-DB will see at least 7.9% of their paycheck contributed to the pension fund until they leave public employment. For those who leave their jobs within five years of being hired, the PERS-DB acts more like a temporary savings account, giving the employee back only what they put into the system, plus interest, while forfeiting any employer contributions made toward their pension benefit.  

House Bill 226 recognized the trends of the modern workforce. It would have shifted the default benefit offered to new hires from the PERS-DB plan to the PERS-DC (defined contribution) plan while preserving choice to ensure employees can best match their retirement plan with their particular situations.  

This would have allowed for more portability and greater retirement security for the vast majority of employees hired by Montana governments, not just a relatively small group of full-career workers. The bipartisan measure maintained the current PERS-DB benefit as an option for new hires who intend to serve out their careers in public employment. Only affecting prospective state employees, HB 226 preserved the status quo for all active PERS-DB members, retirees, and their beneficiaries. 

Based on the contribution rates proposed in HB 226, any employee at any age that chooses to leave their public employer within 25 years—meaning, most of the future government employees hired—would be better prepared for retirement with the proposed default PERS-DC benefit. 

Backgrounder: The PERS-DC benefit best serves the majority of Montana workers

Conclusion 

Policymakers, public workers, and taxpayers should be proud of the 2023 legislative results. The major policies adopted this spring will help protect the state’s public pension dollars from being leveraged by political activists. The state has also committed to fully funding all earned pension benefits for public safety workers.  

Still, much more work must be done if state and local leaders want to offer the same funding commitment to all other public employees and educators. Most public employees will still join the public workforce only to be left upon separation with their wages and little to no meaningful progress towards a secure retirement. The longer it takes for the state legislature to move the remaining systems to an actuarially determined funding rate, the more expensive it will become for members and taxpayers, and the fewer people the pension systems will serve as a result.  

The post Montana makes public pension progress but major opportunities remain  appeared first on Reason Foundation.