Mississippi Public Employees Retirement System post-Tier 5 funding stress test and recommendations

The following analysis was provided during invited testimony for an interim study before the Mississippi Special Committee on the Public Employees Retirement System.

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.