PEER On PERS
PEER On PERS
Financial Soundness
of the Public
Employees’
Retirement System
May 9, 2023
Representatives
Jerry Turner
Honorable Tate Reeves, Governor
Chair
Honorable Delbert Hosemann, Lieutenant Governor
Richard Bennett
Honorable Philip Gunn, Speaker of the House
Cedric Burnett Members of the Mississippi State Legislature
Carolyn Crawford
Becky Currie On May 9, 2023, the PEER Committee authorized release of the report titled
Timmy Ladner 2022 Update on Financial Soundness of the Public Employees’ Retirement
System.
Percy Watson
Senators
Charles Younger
Vice Chair
Sollie Norwood
Secretary
Kevin Blackwell
Lydia Chassaniol
Dean Kirby
Representative Jerry Turner, Chair
Chad McMahan
John Polk
Executive Director
James F. (Ted) Booth
List of Exhibits……………………………………………………………………………………………. iv
Introduction .................................................................................................................................. 1
Authority, Scope, and Purpose ............................................................................................ 1
Method ............................................................................................................................... 1
Background .................................................................................................................................. 2
Overview of the Public Employees’ Retirement System ..................................................... 2
Composition and Role of the PERS Board of Trustees ....................................................... 3
Prospective Changes in Asset Allocation Model for the PERS Plan .......................................... 19
How are PERS plan assets currently invested? ................................................................. 19
What are private credit and private infrastructure investments? ...................................... 22
Why did the PERS Board change the asset allocation model for the plan? ..................... 24
Exhibit 2: PERS Plan Payroll Growth (by Source) for FYs 2021 and 2022 .................................... 6
Exhibit 3: PERS System Active and Retiree Members for FY 2012 through FY 2022
(in Thousands) ..................................................................................................................... 8
Exhibit 4: PERS Plan Active Employee Change (by Employer) for FYs 2021 and 2022 ............... 9
Exhibit 5: PERS Funding Policy Metric Results as of June 30, 2022 .......................................... 11
Exhibit 6: PERS Funding Policy Metric Results with the Change in Employer Contribution
Rate to 22.40% Projected for June 30, 2024 .................................................................... 12
Exhibit 8: PERS FY 2022 Actual Asset Allocation Compared to PERS Overall Asset
Allocation Model .............................................................................................................. 16
KEY FINDINGS: As of June 30, 2022, all three of the plan’s funding policy metrics reached red signal-light status. Based on
these results and the negative investment experience of the plan for FY 2022, the PERS Board voted to adopt the
recommendation of its actuary to increase the employer contribution rate from 17.40% to 22.40%, an increase of 5.00%.
Additionally, during its June 2022 meeting, the PERS Board, on the recommendation of Callan LLC, adopted changes to the
overall asset allocation model utilized by the System to include private credit and private infrastructure.
Introduction
c
Method
To conduct this analysis, PEER:
• reviewed PERS’s financial reports;
• reviewed actuarial reports, projections, and experience studies prepared for PERS;
• reviewed investment assessments prepared for PERS; and,
• interviewed personnel of PERS.
Mississippi provides a retirement system for public employees overseen by an agency of state government
that is responsible for the investment and administration of the benefit payment process.
This chapter will present:
• an overview of PERS; and,
• the composition and role of the Board of Trustees of the Public Employees’ Retirement System
(PERS Board).
Under MISS. CODE ANN. § 25-11-101 (1972), the Legislature created a retirement system to
provide retirement allowances and other benefits for officers and employees in the state’s service
and their beneficiaries. The PERS Board is responsible for the administration of PERS and for all
other state retirement systems. For purposes of this report, the collection of these systems will be
referred to as the “System.” Exhibit 1 on page 2 lists the plans under the System.
Established in MISS. CODE ANN. § 25-11-15 (1972), the 10-member PERS Board of Trustees is
responsible for the administration of the state’s retirement system.
A primary responsibility of the PERS Board is to ensure adequate funding of the plans it
administers. In FY 2021, the PERS Board continued its contractual relationship with Cavanaugh
Macdonald Consulting, LLC, a nationwide actuarial and healthcare consulting firm, to create
comprehensive models that are used to project the financial position of the various plans. These
models include such factors as investment return assumptions, wage inflation assumptions,
retirement tables, and retiree mortality tables.
In addition to annual actuarial valuation and projection reports, the PERS Board biennially
compares the actual experiences of the various plans to expected experience for reasonableness
and adjusts, as necessary, the assumptions used. The PERS Board received the results of the most
recent study at its April 2023 meeting.
The PERS Board also contracts with an investment consultant to conduct asset/liability studies,
provide quarterly performance reports and economic updates, and assist the PERS Board and staff
in establishing an asset allocation policy and selecting investment management firms. The PERS
Board currently contracts with Callan LLC, one of the nation’s largest independently owned
investment consulting firms.
PERS Board members have a duty to manage and invest the funds of the various plans for the
exclusive benefit of the members and beneficiaries in the manner provided by law. MISS. CODE
ANN. § 25-11-121 (1972) provides guidelines and limitations on the types of assets the PERS
Board may use as investments for the PERS plan.
“Financial soundness” should be defined not as a point-in-time comparison of assets and liabilities, but as
a multifaceted construct that encompasses sustainability in consideration of all relevant environmental
conditions and an understanding of the role of risk and investment management in the long-term financial
health of the System.
This chapter discusses:
Actuarial Soundness
The PERS Board, in consultation with its actuaries, develops an actuarial model based on
assumptions such as projected investment returns, payroll increases, inflation, retirement ages,
mortality rates, marriage rates, and accrued leave to project the plan’s future assets and liabilities.
Although the PERS Board sets plan assumptions based on biennial experience studies, the plan’s
actual experience (e.g., investment returns or mortality rates) is a product of environmental and
demographic factors.
Variances in the actual experience of the plan compared to the model’s assumptions have an
impact on the plan’s financial condition. Therefore, the PERS Board, with assistance from its staff
and other contractual advisers, endeavors to maintain the actuarial soundness of the plan by
monitoring all components used in the PERS actuarial model through quarterly updates on the
performance of the plan’s assets, annual actuarial updates, annual projections, and biennial
experience reports.
This section discusses the actuarial soundness of the following three areas of the PERS plan:
• differences between actual and assumed wage inflation;
• active and retired member assumptions; and,
• differences between the actuarially recommended and Board-adopted long-term
assumed investment rate of return.
1
Each employee must contribute 9% of his or her salary to PERS, and his or her employer must contribute 17.40% of
the employee’s total salary to PERS.
2
Over the past 10-year period, the PERS Board’s actuarial assumptions included an assumed growth rate of 4.25%
from FY 2012 to FY 2014, 3.75% for FY 2015 and FY 2016, 3.25% for FY 2017 and FY 2018, 3.00% for FY 2019 and FY
2020, and 2.65% for FY 2021 and FY 2022.
3
Annual payroll is a statistical figure reported in the PERS plan’s annual valuation that represents the total combined
wages paid to PERS members by PERS plan employers.
Total Payroll
Increase Percentage
Payroll Source
(Decrease) Change
FY 2022 FY 2021
Other Political
300,833,496 302,533,163 (1,699,667) (0.56%)
Subdivisions
SOURCE: PEER analysis of the Report on the Annual Valuation of the Public Employees’ Retirement System of
Mississippi as of June 30, 2022.
While PERS has experienced positive payroll growth in three of the last five fiscal years, as shown
in Appendix A on page 26, each of these periods’ results, with the exception of FY 2022, was
below the rate of wage growth assumed by the PERS Board for the corresponding period.
As reported in An Update on the Financial Soundness of the Mississippi Public Employees’
Retirement System and Related Legal Issues: 2014
Definition: amortization period
(PEER Report #591), PERS’s actuaries stated that
The amount of time it takes a
less-than-expected payroll growth can increase the
borrower to pay back full loan
amortization period of the unfunded actuarial
principal plus interest.
accrued liability (UAAL), which occurs when a
pension system’s current actuarial value of assets is
less than the present value of benefits earned by retirees, inactive members, and current
employees as of the valuation date. However, the upward pressure on the UAAL may be partially
or totally offset due to the decrease in the number of future liabilities resulting from a lower payroll
amount than assumed in the actuarial model.
In addition, the October 2022 edition of the Public Fund Survey from the National Association of
State Retirement Administrators (NASRA) states that when a plan’s payroll grows at a rate less than
expected, the base amount of funds used to amortize the plan’s unfunded liability is smaller,
meaning that the cost of amortizing the unfunded liability is larger. This is due to the fact that only
part of the amount contributed to the PERS plan each year goes to the accrual of employee
Each type of member is considered within the actuarial model of the plans; however, because
liabilities associated with inactive members account for only 0.94% of the overall PERS plan’s
present value of future benefits, the ratio of active to retiree members is of primary importance.
As shown in Exhibit 3 on page 8, the ratio of active to retiree members in the PERS plan decreased
4
Normal cost is the annual cost of providing retirement benefits for services performed by current members. This is a
shared responsibility between the member and employer.
Exhibit 3: PERS System Active and Retiree Members for FY 2012 through FY 2022 (in
Thousands)*
Member
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Type
Active 163 162 162 158 155 153 151 151 151 146 145
Ratio 1.81:1 1.74:1 1.69:1 1.60:1 1.52:1 1.46:1 1.40:1 1.37:1 1.35:1 1.27:1 1.24:1
Exhibit 4 on page 9 provides more detailed information about the decline in active employee
membership specific to the PERS plan. While not every employer group has seen a decline in
active membership, the overall effect is a lower number of active employees from FY 2021 to FY
2022.
As a result of the decrease, the payroll of fewer active members must fund future pension
obligations, a factor made more important because contributions from active members and their
employers comprise approximately 45% of PERS revenues (as of FY 2022).
According to the October 2022 Public Fund Survey, the most recent nationwide information
available, when examining the membership of the
At the end of FY 2021, the active to
pension plans tracked by the database, the overall
retiree member ratio was 1.27:1, which is
active to retiree ratio is 1.26:1 as of the end of FY
a higher ratio than the average U.S.
2021. While the PERS active to retiree member
pension plan.
ratio has declined since FY 2012, the ratio of
1.27:1 at the end of FY 2021 was above the
average ratio for other pension plans across the nation. This indicates that PERS has a higher active
member to retiree ratio compared to the average pension plan in the United States.
In addition, the Public Fund Survey observed that a lower ratio of active members to retiree
members results in funding future obligations over a smaller payroll base, although a declining
active member to retiree member ratio does not automatically pose an actuarial or financial
problem. However, when combined with an unfunded liability, a low or declining ratio of actives
to retirees can cause financial distress for a pension system provider.
5
The rate of decline in the ratio of active members to retired members between FY 2011 and FY 2021 was 34%.
Active Employees
Increase Percentage
Employers
(Decrease) Change
FY 2021 FY 2022
Other Political
7,076 6,738 (338) (4.78%)
Subdivisions
SOURCE: PEER analysis of the Report on the Annual Valuation of the Public Employees’ Retirement System of
Mississippi as of June 30, 2021, and June 30, 2022.
With a maturing plan,6 increasing retirements are expected, and the model attempts to account
for these changes through the use of demographic assumptions. Although the PERS ratio of active
members to retirees is above the national average, PERS’s experience does differ from the average
plan of the Public Fund Survey. PERS active membership has continued to decline, whereas the
national average plan’s membership has grown in six of the last seven fiscal years (FY 2015 through
FY 2021). The national average plan’s membership did decline by a rate greater than 1% for FY
2021. As such, continued analysis of the assumptions for active and retiree members is warranted.
Differences between the Actuarially Recommended and Board-adopted Long-term Assumed
Investment Rate of Return
The investment return assumption is a metric used in PERS’s actuarial model to project and
demonstrate the long-term perspective of investments in combination with the long-term
perspective of the liabilities.
The plan’s consulting actuary recommends an investment return assumption to the Board during
its biennial experience studies. This recommendation is based on several factors such as forward-
looking asset models created by the actuary, consideration of the investment assumptions of other
state and local pension systems in the United States, and the plan’s inflationary environment. The
6
According to Zacks Investment Research, a maturing pension plan is a plan where the number of employees and
retirees is approaching equality.
According to NASRA, a pension plan funding policy is a set of guidelines adopted by a pension plan that
determines how much should be contributed each year by the employers and active participants to
provide for the secure funding of benefits in a systematic fashion. The PERS Board continues to operate
the PERS plan under the funding policy that was implemented during FY 2019. The plan’s funding policy
defines several goals and objectives, including contribution rate stability and the maintenance of an
increasing trend in the plan’s funded ratio (over the projection period) with the target of a 100% funding
level.
Review of Funding Policy Metrics
Included in the policy are three metrics that will
Based on the results of the evaluation
be utilized to track the plan’s progress in
metrics in the funding policy as of June
achieving the funding goals and objectives set by
30, 2022, all three of the plan’s metrics
the PERS Board and a course of action should any
are at red signal-light status.
of these metrics fall below certain thresholds.
These new metrics will be evaluated through the
use of a “signal light” approach (green indicating goals and objectives achieved; yellow
representing a warning that future negative actions may lead to a failure of the goals and
objectives; and red suggesting that the Board must consider making changes to the employer
contribution rate).
Based on the results of the evaluation metrics in the funding policy as of June 30, 2022, all three
of the plan’s metrics are at red signal-light status. Exhibit 5 on page 11 illustrates the status of
these three metrics as assessed through the annual valuation and projection report as of June 30,
2022.
SOURCE: Report on Thirty-Year Projections of the Mississippi Retirement Systems, prepared as of June 30, 2022.
As highlighted above, one of the plan’s funding policy metrics analyzes the plan’s projected
funded ratio as of FY 2047. For the fiscal year ended June 30, 2022, the plan’s projected funding
level was 48.6%, decreased from 93.5% for the year ended June 30, 2021.
Prospective Changes to PERS’s Employer Contribution Rate
The PERS plan’s actuary presented the results of the plan’s valuation and projection reports, for
the fiscal year ended June 30, 2022, to the PERS Board at its December 2022 meeting. As
Exhibit 6: PERS Funding Policy Metric Results with the Change in Employer Contribution
Rate to 22.40% Projected for June 30, 2024
Metric Result Status
Funded Ratio (in FY 2047) 86.1% Green
Cash Flow as a Percentage of Assets -5.4% Green
ADC/FCR Ratio* 100% Green
*The plan’s actuarially determined contribution (ADC) is the potential payment to the plan as determined by the actuary using a
contribution allocation procedure that, if contributed consistently and combined with investment earnings, would be sufficient to
pay promised benefits in full over the long term. The plan’s fixed contribution rate (FCR) is the employer contribution rate set by the
Board.
SOURCE: Report on Thirty-Year Projections of the Mississippi Retirement Systems, prepared as of June 30, 2022.
In its December 2022 meeting, the PERS Board voted to adopt the employer contribution rate
change recommended by the plan’s actuary with an effective date of October 1, 2023.
In light of concern expressed by multiple employer groups, the PERS Board voted in its February
2022 meeting to amend the effective date of the prospective rate change to July 1, 2024.
7
See Attorney General’s Opinion to Robertson, February 22, 2010.
8
PERS’s anticipated liability payment period, as of June 30, 2020, was 37.1 years.
Risk management and investment management represent the other major components of financial
soundness. These concepts are utilized to provide a framework for the structure that will manage
the plan’s long-term risk environment in ways that allow it a reasonable opportunity to collect or
earn sufficient assets to meet its benefit obligations.
Risk Management
To determine the funding ratio, or funding level, of a plan, the current value of all projected future
obligations of the plan (such as future pension payments) is calculated. In other words, the cost of
all of the plan’s future obligations is calculated in today’s dollars. The total of the current value of
future obligations is compared to the plan’s assets on hand today and a funding ratio is derived.
The calculation of a plan’s funding ratio is an accounting measure that quantifies the plan’s ability
to meet its projected future obligations based on service already performed with assets currently
available. However, this measure, like most accounting measures, assesses the plan in a
conservative manner and does not take into account items such as future investment gains and
losses and/or loss of contributions from employees and participating employers. This measure
also does not reflect the ability of the plan to meet its current obligations.
For FY 2022, the actuarial value of assets in PERS remained flat in relation to the actuarial value of
its liabilities—61.3% for both FY 2021 and FY 2022.9 The relationship between these two
valuations remained flat because gains and losses due to actuarial experience variations from
expected experience regarding investment returns, member mortality, and salary growth
produced offsetting effects.10 The actuarial gain on investments for FY 2022 was 8.49%, which
represents the actuarial smoothing of gains and losses from FY 2017 through FY 2021.11
According to projections prepared by PERS’s
Primarily due to lower-than- consulting actuary as of June 30, 2022, the plan’s
expected investment returns, the funding ratio was projected to be 48.6% by 2047, as
PERS plan has a projected future compared to 93.5% reported in the FY 2021 projection
funding ratio of 48.6% as of 2047. reports.12 The decrease in the future funding level is
primarily due to less-than-expected investment gains.
9
For the fiscal year ended on June 30, 2020, the PERS plan had a funding level of 60.5%.
10
Member mortality refers to mortality estimates for pre- and post-retirement mortality rates for retirees and their
beneficiaries.
11
The PERS plan’s actuarial gain on investments as of June 30, 2021, was 12.47%.
12
For the period ended on June 30, 2020, the PERS plan’s projected funding level in 2047 was 67.7%.
Having realized a loss of approximately 8.54% in the PERS plan’s combined investment portfolio,
the market value of assets decreased from approximately $35.6 billion to $31.2 billion during FY
2022, a decrease of approximately $4.4 billion.
As presented in Exhibit 7 on page 15, according to investment consultant Callan LLC, PERS’s
investment performance for FY 2022 was below the current actuarial model’s utilized investment
return rate of 7.55%, placing it below the median return for its peer group14 of -5.64%.
Additionally, PERS’s investment performance has exceeded its peer group median for each of the
past 3-, 5-, and 10-year periods.
* In this example, 78th percentile means PERS outperformed 22% of peer group funds; 25th percentile means these returns were
greater than 75% of peer group funds.
According to the Public Fund Survey, the median public pension annualized investment 10-year
return for the period ending December 31, 2021, was 9.6% and the 30-year return was 8.5%.15
Over the past 10 years, PERS’s investment return on assets averaged 9.02%. Investment returns
ranged from 1.16% during FY 2016 to 32.71% during FY 2021. The volatility of the recent years’
13
The Governmental Accounting Standards Board is an independent organization that establishes standards of
accounting and financial reporting for state and local governments in the United States.
14
The PERS peer group is composed of other nationally based large pension plans (plans having greater than $10
billion in assets).
15
At the time of publication of this report, the Public Fund Survey for the period ending June 30, 2022, had not been
released.
Exhibit 8: PERS FY 2022 Actual Asset Allocation Compared to PERS Overall Asset
Allocation Model
PERS’s assets are being invested in accordance with the asset allocation model. Instances in which
current investment levels do not agree with the model do not automatically constitute a cause for
16
Active investment management refers to a portfolio management strategy by which the manager uses various
investment research approaches, models, and systems to select the fund’s specific investments with the goal of
outperforming the fund investment’s benchmark index.
As outlined under MISS. CODE ANN. § 25-11-101 (1972), the PERS Board is responsible for the
administration of PERS and for all other state retirement systems. A component of this
responsibility is the investment of assets held in trust for System members and beneficiaries. These
investments must conform to specific guidelines for allowable investments codified in MISS. CODE
ANN. § 25-11-121 (1972).
To help mitigate risk, the PERS Board invests the assets of the System through the use of an asset
allocation model. This model determines the mix of asset classes in which the System invests and
the overall weight of each asset class within the portfolio.
The model detailed on page 20 provides a broad overview of the general asset classes utilized by
the System. Most of these asset classes are further broken down by sector or other various
investment factors (e.g., style, capitalization, or region).
For example, as of June 30, 2022, the real estate sector made up 10% of the total System asset
allocation. This means that the goal of PERS staff is to invest approximately 10% of the plan’s total
investable dollars in assets associated with real estate. The PERS plan’s Investment Policy
Statement further defines this goal and outlines three component areas for investment. Exhibit 9
on page 20 illustrates the components of the real estate asset class.
Total
Component
Component Portfolio Component Description
Weight
Weight
Core investments include existing substantially leased income-
Core 70% 7% producing properties held within a portfolio that exhibits
reasonable economic diversification.
Non-core investments represent those properties and/or
investment strategies that require specialized acquisition and
Non-Core 15% 1.5%
management expertise or skill to mitigate the business and
leasing risks that may be associated with individual investments.
Public Real
Public real estate securities include both public real estate
Estate 15% 1.5%
investment trusts and public real estate operating companies.
Securities
Total 100% 10%
SOURCE: PERS Plan, Investment Policy Statement, adopted August 22, 2022.
Each of the main asset classes, as well as their components, are periodically reviewed by
PERS staff and Callan LLC. Callan LLC periodically performs an asset/liability allocation
study that considers projected future liabilities of the System, expected risk, returns of
various asset classes, and statutory investment restrictions.
During its June 2021 meeting, the PERS
Callan’s 2021 Asset Liability Study
Board presented the results of Callan
recommended that PERS consider
LLC’s 2021 Asset Liability Study. One of
inclusion of two new asset classes within
the results of this study was the
its asset allocation model: private credit
recommendation that the PERS Board
and private infrastructure.
consider inclusion of new asset classes
within its asset allocation model. In
addition to adjustments to the existing asset class weightings, Callan LLC suggested that
the PERS Board consider expanding into two new asset classes: private credit and private
infrastructure.
To implement these new investment strategies, During the 2022 Legislative Session, the
PERS Board sought legislative approval to amend the law that governs the plan’s available
investment options. According to PERS staff:
SOURCE: Callan LLC, Preliminary 2023 Capital Market Assumptions and Asset Allocation Review.
17
The “basket clause” is a catch-all term used to describe provisions within PERS’s investment authority that grant the
PERS Board the ability to invest plan assets in investments not specifically authorized by other areas of the plan’s
investment directive. These assets must be in the form of a separate account managed by a Securities and Exchange
Commission registered investment advisory firm retained as an investment manager by the Board or a limited
partnership or commingled fund approved by the Board.
Private Credit
Private credit investments are an asset class of privately
negotiated loans and debt financing from non-bank Definition: illiquid
lenders. These investments are issued through illiquid Not easily converted into cash.
investment types. According to Callan LLC:
the prevalence of these investment types developed in the aftermath of the global
financial crisis. As the oversight on traditional banking establishments increased,
the types and amounts of loans able to be issued decreased. This reduction in the
availability of funds created a niche for non-bank lending.
Returns from these types of investments can be generated through a combination of coupon
payments, capital appreciation, and in some cases, equity participation.
This type of private credit investment can take several forms, including (but not limited to):
• Direct lending: Direct lending is the origination or purchase of commercial loans used to
finance general business operations, specific projects, or growth opportunities.
• Real asset lending: Real asset lending is the origination or purchase of loans backed by
traditional (core) real assets, including land and buildings.
• Specialty financing: Specialty financing is the origination or purchase of loans backed by
less traditional forms of collateral (e.g., franchise lending).
• Asset-based lending: Asset-based lending is the origination or purchase of loans backed
by assets utilized for the transportation of people and goods (e.g., aircraft or rail cars).
Benefits of Private Credit Investments
Private credit investments have the following benefits:
• the ability to generate cash flow quickly through the receipt of coupon payments;
• generally, a higher expected return
than more traditional debt instruments Definition: downside protection
(e.g., bonds); and, Ability to limit the impact of potential
losses from market downturns.
• better downside protection than
private equity investments.
Why did the PERS Board change the asset allocation model for the
plan?
The new PERS asset allocation model is projected to provide a higher investment return relative to
the risk associated with its investment. This means that the new model is more likely to provide the
assets needed to meet PERS obligations.
As the custodian for the PERS plan, it is the responsibility of the PERS Board to invest the plan’s
assets to ensure that PERS meets its financial responsibilities to provide stable benefits for its
members.
When asked why the PERS Board adopted changes to the plan’s asset allocation model, the PERS
Board responded:
The driving reason for the addition of the new asset classes is that they are
expected to provide further diversification to a portfolio heavily weighted in
public equities. The benefits that both private credit and infrastructure can
provide to the PERS portfolio are (but are not limited to) cash flow generation,
expected return premiums, higher downside protection, and volatility
dampening.
The PERS Board’s decision to adjust the While all pension plans are unique due to their
plan’s asset allocation model will mixture of members, provided benefits,
decrease the plan’s allocation to equity contribution requirements, and legal climates,
from 61% to 57%, which is closer to the comparisons with these differences in mind can
average for all plans in the U.S. be used to assess particular facets of PERS. For
example, this change will decrease the plan’s
allocation to equity from its current 61% to 57%,
which is closer to the average for all plans in the Public Plans Data.18 The October 2022 Public
Fund Survey reports the weighted average plan exposure to equities to be 47.4%. The benefit of
this adjustment is that it moves funds previously allocated to equity into other investment classes
with lower levels of expected risk or volatility.
Prudent financial management dictates that any investment decision balances the risk associated
with the investment and the return expected from the investment. Callan LLC’s 2023 Capital
Market Projections provides the most recent information from PERS’s investment consultant on
projected returns and risk levels for assets within the PERS plan. The information provided
projected investment return and investment risk assessments for the PERS plan’s old and new
asset allocation matrices.
18
Public Plans Data is an online, interactive resource containing public retirement system information. The database
is sponsored and maintained by the Center for Retirement Research at Boston College, NASRA, MissionSquare
Research Institute, and the Government Finance Officers Association.
† Payroll totals reported here have been rounded and may be different from the payroll figures reported on page 6.
* 2017 payroll data is for baseline comparisons only.
SOURCE: PERS annual valuations for years ending June 30, 2017, through June 30, 2022.
Exhibit B1: PERS Funding Policy “Signal Light” Levels and Definitions
Status Definition
Green Plan passes metric and PERS funding goals and objectives are achieved.
Yellow Plan passes metric but a warning is issued that negative experience may lead to failing status.
Red Plan fails metric and PERS must consider contribution increases.
The new funding policy, like its most recent predecessor, also includes a provision that serves as a safety
net for the plan. If any one of the metrics is in red signal-light status in conjunction with the annual valuation
report and the projection report, the actuary will determine and recommend to the Board for its
consideration an employer contribution rate increase that is sufficient to get all three metrics back into
green signal-light status.19
Funded Ratio
The calculation of a plan’s funding level is an accounting measure that quantifies the plan’s ability to meet
its projected future obligations, based on service already performed, with assets currently available.
This metric uses information from the 30-year projection reports developed by the plan’s actuaries to
assess the plan’s funding level at a defined point in the future (for now, FY 2047).
Exhibit B2 presents the funding policy’s defined channels for the funded ratio signal lights.
19
Any resulting contribution rate increase would be effective for July 1, 18 months following the completion of the
associated projection report. The delay allows the state, counties, municipalities, and political subdivisions ample time
to incorporate the increase into their operating budgets.
For the year ended on June 30, 2022, the projected funding ratio in FY 2047 is 48.6%, placing the PERS
System in the red signal-light status. This is one of the contributing factors that led to the actuary’s
recommendation to increase the employer contribution rate.
As noted on page 11, one of the policy’s goals is to maintain an increasing trend in the funded ratio over
the projection period with an ultimate goal of being 100% funded. However, the use of a 100% funded
ratio can be seen differently when used as a target of financial health versus a goal of a pension’s funding
policy.
Even with the assignment of being 80% funded as the threshold for green status, there is no industry
statement or requirement for a pension plan’s funding level to be at 80% to be defined as “healthy.”
Neither the Governmental Accounting Standards Board or the American Academy of Actuaries uses an
80% funded ratio to define a plan as financially healthy.
For example, computing the cash flow as a percentage of assets for FY 2022 (in thousands) is calculated
as follows:
(1,826,424 – 3,255,666)
x 100 = −4.06%
35,216,597
PERS testing of cash flow as a percentage of assets is not only a point-in-time comparison for the current
fiscal year, but it also will be evaluated over the entirety of the period reviewed during the actuary’s 30-
year projection report, with the lowest current or projected cash flow as a percentage of assets used as
the metric result.
Exhibit B3 defines signal-light statuses for cash flow as a percentage of assets.
20
For purposes of this calculation, PEER included any refunds made to inactive members as benefit payments.
Net Cash Flow Percentage above –5.80% during the projection period.
Net Cash Flow Percentage between –5.80% and –7.55% during the projection period.
Net Cash Flow Percentage below –7.55% during the projection period.
NOTE: The targets utilized in this metric were adjusted during the April 2022 Board meeting to correspond with the
approved changes in the plan’s utilized investment return rate.
For the projection period, the lowest cash flow rate is –7.78% in FY 2039, which places the PERS plan in the red
signal-light status for this metric.
The Public Fund Survey also provides data on cash flow as a percentage of assets. According to the
October 2022 report, nearly all systems in the survey had a negative cash flow, and the median cash flow
as a percentage of assets for plans in its survey, as of FY 2021, was –2.2%.21 While this can be compared
to the PERS result of –5.65% for FY 2021, it must also be noted that this is not a direct comparison. As
discussed on page 28, PERS cash flow as a percentage of assets metric is not a point-in-time comparison
(like the Public Fund Survey) but a measure over its full projection period, and the Public Fund Survey
metric accounts for administrative expenses, while the PERS metric excludes administrative expenses from
the calculation.
ADC/FCR Ratio
The ADC/FCR ratio is a comparison of the plan’s actuarially determined contribution (ADC) and the plan’s
fixed contribution rate (FCR).
The plan’s funding policy defines the ADC as the potential payment to the plan as determined by the
actuary based on the following principal elements disclosed in the funding policy:
• actuarial cost method;
• asset valuation method; and,
• amortization method.
The purpose of the ADC is to provide a measure of the potential contribution rate necessary to allow the
PERS plan to reach its funding goals within a 30-year period under the prescribed methods outlined in the
Board’s funding policy.
The plan’s funding policy defines the FCR as the employer contribution rate set by the Board. 22
The ADC/FCR ratio is determined by dividing the ADC calculated during the actuarial valuation for the
fiscal year (typically released during the Board’s December meeting) by the FCR set by the Board for the
21
The Public Fund Survey cash flow as a percentage of assets figure also includes administrative expenses within plan
outflows in its methodology.
22
To help potentially limit annual fluctuations to members’ and employers’ contribution expenditures, the Board
adopted funding policies that “fix” the employer contribution rate as a percentage of covered payroll.
Exhibit B4: Signal Light Definitions for Actuarially Determined Contribution/Fixed Contribution
Rate
ADC/FCR ratio between 100% and 110% of fixed contribution rate at valuation date.
For the fiscal year ended on June 30, 2022, the plan’s ADC/FCR ratio was 124.83%, placing it in red signal-
light status.23 This indicates that the FCR set by the Board is smaller than the ADC, and the difference
between these two figures, in the opinion of the plan’s actuary, is outside the range established.
According to the PERS funding policy, if any one metric is in the red signal-light status in conjunction with
the annual valuation report and the projection report, the actuary will determine and recommend to the
Board an employer contribution rate increase to consider that is sufficient enough to get all three funding
policy metrics back into the green-light status.
23
For the year ended on June 30, 2022, the plan’s ADC was 21.72% and the plan’s FCR was 17.40%.
24
Layered amortization is the amortization of components of the UAAL over a separate fixed period as they emerge.
25
A closed amortization period is a type of amortization period utilized by pension plans that results in the full
amortization of specific items within a finite (or predefined) period (i.e., a traditional 30-year mortgage on a home).
Private Equity GROSVENOR & PATHWAY CAPITAL MAN – PRIVATE EQUITY 14,685 14,750
* While PERS paid no investment management fees to this manager during FY 2022, PERS’s relationship with this
manager/investment is still ongoing.
SOURCE: PERS staff and PERS FY 2022 and FY 2021 Annual Comprehensive Financial Report.