Mississippi’s low pension contributions cause S&P Global to downgrade its credit outlook

In response to Mississippi’s rising public pension debt and management challenges, S&P Global Ratings shifted the state’s credit outlook from stable to negative. This forecast adjustment reflects growing concerns over the adequacy of the state’s pension system funding and puts Mississippi at risk of a future credit rating downgrade, which would significantly increase borrowing costs.

However, Mississippi’s credit rating remains unchanged, with the state still carrying an “AA” long-term rating on its general obligation (GO) debt outstanding. S&P Global issued a letter of intent, a critical warning, citing concerns about Mississippi’s failure to meet the actuarially determined contribution rate for the state’s largest public employee pension system. In the S&P Global announcement on March 1, S&P credit analyst Rob Marker said: 

“The risk of future budgetary pressure is further elevated due to pension contributions falling short of their actuarially determined contribution amounts in each of the past three years and a relatively high level of unfunded pension liabilities. Finally, recurring delays in adopting the state’s annual revenue forecasts or a reduced commitment to debt management policies could worsen our view of the state’s budgetary performance and Financial Management Assessment,” Mr. Marker added.

The gap in Missisissippi’s public pension contributions

Mississippi’s largest pension system, the Public Employee Retirement System, PERS, follows an employer contribution plan binding the state to “contractually required employer contributions”—determined by the PERS board as a fixed percentage of payroll rather than by actuarial estimates. 

For most public pension plans, the amount the government employer—in this case, the state—must contribute depends on how much actuaries determine the pension plan needs to cover its promises and amortize its debt that year. That’s not the case for Mississippi PERS, which is a significant reason why its accumulated debt (the notorious unfunded pension liabilities) keeps growing.

In 2023, the contractually determined employer contribution rate for the Mississippi PERS plan was 17.4%, while the actuarially determined contribution (ADC) was 25.17%.

Even the ADC can often underestimate a pension plan’s needs. Actuaries tabulate the benefit payments they expect to make to retirees decades into the future and then discount those payments by the annual rate of return on investments the board assumes it can achieve. The present value of these discounted cash flows is then compared to the value of assets on hand to determine the plan’s funding level.

A critical danger of this approach is that it assumes pension systems have already recognized gains on investments years before they materialize. If the pension plan’s investment returns fall short, public employees and employers, via taxpayers, have to pay more to make up the difference.

Therefore, negative deviation from Mississippi’s PERS present revenue and investment return expectations will require even higher contribution increases to meet its pension obligations to public workers, and potentially increase the estimated value of the pension liabilities themselves. The Mississippi Public Employee Retirement System is $25 billion in debt.

A call to further increase the state's public pension contributions

In a January letter addressed to the lieutenant governor and speaker of the House of Representatives, Mississippi PERS Executive Director H. Ray Higgins Jr. advocated for a progressive increase in the employer contribution rate to 22.4% of payroll. Anticipating a lower investment assumption, the letter mentions that the pension plan's actuaries have recommended phasing in the employer contribution rate increases at 2% each fiscal year until reaching 27.4% in 2028.

In his letter, Higgins bluntly summarized:

In short, the last 25 years have seen additional benefit enhancements placed into law without additional funding at the time, the active member-to-retiree ratio decline, retirees living longer, several economic downturns (including the Great Recession), and a more conservative approach to public pensions in general. This is not an all-inclusive list, and these factors are not all bad things; but they have had a cost.

The cost of credit downgrades

The S&P rating announcement further cited "delays in adopting the state's annual revenue forecasts" and a general "reduced commitment to debt management policies" as matters of worry, justifying the outlook revision—a warning to Mississippians of what is to come if nothing changes. 

Credit outlook revisions have real implications beyond their symbolic significance for bureaucrats and plan administrators. One notable consequence is a rise in borrowing costs. With a worsened credit rating, Mississippi is likely to encounter higher interest rates when issuing municipal bonds or seeking credit in financial markets. This increase in borrowing costs will ultimately be borne by taxpayers and residents. As a result, they may also experience reduced government services due to budget constraints, see diminished investments in crucial infrastructure and development projects in the state, and face higher taxes to offset the increased costs.

Mississippi's challenges with insufficient pension contributions to its largest pension fund—and its growing pension debt—have been jeopardizing the retirement security of public employees and now threaten the state's fiscal resilience. This reality is reflected in Mississippi's credit outlook and may soon impact the state's credit rating if reforms to address growing funding and contribution challenges are not achieved.