Public Pension Reform: Mississippi’s Public Employees' Retirement System
Retirement plans for public employees are treated by most courts as giving rise to a
contract between the government and at least some classes of employees. At the outset, this
memo operates within the majority view that a public pension plan, though created by statute,
creates a contract at some stage of employment. To the extent it is a contract, it is governed by
the Contract Clauses of the U.S. and Mississippi constitutions which forbid a State to “pass any
. . . Law impairing the Obligation of Contracts . . . .” (U.S. Const., art. I, §10; likewise, Miss.
Const., art. 3, §16.)
Under the Majority View, the General Rule (in the absence of impending insolvency or
projected budget deficit) is that “alterations of employees’ pension rights ... which result in
disadvantage to employees should be accompanied by comparable new advantages.” Allen v.
City of Long Beach, 45 Cal.2d 128, 287 P.2d 765, 767 (1955). The same rule stated by a
California court was put differently by a federal court in Maryland: “[I]n Maryland, ‘under
certain circumstances the government may unilaterally modify [pension benefits] so long as the
. . . benefits . . . adversely altered . . . are replaced with comparable benefits.” Andrews v. Anne
Arundel County, 931 F.Supp. 1255, 1266 (D.Md. 1996). When the Massachusetts high court
was asked for an advisory opinion on whether it would be constitutional to raise employees’ rate
of contribution from 5% to 7%, the justices opined that “such an increase without a
corresponding increase in benefits would be presumptively invalid as an impairment of
contract.” Opinion of the Justices, 364 Mass. 847, 303 N.E.2d 320, 330 (1973).
Mississippi’s Attorney General described a decision of the state’s highest court this way:
“[T]he Mississippi Supreme Court in Public Employees' Retirement System v. Porter, 763 So. 2d
845 (Miss. 2000), held unanimously that an employee acquires contractual rights under PERS at
the time that the employee joins PERS.” In re: Robertson, A.G. Opin. # 2010 - 0039 (Feb. 22,
2010).
The Attorney General Opinion concluded that financing the benefit increase granted in
1999 through “an increase in the member contribution [rate] would subject a member [employee]
to a substantial new disadvantage and would be violative of the contract clauses of the
Mississippi and United States constitutions.” His opinion addressed the authority of the PERS
Board to declare an increase in the employee contribution rate, but his conclusion is stated
broadly enough to lead legislators to think that they, too, lack authority to increase what
employees contribute, unless they pair the rate increase with a comparable new benefit or
advantage.
The Attorney General’s conclusion, however, fails to account for court decisions that
speak more directly to the question of whether a legislature can unilaterally modify state
contracts with public employees. These decisions, in fact, map the path for a legislature wishing
to change the terms of a public pension plan.
For the Legislature’s use and the Commission’s study, it is more important to learn that
the A.G. Opinion is silent about the U. S. Supreme Court’s interpretation of the Contract Clause.
Decisions by the U. S. Supreme Court make room for legislatures to unilaterally modify State
contracts that were unilaterally created by statute – contracts under which membership in the
retirement system is compulsory, employee contributions to the pension fund are mandatory, and
the terms governing eligibility and amount of the pension were not subject to negotiation by the
employee.
Secondly, it is important to learn that the Alabama Supreme Court decision (Snow,
decided in 1976) on which the Mississippi Supreme Court heavily relied in Porter (Miss. 2000)
was practically superceded by the Alabama Supreme Court in Cary (1979). Mississippi’s
Attorney General rested his Opinion on Mississippi’s Porter case without mentioning that the
foundation on which the Porter decision stood is barely strong enough to support that decision
(which was confined to an employee’s right to designate his beneficiary); but that foundation is
entirely inadequate to support the broader conclusions announced in the A. G. Opinion covering
all features of a pension plan. This is explained below on pages 7 - 8.
I.
The United States Constitution
The Contract Clause Allows the State to Modify Certain State Contracts When Necessity
Requires
When government employees file suit to claim that a legislative body’s modification of a
retirement plan impairs the government’s contract with its employees, virtually every lower court
begins its analysis with the Supreme Court’s opinion in United States Trust Co. of New York v.
New Jersey, 431 US 1, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977). 1
When analyzing state public pension plans as contracts, lower federal courts have drawn
the following lessons from the Supreme Court’s decision construing the Constitution’s
prohibition against passing laws that impair the obligation of contract.
In Baltimore Teachers Union v. Mayor and City Council of Baltimore, 6 F.3d 1012 (4th
Cir. 1993), the U.S. Court of Appeals for the Fourth Circuit upheld the reduction of salaries paid
to teachers under a collective bargaining contract on the following rationale:
“Though the Contract Clause is phrased in absolute terms, the Supreme Court does not
interpret the Clause absolutely . . . . Rather, it has formulated essentially a three-part
analysis for harmonizing the command of the Clause” (id., at 1015) with the “sovereign
power ... necessarily reserved by the State . . . to safeguard the vital interests of its
people.” U.S. Trust Co., 97 S.Ct. at 1517 and 1514.
1. A court must determine whether the challenged law impairs a contractual obligation.
2. If the law impairs an obligation of contract, a court will determine whether the
1
This is true even though U.S. Trust did not involve public pension plans, but dealt with governmental
entities’ contract with private investors who judged whether to purchase public bonds based on covenants ensconced
in state statutes.
impairment is substantial.
3. If the impairment is deemed to be substantial, then a court will decide “whether that
impairment is nonetheless permissible as a legitimate exercise of the state’s sovereign powers.”
Baltimore Teachers Union, 6 F.3d at 1015.
It was obvious that the city government intended to enter contracts when it agreed to
collective bargaining agreements with the teachers’ and police unions. Plainly, reducing their
salaries 2 substantially impaired the contracts. The Fourth Circuit determined that reducing
teacher’s and police officers’ salaries was nevertheless legitimate because it was a “reasonable
and necessary” measure “to serve an important public purpose.” Id. at 1018. A few facts led to
the conclusion that a cost-saving measure was necessary:
1. “[E]nsuring the financial integrity of the City [budget] is a significant public purpose.”
Id. at 1019. The government was required to balance its budget. Id. at 1020.
2. The government was facing a huge deficit. Id. at 1020. Its financial condition was
already weak ‘from the sluggish economy and poor financial management.” Id. The legislative
body was reacting to an “immediate budgetary shortfall;” Anne Arundel County, at 1262.
Several factors led to the conclusion that the furlough was reasonable:
1. The government had first resorted to other measures (layoffs, closing job positions,
and early retirements); it also combined the furlough with additional actions that cut expenses
and generated revenue. Baltimore Teachers, 6 F.3d at 1020 and n. 12.
2. A furlough of all employees avoided further layoffs of some employees, and “was less
drastic than . . . additional layoffs.” Id.
3. The length of furlough “was no greater than that necessary to meet the anticipated
shortfall” in revenue. Id.
4. The furlough was a response to “a broad, generalized economic or social problem.” Id.
at 1021.
5. The furlough was “generally applicable” and “extended to all City employees.” Id. It
did not target a narrow class of people or benefit a special interest constituency.
6. “Public employees . . . by definition serve the public.” “[T]heir expectations are
necessarily defined, at least in part, by the public interest. It should not be wholly unexpected,
therefore, that these public servants might well be called upon to sacrifice first when the public
interest demands sacrifice.” Id. at 1021.
For these reasons, the legislature’s method of restoring solvency by paying lower salaries
was “reasonable and necessary” to achieve “an important public purpose.”
Standard of Judicial Review
In upholding the legislature’s remedy and reversing the trial court’s decision striking
down the legislation, the Fourth Circuit acknowledged that courts cannot get away with
2
Employees were not asked to work the same hours for less money. The amount of income they could
earn from that particular employer was reduced by placing everyone on furlough for 2 ½ days of no work and no
pay. But the court opinion is devoid of any free market analysis.
3
postulating that lawmakers “could have shifted the burden from another governmental program,”
or that they “could have raised taxes.” Baltimore Teachers, at 1019 - 20. If these were the proper
criteria, “no impairment of a governmental contract could ever survive constitutional scrutiny,
for these [other] courses are always open, no matter how unwise they may be.” Id. at 1020
[insertion mine]. Rather, a court’s task is “to ensure through the ‘necessity and reasonableness’
inquiry” that states do not treat the option of impairing their own obligation under a contract
lightly or “on a par with other policy alternatives.” Id. Nor should states “ ‘impose a drastic
impairment when an evident and more moderate course would serve its purposes equally well.’”
Id. at 1020, citing U. S. Trust., 431 U.S. at 30 - 31, 97 S.Ct. at 1522. A court must grant due
deference to the legislature’s judgment, and is not “to sit as [a] superlegislature[].” Id., 6 F.3d at
1021.
To drive the point home, notice that, even when federal trial courts strike down a
modification to a public pension plan, the courts operate under the interpretation that the
Contract Clause is “not . . . an absolute prohibition” against a State impairing contractual
obligations, and “is not to be read literally.” Andrews v. Anne Arundel County, MD., 931
F.Supp. 1255, 1260, 1261 (D.Md. 1996). 3 Rather, the Constitution prohibits a State from
enacting drastic impairments if “less drastic means of achieving the State’s goals were at its
disposal.” Id. at 1260. If the legislature had “a legitimate public purpose” for adjusting a
contractual expectation, if the adjustment “is reasonably designed to achieve the public purpose,”
and if the adjustment was done to react to an “unforeseen and unintended” crisis, then the
adjustment (impairment) of the contract might be permissible under the Contract Clause.
Restoring the actuarial soundness of a retirement fund qualifies as an important public purpose,
even if it is not an immediate emergency. Id. at 1266.
“[S]tates retain some reserve power to modify the terms of their own contracts . . . when
the public interest so requires.” Marvel v. Dannemann, 490 F.Supp. 170, 175 (D. Del. 1980). 4
“[A]n impairment [of a State contract] may be constitutional if it is reasonable and necessary to
serve an important public purpose.” Id. at 174. “The adverse impact” of the impairment “must
be considered in light of the importance of the public interest purportedly served by the contract
amendment and the need for the changes.” Id., at 176. To pass scrutiny under the Contract
Clause, the government would need to show “that circumstances have substantially changed or
that its finances are in a precarious state.” Id. at 177, citing U.S. Trust Co.
Before modifying PERS, it is imperative that the legislature make a record of evidence that:
•
An impending insolvency or lack of financial integrity in the pension fund or a budgetary
shortfall will result if the State does not act; Or, an emergency has already arrived;
3
Reductions in monthly payments to retirees were struck down in Andrews v. Anne Arundel County
because the reductions were not shown to be the least drastic remedy available, nor were they shown to be
reasonable and narrowly tailored to achieve the purpose of restoring financial soundness.
4
In Marvel v. Dannemann, the court struck down an increase in employee contribution rates because the
State did not claim that the “Judicial Pension Plan has been unable to meet its obligations to retire[d] jurists in the
past or that it is likely to be unable to do so in the future.” 490 F.Supp. at 177. “[N]othing in this record suggests
that the necessary financial support for the Plan will not be forthcoming” from the State’s general fund. Id.
4
•
Circumstances have significantly changed. Examples: The investment market may be
much poorer than it was when generous benefits were promised; actual rates of return
may be far below the actuarial assumption; or the state budget may be in distress; the
number of employees available to contribute to the pension fund may have shrunk.
•
The change in circumstances was unforeseen when the legislature enhanced retirement
benefits;
•
Other remedies or relief measures have been tried but turned out to be inadequate, or
were considered but rejected as insufficient. Impairing the contractual obligation was not
the first resort;
•
The poor market/economic downturn/emergency is a general, society-wide problem, and
the State’s remedy is not confined to a narrow sector, nor targeted to help or hurt a
narrow group;
•
The legislature’s remedy applies equally to a broad class of state employees;
•
Smaller curtailments in benefits or smaller increases in employee contribution rates, or
other more moderate options, will not achieve solvency equally as well as the proposal;
•
The proposed curtailment in benefits and/or increase in contribution rate is less drastic
than other options considered; or
•
The measure proposed is no more drastic than necessary to achieve solvency,
sustainability, financial integrity or soundness.
These are the tests by which the U.S. Supreme Court and lower federal courts have
evaluated adjustments to public pension plans made by legislatures in other states when public
employees challenged a cutback in promised benefits or an increase in their contribution rates.
If several of the conditions listed above are proven, and a record is made of the proof,
then the legislature may expect that increasing employee contributions, raising the retirement
age, or curtailing retirement benefits will be upheld by the judicial branch applying the U.S.
Constitution, even if the cutbacks are not accompanied by a comparable new advantage for the
employees.
OPTIONAL REMEDIES:
•
Raise the employee contribution rate without pairing it with a comparable increase in
benefits.
•
Raise the age at which state employees may retire from 60 years to 62 years for all
employees except those who have accrued 25 years time in service before July 1, 2011.
5
•
Shift from the current defined-benefit plan to a defined-contribution model. Under the
defined-contribution plan, the government employer makes contributions to employees’
retirement accounts that are managed by employees. The contribution is the full extent of
taxpayer liability to government employees.
•
New employees and all persons hired after July 1, 2007 who have not accrued eight years
of time in service can be switched to a defined-contribution plan. (Savings to the State
multiply: When each employee manages his own fund, PERS won’t need to employ so
many investment managers. PERS added 12 managers over the past ten years to the 17
that were on staff in 2000. Switching to the defined-contribution plan would allow most
of the 29 investment managers to leave PERS and find work in the private sector –
perhaps advising state employees seeking to invest the funds in their retirement accounts.
The State would stop paying the high salaries of several public investment managers and
would stop contributing to those investment managers’ retirements.)
•
Repeal benefit enhancements granted in 1999 and return to the pre-1999 level of benefits
for all employees except those who have accrued 25 years time in service before July 1,
2011.
•
Eliminate the “double-dipping” practice of drawing a state retirement while continuing to
serve a state or local government as a contractor. As of July 1, 2011, Miss. Code §25-11127 requires an employee to wait 90 days after retiring to start back to work; and he may
only work ½ of the time and earn only ½ of the annual compensation. The employee
may as an alternative work an amount of time to earn 25% of his/her average
compensation for retirement purposes. Apply the same restrictions to retirees who
become contract consultants (as opposed to regular employees) to their former employer.
Simultaneous Remedy: Cut Costs within PERS
•
For instance, reduce the number of investment managers. PERS employs 29 investment
managers, compared to 17 managers ten years ago. That is a 70% increase. 5
More Moderate Remedies Have Been Tried But Have Proven to be Inadequate:
•
Years of continuous service before an employee acquires vested rights in the
government’s contributions to his retirement plan was raised from 4 years to 8 years –
only for persons hired after July 1, 2007.
•
Time in service to be eligible to retire, regardless of age, was raised from 25 years to 30
5
PERS Facts & Figures, p. 8, Total System 10-Year Comparison (Jan. 11, 2011). In 2011, PERS
requested an increase from 159 to 160 positions for its 2012 budget. (Proposed Budget, page 570.) The position
PERS wanted to add was titled, “Investment Director - Real Asset.” The occupant would “specialize in real estate
and timber investments,” and research, analyze, and evaluate “the merits of different types of investment projects
and programs . . . [,] monitor[] financial markets and assist[] in the formulation of investment recommendations . . .
.” PERS Facts & Figures, pp. 40 - 41.
6
years – only for persons hired after July 1, 2011.
•
The employer contribution rate is now 12%, after holding steady at 9.75% for fifteen
years (1990 to 2005). And it will rise to 12.93% on Jan. 1, 2012.
•
The employee contribution rate was raised from 7.25% to 9.0% beginning July 1, 2010.
(The rate rose from 6.50% to 7.25% around July, 1991 and remained at 7.25% for 19
years.)
II.
The Mississippi Constitution
At What Stage of Employment Do Participants in PERS Become Immune to Legislative
Alterations to the Retirement Plan?
The Mississippi Constitution contains a provision nearly identical to the Contract Clause
of the federal constitution. “Ex post facto laws, or laws impairing the obligation of contracts,
shall not be passed.” Miss. Const., art. 3, §16 (1890). The Mississippi Supreme Court has
indicated that it is disposed to interpret the state version of the Contract Clause in the same
manner that federal courts interpret the U.S. Constitution’s Contract Clause. Porter, 763 So.2d
at 849 (the two clauses “are substantially similar”), and at 850 (law as applied to plaintiff was
unconstitutional under both Constitutions); Dillon, 632 So.2d at 1303 (law was not
unconstitutional under either Constitution). Mississippi’s high court has treated them as
equivalent.
In PERS v. Porter, 763 So.2d 845 (Miss. 2000), the Mississippi Supreme Court enforced
a deceased participant’s designation of his sister to be the beneficiary of the death benefit his
pension plan provided in case he died before retiring. The Court did not enforce a subsequently
enacted state statute declaring that a widow “shall receive” the death benefit as if her husband
had designated his spouse. Because the statute did not exist when the participant was hired, but
was enacted after he entered PERS and after he exercised the then-existing right to designate a
beneficiary other than his spouse, the Court held that the statute impaired his contractual right.
The employee acquired a contractual right to designate whomever he wanted to be the
beneficiary of the death benefit on the date he was hired. Id. at 850.
The result was both correct and compatible with the analysis and proposals presented
here. The supporting rationale was that an employee acquires at least one contractual right on
the date of hire: the right to designate one’s beneficiary. This does not mean that all other
features offered by the PERS plan become contractual rights on the date of hire.
In deciding Porter, the Mississippi court relied heavily on Alabama precedent in Snow v.
Abernathy, 331 So.2d 626 (Ala. 1976), where the Alabama Supreme Court enforced a deceased
employee’s designation of his children (rather than his second wife) as his beneficiaries, and
refused to enforce a subsequently enacted statute making all benefits payable to a surviving
spouse. Alabama’s high court built its decision on the premise that when employees voluntarily
elect to join the public retirement plan, they “acquire vested rights of contract to the benefits
provided therein upon acceptance of the plan.” A statute could not divest an employee of a right
7
to designate his beneficiary that had vested in him the day he joined the plan.
However, three years after deciding Snow, the Alabama Supreme Court directly and
broadly confronted the question of when rights to pension benefits become vested under a public
retirement plan in which membership is compulsory for all public employees. Board of Trustees
of Policemen’s and Firemen’s Retirement Fund v. Cary, 373 So.2d 841 (Ala. 1979). The plan at
issue made an employee eligible to retire after twenty years of service. In Cary, the court held
that employees who had not yet served for twenty years (prior to the effective date of the
legislative amendment) did not have vested rights to benefits; the legislature was constitutionally
free to alter and amend benefits of the plan for those members of the plan. On the other hand,
both retirees and those eligible to retire because they completed twenty years of service prior to
the effective date of the new law, had fulfilled all the prerequisites (conditions precedent)
necessary to receive the retirement benefits offered, and therefore possessed a vested right to the
benefits promised at the time they completed their twenty years. At that point, and no earlier, the
benefits became a contractual right which the state Constitution rendered immune from
subsequent legislative modification. Id. at 843. “This right, once vested,” was not lost by their
choice to continue working, “nor can it be now divested by subsequent legislative enactment.”
Id.
Contract law acknowledges that a contract can be formed when a unilateral, unnegotiated, conditional offer has its conditions met by a person relying on the offer. A person
can accept the offer by the act of fulfilling the conditions of the offer before the offer is closed.
The Alabama Supreme Court drew a tight analogy between the public retirement plan and “a
unilateral contract, where the promisee has completely performed all of the obligations and all
conditions precedent so that the promisor” becomes bound by his promise and “has an
unqualified duty to” make good on his offer. Id. at 842. Since the Cary case was decided in
1979, the law in Alabama has been that only employees who have completed the number of
years necessary to be eligible to retire are the ones who possess vested rights to a certain level of
retirement benefits that cannot be diminished by a later act of the legislature.
The Mississippi legislature should assume that Mississippi courts will fall into step with
the basic principles of contract law that are honored in all fifty states and that were clearly
articulated by the Alabama Supreme Court – three years after the Snow case on which the
Mississippi Supreme Court relied in order to reach a decision in Porter. Four more observations
indicate this is a safe assumption for the legislature to make:
(1)
When the Mississippi court held that an employee received the contractual right to
designate his beneficiary upon entry into PERS membership, Porter, 853 So.2d at 850, the Court
did not hold that employees acquire contractual rights to all other terms and benefits offered by
PERS. 6
6
“[W]hen Gaines entered PERS in 1980, he received, among other things, the non-contingent contractual
right to designate his beneficiary . . . .” Porter, 853 So.2d at 850, ¶15. The court stated its formal holding this way:
The statute enacted in 1992 “impairs a contractual right which Gaines acquired in 1980.” Id. at ¶16. The decision
does not identify any other rights acquired at this early stage. I suggest one more: The right to a full refund of all
amounts withheld from one’s paycheck as the employee contribution to the PERS fund.
8
(2)
Both Porter and an earlier case, Estate of Dillon, 632 So.2d 1298 (Miss. 1994),
resolved a battle over designation of beneficiary. Designation is made upon entry into PERS
membership. That is a right all new hires must exercise upon joining PERS. The Supreme
Court may acknowledge, when faced with the issue, that the right to designate one’s beneficiary 7
and the right to a refund of all amounts withheld from one’s paycheck for the employee
contribution to the retirement Fund 8 are the only rights an employee possesses at the date of hire.
(3)
Mississippi precedent in this field is not deeply entrenched. Only one case,
Porter, has addressed whether employees acquire any right at all upon entering PERS.
(4)
Porter did not deal with a legislative adjustment to PERS made during a severe
downturn in the economy and in response to budgetary distress to save the retirement Fund from
being exhausted.
Applying the Alabama rulings to Mississippi, members of PERS who completed at least
25 years of service prior to July 1, 2011, possess vested rights to retirement benefits at the level
set in 1999 when the legislature enhanced them. Those who will complete 30 years of service
thereafter will acquire a vested right to the retirement benefits at the 1999 level unless the
legislature repeals or alters them first.
Does a Law Impair a Contract If the Law Preserves the Contract and
Renders it Sustainable?
If a public pension plan is a contract, then the PERS Fund backs a group of 251,493 9
contracts, each contract being between the PERS Board of Trustees and an individual public
employee. None of these contracts have a predictable, definite expiration date or a deadline for
PERS to perform its obligations. Depending on the pay-out option chosen by the retiree, PERS
may be obligated, after the retiree dies, to continue paying his designated beneficiary a monthly
benefit throughout her lifetime.
Even if a lower court were to declare that all terms of the PERS plan constitute contracts
with all employees at all times, a strong argument could be made on appeal that legislative
amendments which fortify the PERS Fund do not impair the contracts. Restoring solvency and
actuarial soundness to the Fund, though accomplished by adjustments that are painful to current
employees in the short-term, should not be considered an impairment. Rather, the adjustments
preserve and sustain the contracts. They restore longevity to a contract intended to last until the
death of the longest-living beneficiary after the retirement of the youngest employee.
7
Miss. Code §25-11-103(g).
The natural right of property to recover one’s contributions to the fund is acknowledged in various
statutes. See, e.g., Miss. Code § 25-11-115(1) and (7), § 25-11-117, and § 25-11-201.
9
251,493 is the sum of 85,849 retirees (as of June 1, 2011) plus 165,644 active employees in the total
system (as of June 30, 2010). This total is 125,606 less than the “Total System Membership” of 377,099 (as of June
30, 2010), which includes Inactive members, most of whom it is assumed are entitled to nothing more than a refund
of the employee’s contribution deducted from each paycheck during active service.
8
9
The “Availability of Funds” Clause Should Be Implied in the PERS contract
– If it Is Judicially Declared to be a Contract
The Mississippi Constitution, Section 272 A, adopted in 1985 and effective as of Nov. 20, 1986,
governs “Retirement systems.”
Summary of §272A (1):
All assets are held in trust for the exclusive purpose of funding benefits. 10
Subsection (2) provides:
“(2) Legislation shall not be enacted increasing benefits under the Public Employees'
Retirement System of Mississippi and the Mississippi Highway Safety Patrol Retirement
System in any manner unless funds are available therefor, or unless concurrent provisions
are made for funding any such increase in accordance with a prior certification of the cost
by the board of trustees of the systems based on accepted actuarial standards.”
Major increases of benefits were granted in 1999 and phased in in seven stages between
1999 and 2002. An official publication by PERS states: “Benefit improvements were enacted in
1999 without a funding mechanism in place other than the expectation of continued investment
gains.” Are Mississippi’s Public Retirement Plans Secure? (Fall 2010), p. 14. But, beginning in
FY 2008, gains turned into losses.
Our state Constitution commands that the Legislature shall not increase benefits unless
funds are available or will be funded by a simultaneous act that covers the cost as predicted and
certified by the Board of Trustees’ actuary. A logical inference from this prohibition is that, if
funds are no longer available, any previous increase in benefits can be withdrawn and repealed.
Written contracts to which the State of Mississippi is a party generally contain an
“Availability of Funds” clause. Here are examples quoted from actual contracts:
“Availability of Funds. It is expressly understood and agreed that the obligation of MDHS to
proceed under this Contract is conditioned upon the availability of funds, the appropriation of
funds by the Mississippi Legislature, and the receipt of state and/or federal funds. If, at any
time, the funds anticipated for the fulfillment of this Contract are not forthcoming or
insufficient, either through the failure of the federal government to provide funds or of the
State of Mississippi to appropriate funds or the discontinuance or material alteration of the
program under which funds were provided, or if funds are not otherwise available to MDHS
for the performance of this Contract, MDHS shall have the right, upon written notice to the
Independent Contractor, to immediately terminate this Contract without damage, penalty,
cost or expense to MDHS of any kind whatsoever. The effective date of termination shall be
10
“ (1) All of the assets, proceeds or income of the Public Employees' Retirement System of Mississippi
and the Mississippi Highway Safety Patrol Retirement System or any successor systems, and all contributions and
payments made to the systems to provide for retirement and related benefits shall be held, invested as authorized by
law, or disbursed as in trust for the exclusive purpose of providing for such benefits, refunds and administrative
expenses under the management of the board of trustees of the systems, and shall not be encumbered for or diverted
to any other purposes.”
10
as specified in the notice of termination.” 11
The version found in MEMA’s contracts has slight variations from the MDHS example
above. This example comes from one of ten MEMA contracts with Post Buckley Schuh &
Jernigan (PBS&J) of Atlanta, GA.
“Availability of Funds. It is expressly understood and agreed that the obligation of MEMA
to proceed under this agreement is conditioned upon the appropriation of funds by the
Mississippi State Legislature, and the receipt of state and/or federal funds. If the funds
anticipated for the continuing fulfillment of this agreement are, at any time, not forthcoming
or insufficient, either through the failure of the federal government to provide funds or of the
State of Mississippi to appropriate funds or the discontinuance or material alteration of the
program under which funds were provided or if funds are not otherwise available to MEMA,
MEMA shall have the right upon ten (10) working days’ written notice to PBS&J, to
immediately terminate this agreement without damage, penalty, cost or expense to MEMA of
any kind whatsoever with the understanding that PBS&J shall be compensated for work
performed prior to termination. The effective date of termination shall be as specified in the
notice of termination.” 12
Similarly, a Miss. Dept. of Employment Security (MDES) contract with MINACT, Inc.,
of Jackson, MS for $1,661,812.00 includes two provisions which, if carried over to PERS, would
acknowledge a power in the legislature to adjust the State’s “contract” with public employees
promising retirement benefits:
“Article 7. Availability of Funds.” [This paragraph is essentially the same as the provision
quoted above from the contract between MEMA and PBS&J.]
“Article 19. Sovereign Immunity. “By entering into this Contract with Contractor, the State
of Mississippi does in no way waive its sovereign immunities or defenses as provided by
law.” 13
The Attorney General’s special assistants assigned to most state agencies are usually
careful to make sure every state contract they review includes the “Availability of Funds”
paragraph. If a contract is for performance of services over a period of time, it nearly always
contains an “Availability of Funds” clause. It is a standard escape clause.
The routine inclusion of an “Availability of Funds” clause in written contracts indicates
that the State generally does not intend to enter a contract that will be binding upon it regardless
of a depressed economy. The State does not intend to bind itself to any contract that would
remain in full force regardless of a major drop in revenue. Rather, should the funds counted on
become unavailable, the State intends to have some relief or be released from contract.
11
Contract #48611 with the Child Welfare & Policy Practice Group of Montgomery, AL.
https://merlin.state.ms.us/CONTRACTS/NETS-7Z8VJW_48611fy10.pdf)
12
https://merlin.state.ms.us/transparency/transpredef.nsf/independentContractsB?OpenForm&Seq=
1&55150%207210#
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https://merlin.state.ms.us/CONTRACTS/NETS-7ZEMHC_20100105094435837.pdf
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If the State includes this escape clause in almost every written contract if performance
and payment are due at a distant point in time, why would parties to an unwritten, unsigned
contract with the State be in a stronger position than parties to written contracts with the State?
Under the retirement plan for public employees, terms such as contribution rates, the
minimum time in service and age at which one becomes eligible to retire, and the formula by
which benefits are calculated, were probably not intended by the Legislature to become a
contractual obligation to employees who have not yet satisfied the conditions on which the offer
of benefits was predicated. It is even more unlikely that the Legislature intended those terms to
be modifiable to the advantage of employees but to be unalterable to the detriment of employees.
Appendix:
Evidence of the Financial Condition of PERS
The total number of retirees grew by 52.1% during the last ten years. Moreover, as of a year ago
(June 30, 2010), 14% of active, contributing PERS members became eligible to retire.
The PERS fund last year paid out $1.643 billion dollars to retirees. Ten years ago, total benefits
were $655 million. That’s an increase in pay-outs of 144.3%
The total net assets held by PERS have increased by only 2.4 % compared to ten years ago.
Averaging the ten years that ended June 30, 2010, the annualized rate of return earned by PERS
investments was 2.3%. The rate of return necessary for the retirement Fund to be on sound
footing is 8%.
The total number of public employees in Mississippi has declined slightly from 167,900
employees in 2009 to 165,600 at the start of FY 2011. (This figure includes employees of public
school districts, state universities and junior colleges, cities and counties.) State agencies have
trimmed the total number of state employees by 1,700 persons during the last two years.
Therefore, contributions into the retirement fund have dwindled.
The unfunded accrued liability ("UAL") amortization period of the PERS system has grown
from 9.8 years in 1998 to 30 years at present. The Fund’s UAL amortization period exceeds the
22-year ceiling specified by the Legislature in 1999 when it authorized enhancement of
retirement benefits.
The UAL period climbed to 39.4 years before the Legislature raised the employee contribution
rate to 9% and the PERS Board raised the employer contribution rate to 12%.
Though the employees’ contribution rate was recently raised from 7.25% to 9%, and the
employer contribution was recently raised from 9.75% to12% and will increase to 12.93% on
January 1, 2012, the PERS actuary projected that the employer contribution rate that taxpayers
cover will again have to be raised to the range between 15% and 16% for the years 2012 through
2018 to keep the retirement fund solvent (at a 30-year UAL level), unless another solution is
implemented. A September 2011report by PERS likewise anticipated that the employer
contribution rate will have to increase to 14.35% over the next year to sustain the 30-year
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amortization period.
GW/gw
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