A non-partisan group says the time to fix Mississippi’s defined benefit pension system is now and they also have solutions to get the plan’s finances under control.
Analysts from the Reason Foundation’s Pension Integrity Project held a webinar recently on the issues facing the Mississippi’s defined benefit pension system. The group offers pro bono consulting to public officials to help them identify problems with their plans and implement reforms that make them more solvent.
The Public Employees’ Retirement System of Mississippi (PERS) serves most state, county and municipal employees and was in serious financial jeopardy even before the COVID-19 related economic shutdown. As of the last year’s comprehensive annual financial report, PERS has an unfunded liability of more than $17.6 billion or three years of all general fund tax revenues. The plan is only 60.9 percent funded.
The group said the funding ratio for PERS could be in the 50s by the end of this year because of the economic downturn from the COVID-19 pandemic. The last time the plan was that low was in 2013, when it was only 57.7 percent funded. While the plan’s bills won’t come due all at once, the funding ratio is a useful tool to evaluate a plan’s financial health.
The group recommends that policymakers do several things to repair the damage to PERS. First would be to change the assumed rate of return and other assumptions to a more realistic expectation. Also, a plan needs to be established to pay off the $17.6 billion in unfunded liabilities as soon as possible. The group also recommends that policymakers adopt a system that would allow employees who leave government work the chance to earn some income from their contributions. The group also recommends changes to the plan’s cost of living adjustment.
Jen Sidorova is a policy analyst for the Pension Integrity Project. She said main factors for the huge shortfall in the plan’s finances are underperforming investment returns, insufficient prefunding and negative amortization, inaccurate demographic assumptions and miscellaneous gains and losses.
One problem with PERS is that the investment return expectation has been too high for years, which is critical to future planning by the plan’s administrators. Until 2015, PERS had an expectation of 8 percent in annual returns on its investment portfolio. The PERS board reduced that to 7.75 percent, but that’s still too high considering that underperforming investments have added $6.8 billion to the plan’s unfunded liability.
From 2001 to 2018, the plan received an average of 5.8 percent return on its investments, well below the 7.75 percent figure. The last five years of the bull market on Wall Street (9 percent returns) haven’t been enough to increase the plan’s funding ratio out of the 60 percent range.
Sidorova said this is a common problem for pension plans.
The amortization length for PERS is far too long, as the plan’s amortization payments are not sufficient to pay the interest on the plan’s unfunded liability. The national Board of Actuaries recommends funding periods of 15 to 20 years. PERS’ amortization period is up to 35.3 years. Sixty percent of 2019 contributions from PERS members went to pay off pension debt and 40 percent went to cover future benefits. These issues add up to $3.7 billion to the plan’s unfunded liability since 2001.
Inaccurate demographic assumptions — the number of new contributing employees, longer life expectancies for retirees and more members heading for retirement — have contributed $3.4 billion to the plan’s unfunded liability since 2001.
As for the miscellaneous gains and losses, Sidorova said that PERS records aren’t detailed enough to completely explain how the plan lost $2.1 billion. She said those reasons include data adjustments and timing and financial transactions.
The Reason analysts also discussed the so-called 13th check for PERS retirees that has become one of several issues dragging down the plan’s finances. PERS provides a cost of living adjustment that amounts to three percent of the annual retirement allowance for each full fiscal year of retirement until the retired member reaches age 60.
From that point, the three percent rate is compounded for each fiscal year. Since many retirees and beneficiaries choose to receive it as a lump sum at the end of the year, the benefit is known as the 13th check. The analysis performed by the Pension Integrity Project shows that the average COLA for PERS adds up to nearly 26 percent of the benefit value.
Zachary Christensen is a managing director of the Pension Integrity Project and a senior policy analyst at the Reason Foundation. He says PERS doesn’t have a COLA, which tracks inflation and the price of goods and services in the economy. Instead, it has an automated, autopilot benefit increase since it is a fixed number.
Christensen suggested that there is room for compromise between the extremes of not having a COLA and the present system and he used the example of New Mexico. The Pension Integrity Project helped guide needed reforms there as they have in several other states.
In the Land of Enchantment, analysts got public sector unions to sign off on reforms that increased the employee and employer (taxpayer) contributions by two percent of payroll over four years and changed the plan’s cost of living adjustment from a fixed two percent annually to a model where granting a COLA is dependent on investment performance and the plan’s funding status.
Mississippi’s COLA is unsustainable, increasing from $103 million in 1999 to nearly $700 million in 2019. From 2018 ($650 million in COLA payments) to 2019, the amount paid to beneficiaries grew by 7.6 percent.
As a percentage of benefits paid, the COLA grew from 24.9 percent of benefits paid in 2018 to 25.4 percent in 2019.
PERS is not a powerful lure for the state to hire and retain quality workers. According to the analysis of data from PERS, 71 percent of all new workers leave before they vest with eight years of service, which means they forfeit all contributions made to the plan on their behalf. Eighty nine percent of new workers leave before they reach 20 years of service. Only four percent of PERS members remain in the system to receive full benefits, while 11 percent receive partial benefits (gained after vesting).