A report requested by the state auditor’s office conducted by a respected policy group with expertise in pensions found the state’s defined benefit pension system is struggling compared with ones in other states.
State Auditor Shad White’s office released a study that was conducted by the non-partisan Pew Charitable Trusts about the Public Employees’ Retirement System (PERS) of Mississippi, which is the retirement fund for most state and local employees.
The report found that lower than expected investment returns have been the largest source of increasing pension debt and increased annual contributions to the fund have been less than the amount needed to improve funding levels. According to 2017 data, Mississippi is near the median in terms of investment fees.
The report also said PERS’ overly optimistic expected rate of return on its investments (7.75 percent) won’t be met for over the next 20 years. Pew estimates a return of between 6.2 percent and 6.6 percent. Pew also says the state’s assumed rate of return is higher than all but 13 states.
Pew ranked the state 39th worst for funding ratio (which is defined as the share of future obligations covered by current assets), with the national average of 72.5 percent. In 2000, PERS was 90 percent funded.
It also ranked the state eighth from the bottom in terms of operating cash flow to assets ratio. The report found the number to be negative 4.38 percent, much lower than the national average of negative 3 percent.
Pew researchers also said significant increases in required contributions due to lower than anticipated investment returns might be likely, requiring an estimated infusion of $200 million. The accounting firm that advises the PERS governing board has recommended the board increase the employer (taxpayer) contribution rate for the second time in three years.
The last rate increase (from 15.75 percent to 17.4 percent) cost the state an additional $73 million annually, with local governments chipping in $25 million each year. The report recommends a 19.6 percent contribution rate for taxpayers if the present investment income estimate is maintained.
Going lower (7.5 percent) would require a 20.5 percent employer contribution according to the report, while 22.25 percent would be required if the 7.25 percent investment income assumption becomes PERS policy.
Employees have not had their contribution increased in more than a decade when it was increased to 9 percent.
The report also warns of issues with the funding ratio if the contribution rates go unchanged and investment returns continue to perform below expectations. Pew researchers predict if the plan’s assets generate investment returns of 5 percent, the plan’s funding ratio would decline from the 59 percent now to 48 percent by 2030 before rebounding slightly to 49 percent by 2040.
A more dire scenario would involve negative returns over the next two years, a three-year recovery and 5 percent returns in 2026 and beyond would leave the plan down to 44 percent by 2030 before a rebound to 49 percent by 2040.
Lawmakers continue to avoid any reforms to PERS. There were eight bills related to PERS filed this session, with most either to cut off those who were convicted of job-related felonies from receiving benefits or to allow lawmakers to collect their pensions while serving in the Legislature. All those bills died in committee.
PERS was in jeopardy even before the COVID-19 pandemic hit, according to the fiscal 2020 financial report.
PERS’ net position decreased by $393 million (1.4 percent) due to the fund’s investments earning only 3.35 percent ($844 million). The pension’s unfunded liability increased to $19.4 billion.
The plan’s investment income was down 49.6 percent compared to the year before and the plan’s net position was $27.8 billion, a decrease of $379 million (1.3 percent).
Last year, the unfunded liability was $17.6 billion and the year before, $16.9 billion. The plan earned a 6.64 percent rate of return on its investments in 2019 ($1.7 billion), which is still below the plan’s annual expectation of 7.75 percent.
