Jackson Jambalaya

The Senate passed a resolution (SCR #678) on March 30 that would establish a commission to study PERS if enacted. The commission would be comprised of four members appointed by the Governor, four non-legislative members appointed by the Lieutenant Governor and Speaker of the House, two members of Senate Finance Committee, and two members of House Appropriations Committee. The Governor appoints the chairman. The commission will submit a report to the Governor by December 1, 2011.

Senator Walter Michel said "this is an attempt to bring some independent, private sector expertise to PERS and examine the system." Senator Michel said there was some "push-back" from some Senators who wanted to add state employees (who would have a slight conflict of interest) to the commission so as to dilute the private sector component.

Senator Dearing indeed tried to sabotage the commission by offering an amendment making Pat Robertson, the Executive Director of PERS, chairwoman. Senator Dearing's tried to stuff the commission with state employees by offering an amendment changing the composition of the commission. His commission would consist of nominees appointed by IHL, the Department of Education, the State Board of Community Colleges, four members appointed by Governor and one of those had to be a state employee, two non-legislative members appointed by Speaker and one of them had to be a current PERS recipient, and two non-legislative members appointed by Lieutenant Governor and one of them also had to be a current PERS recipient. The legislative appointments would have remained the same as in the original resolution.

Dearing's amendment failed and the resolution now awaits action from the House.

Meanwhile, the annual report for PERS was released in November. Some quick notes about the report:

• The annual rate of return for 2010 was 14.1%. Sounds great until you realize the rate of return in 2009 was -14.1%. This was probably what we call a "dead cat bounce" (when the market recovers from a sharp decrease in performance) and should not be considered to be an accurate indicator of future returns.
  
• The "defined benefit plans administered by the System were actuarially funded at an average of 65.1% as of June 30, 2010, a decrease from the comparative average of 69.8% as of June 30, 2009." See note 6 of report.
• Total system investments are $16.8 billion as of June 30, 2010. Increase of $1.3 billion over prior year.
  
• Equities showed a 17.3% return while Treasuries showed 12.0%. (Kingfish note: A bubble probably exists in Treasuries, so keep that in mind.).
• Asset allocation: 47.8% in equities, 23.4% in Treasuries, 4.6% in real estate, and 19.5% in foreign equities. The remainder is divided up among various asset classes.
• As of June 30, 2010, "the funded status of the plan decreased to 64.2% from 67.3% at June 30, 2009. The amount by which PERS' actuarial assets were less than actuarial benefit liabilities was $11.3 billion at June 30, 2010, an increase in unfunded actuarial liabilities of $1.3 billion over June 30, 2009.
• The total assets on June 30 are $21 billion. (p8, p. 13) The total liabilities are $4.2 billion. This is important to remember. RIGHT NOW the system is in surplus. The debate comes over FUTURE liabilities and the funding level for those liabilities. I am pointing this out because this is where columnists like Bill Minor screw things up and get the facts wrong. the system is not broke nor close to being broke right now. However, the unfunded liability is a problem and needs to be addressed now. Unfortunately, our leaders are choosing to kick the can down the road.

It is important to realize one can get a false picture of a retirement system such as PERS by focusing on a one or two year snapshot of market returns and one should look at the twenty or thirty year average when discussing PERS. Ms. Robertson wrote this letter to the Clarion-Ledger in response to Bill Minor claiming PERS was in serious trouble:

"The investment return for the fiscal year that ended June 30, 2010, was reported correctly at 14.1 percent. However, Mr. Minor's reference to the -5.5 percent three-year return, 2.1 percent five-year return and 2.3 percent 10-year return were actually annualized returns and not year-specific. While the system aims for an 8 percent annual return, a more accurate annualized depiction of the system's overall performance is its 20- and 30-year returns, which are 7.4 percent and 8.7 percent, respectively. We are focused on how we perform over many years, not just within pockets of time."

It was enjoyable watching Ms. Robertson taking Mr. Minor to school on basic financial principles, of which Mr. Minor is clueless. However, Ms. Robertson wrote this additional letter in response to other reports of PERS's funding level dropping to 64.2%:

"In fact, based on the June 30, 2010, valuation report prepared by consulting actuary Cavanaugh Macdonald Consulting, LLC (CMC), PERS is projected to have sufficient assets to pay all current and future promised benefits. We are not projected to, nor will we, run out of money by 2023 as reported in The Economist.

Yes, we are living in turbulent economic times, and yes, many public pension systems in the nation are facing difficulties. Admittedly, PERS is not as well funded as it should be or as we would like it to be. Our current funded status on an actuarial basis is 64.2 percent, while 80 percent is the benchmark considered by many to constitute a well-funded plan. Furthermore, the actuary makes certain assumptions when computing liabilities and projecting future assets. These assumptions include that PERS will earn 8.0 percent on its investments over time and that the covered employers (i.e., cities, counties, public school districts, community colleges, universities and state agencies) will contribute at the rate required to fund all promised benefits.

The actuary has projected the need for continued increases to the employer contribution rate over the next several years. However, on a more positive note, PERS earned 14.1 percent on its investments for the fiscal year that ended June 30, 2010, and 10.7 percent through the first three months of this fiscal year. Investment returns like these, that exceed 8.0 percent, may help to lessen the degree to which contribution rates will increase in future years.

Understanding the need for continued employer contribution rate increases requires understanding how PERS reached its current funded status. In June 1998, PERS’ funded status was 85 percent and projected to be 100 percent within 10 years. This led to benefit improvements being enacted in 1999 with the expectation that those improvements would be funded by continued investment gains. Since June 30, 1998, PERS’ accrued liabilities have more than doubled to $36.4 billion as of June 30, 2010, (of which $11.3 billion represents unfunded accrued liabilities) due to growth in the number of retirees, improved mortality rates, the compounding effects of benefit improvements and an investment return over that time period of substantially less than 8.0 percent." Letter on PERS website

Yes, we are in good shape. Yes, we can meet our obligations. Yes, we have decent returns this year. But, we might require an increase in contributions, you understand. Sounds like the Senate understood and said we need to take a real long look at PERS. It will be interesting to see what the House does.