Collection of all PERS posts
The Mississippi Public Employees Retirement System continues to spin its wheels in the mud as the latest actuarial report states that the program is only 60% funded.* The Board of Trustees received the news at the presentation of the annual report at the October board meeting. The actual report and video of the presentation are posted below. The nutshell version of the report is that the numbers that should be getting smaller are getting larger while the numbers that should be getting larger are getting smaller. In other words, PERS is going in the wrong direction.
PERS faces one problem that is structural in nature. The ratio of active employees (those paying into the system) to retirees is getting worse as it declined from 2.3 active employees/retirees ten years ago to only 1.5 in 2016. That little number means PERS is forced to pay substantially more in benefits than it receives in employer and employee contributions. When the investing gods are kind, PERS can use investment income to pay the difference. However, when those same gods frown upon the PERS portfolio, then the program must dip into its assets to pay benefits - something no competent portfolio manager wants to do for obvious reasons.
The total amount of employee and employer contributions was $1.593 billion. However, PERS had to pay $2.48 billion to retirees. The deficit between the contributions and payments was $886.8 million. The money has to come from somewhere to make up the difference. There are only two sources: investment income and using assets. Look at the chart posted above. The deficit has worsened every year since 2000. That includes seven years where the rate of return was over ten percent. Let that fact sink in for a minute. The deficit between benefits and contributions worsens even when PERS' investments earn a rate of return of fifteen or twenty percent. Remember the shrieks that took place when Governor Barbour appointed a commission to review PERS and make recommendations? The deficit is now double what it was in 2011 and the funding level is two points lower.
The number of retirees continues to grow every year. There were 99,483 retirees in 2016 - an increase of 3,145 over 2015. There were only 83,000 retirees five years ago and 67,000 retirees ten years ago. The annual growth is approximately over three thousand new retirees. PERS will have over 100,000 retirees next year for the first time.
The rate of return for the PERS portfolio in 2016 was only 1.16% but it did track the market (The S&P 500 was 1.23%), a small consolation. Make no mistake, the Great Recession dealt a cruel blow to PERS but PERS did enjoy some very nice market returns afterwards.** PERS dropped its assumed rate of return last year from 8% to 7.75%. PERS also uses a five-year smoothing technique for incorporating the rate of return into its assumptions. PERS "smooths" the rate of returns so one great or horrible year doesn't skew things. The average return for the last five years was 7.3%, more than half a point below the assumed rate of return.
The investment income was only $217.8 million - not enough to cover the $887 million deficit. Thus PERS had to dip into assets to pay benefits. The total assets of the PERS portfolio fell from 24.8 billion last year to 24.1 billion in 2016.
What does all of this mean? It means the funding level of PERS fell slightly to 60.0%. The unfunded liabilities increased nearly a billion dollars to $16.8 billion in 2016. Such performance yields a chart that looks like this:
A funding level of 80% is considered to be the minimum level for a well-funded public employees retirement program. The problem PERS faces are structural in nature as stated earlier. The number of retirees continues to grow. The contributions are not enough to keep up with the benefits payments. Everyone is happy when PERS enjoys a double digit return in the markets but it is unreasonable to expect that to happen on a regular basis. Mississippi has the tenth worst-funded public employees retirement system in America yet no one in Mississippi wants to even discuss PERS.
The problems for PERS began in 1999 when Tim Ford and his crew decided to increase benefits without, as PERS Executive Director Pat Robertson used to say, finding a way to pay for them. The stock market would give us double-digit returns forever. PERS would always be a land of milk and honey for retirees. Easy enough to do when the number of retirees is around 50,000, not so easy when they are over 100,000. However, no one wants to discuss PERS. Its easier to make a two degree course correction 50 miles away from an iceberg than it is to turn 90 degrees when the iceberg is in front of one's face. However, this is Mississippi where we push off all problems to tomorrow and like our reality to be filled with sand as we bury our heads in it.
*The 60.0% funding level is based upon actuarial market value. The funding level is 57.5% if one uses the actual market value of the assets. The unfunded liability is actually another billion dollars higher if the actual market value of the assets is used.
**Here are the market returns for PERS since 2000:
Five year average: 7.3%
Average since 2000: 5.9%
Kingfish note: No other media was at the PERS board meeting when the annual report was presented. Apparently $25 billion in assets and $42 billion in liabilities are not enough to get their attention.
JJ does not oppose a public employees pension program per se as some do- if the numbers can work. However, ignoring PERS is done at our peril. The legislature increased the employer contribution rate a few years ago with little effect on the financial picture of PERS. This website is not claiming PERS is about to blow up or go broke. However, it is irresponsible to ignore these reports and pretend everything will be just fine if things are left alone. Moody's and Fitch aren't ignoring them.