Monday, September 30, 2019

Bigger Pie: Is PERS Fair to Current Employees?

Mississippi’s defined benefit pension fund, the Public Employees’ Retirement System of Mississippi (PERS), needs serious reform if it is to be the robust and financially stable system its retirees and current employees are counting on.

 PERS’ funding ratio — which is defined as the share of future obligations covered by current assets — warrants serious concern by its beneficiaries both current and especially future beneficiaries yet to retire.

PERS has benefitted greatly from the bull market in stocks that ran from 2009 to 2019, but that record run in stocks has not improved the funding ratio of the PERS portfolio in a meaningful way.

On June 30, 2009 in the early days of the bull market, the PERS funding ratio was 67 percent.  Nine years later on June 30, 2018, the funding ratio had dropped to 62 percent even as the Dow Jones Industrial rocketed from 8500 to 24,200.

A key reason PERS is struggling despite above-average stock market returns is its 3 percent cost of living allowance (COLA) that is one of the most generous in the country.  A COLA is designed to allow retirees’ purchasing power to remain the same despite inflation.

The PERS COLA is often called the 13thcheck since most PERS retirees opt to receive their entire COLA in one check at the end of the year rather than have it distributed evenly across their monthly checks.

The way PERS works is state and municipal employees to include teachers, pay into the system at a 9.0 percent rate while employers (taxpayers) contribute at a rate of 17.4 percent.  In 2019, the rate was increased to 17.40 percent at the PERS Trustees request to address the funding shortfall. This money, along with the returns on the plan’s investments, is supposed to be enough to cover benefits for retirees and ensure the pool of money that PERS invests is sufficient for both current and future retirees.  But that isn’t working out.


 Several challenges have prevented PERS from reaching a healthier funding ratio of 85 to 100 percent.  First, falling interest rates have limited the returns from fixed income in the portfolio.  Second, the increasing number of retirees has increased distributions from the portfolio. Third, but most important has been the very generous three percent COLA granted by the Board of Trustees on an annual basis since 1999.  Three percent compounding over 20 years on an increasing base of retirees adds up.  In 1999, the COLA payments from PERS were $103,263,000.  By 2018, they had increased 530 percent to $650,465,578.  COLA payments will only get higher.

To put that in context, in 2018, PERS collected $1.6 billion in employee and employer contributions and paid out $2.6 billion in distributions. This negative cash flow of $1 billion necessarily reduces the funds available for investment returns.

A critical question for current and future PERS retirees and the state of Mississippi is this:  Can PERS continue to pay its retiree obligations, its generous and growing COLA (13thcheck) and also rebuild its corpus to be there for the current employees who will be retiring in the decades to come?

Doing nothing and just kicking the PERS can down the road is not fair to Mississippi’s current and future teachers, firefighters, police officers, highway patrol officers, professors and other public servants.

This post was sponsored and authored by Bigger Pie Forum. 

29 comments:

Anonymous said...

Quick answer - prolly not.

Anonymous said...

Post about half a billion in management fees: crickets.

Post about cutting that 13th check down to something manageable: fireworks.

Can’t wait to see how many participants light up BPF over the crazy idea of cutting expenses to keep the plan solvent. No doubt the state employees/retirees will ignore that billion dollar shortfall this year.

Anonymous said...

What does our State Leadership lack? Leadership.

Nothing will get done until the wheels fall off. Then the finger pointing will start and they will all claim to be surprised and unaware of the problem.

Anonymous said...

MHP has an entirely different retirement program, so try again.

Anonymous said...

The Highway Patrol has their own retirement, which is administered by PERS, as does the legislature.

Anonymous said...

Will the last to leave the room please turn out the lights?

Anonymous said...

How about all the retirees that come back on contract to double dip. How about contract workers making what a full time worker makes but only working three days a month and not paying into peers.

Anonymous said...

Who cares? The only thing more worthless than a state employee is a state employee retirement system employee. There is zero accountability for return on investment using my tax dollars confiscated from my wealth by the State of Mississippi

TWO SMART GUYS said...

Two Smart Guys

For anyone that missed our debate with a money manger in the post "Retirees Smear JJ" and "Bigger Pie Forum: Mississippi Overpays on PERS Management Fees" we modeled a major component to the mismanagement of PERS. We have not done analysis regarding impact of cost of living payments, but would state that retirees must receive adjustments for inflations. While this topic is fresh we will resurface this information one last time in hopes of educating stake holders. Obviously there are some pretty smart folks commenting on the topic which gives hope, however in one of these threads a self-serving money manager tragically tried to make a case for his existence.

https://kingfish1935.blogspot.com/2019/08/retirees-smear-jj.html

https://kingfish1935.blogspot.com/2019/09/bigger-pie-forum-mississippi-overpays.html

We argue that PERS would have been much better off over the last decade without active fund managers. Possibly to the tune of +$3B (Billion) in assets. We used a passively managed Vanguard Balanced Index Fund (VBAIX) as an example. Ultimately we argue that hundreds of millions of dollars are being wasted on the services of over 40 money managers. We argue that PERS should get rid of all money managers and move assets into passively managed funds with no overlap. Money managers claim they provide value in mitigating losses during market downturns. Let's take a look at that:

PERS lost 19.4% during the 2008-09 fiscal year (recession), during this same period VBAIX only dropped 13.14%. PERS (managed by "professionals") LOST 6.26% more than VBAIX during the same period. Tate Reeves (currently running for Governor) was on the PERS Board during this period of underperformance, which continues under current leadership. We would advocate a financial literacy test to become a board member.

Money managers claim to be able to do something magical for investors to prevent losses during market downturns. PERS had dozens of these people managing money during FY2009 and still managed to underperform VBAIX by 6.26%. This is precisely the time when the money managers should be able to provide the value they claim to provide. When you are dealing with $20-$30B (Billion) these percentages are tremendous. An even larger problem is that they also significantly underperformed the market during the subsequent recovery as well, likely to the tune of $3B (Billion). Bad management in both directions...


Listed below are the FY2009 values with quarterly dividend reinvested, and subsequent calculated return for:
VBAIX (Vanguard Balanced Index Fund 60/40, Institutional)
---------------------------
7/01/2008: Open $20.39
09/25/2008: $19.62 Dividend: $0.149 Dividend% 0.76
12/26/2008: $16.24 Dividend: $0.163 Dividend% 1.00
03/26/2009: $15.88 Dividend: $0.137 Dividend% 0.86
06/25/2009: $17.02 Dividend: $0.122 Dividend% 0.72
06/30/2009: Close $17.03
---------------------------
16.48% (minus yield of 3.34%), a loss of 13.14% as compared to a PERS loss of 19.4%

Greater savings can be achieved by PERS manually maintaining a 60/40 balance using Vanguard Total Bond Market Institutional Plus fund (VSMPX) at 0.02% expense ratio and Vanguard Total Bond Market Institutional Plus fund at 0.03% expense ratio. The use of these two funds with minimal management effort are estimated to save PERS approximately $100,000,000 (one hundred million) per year in management fees.

An argument was made that it is too risky to place $28.2B (Billion) in one financial institution (Vanguard). Our response is that Vanguard has $5.3T (Trillion) in assets under management. We would trust it a bit more than the assortment of 50 advisers handling PERS assets. However, an alternative option is to place half in Fidelity index funds, or distribute a third to Blackrock index funds using identical holdings across institutions.

Anonymous said...

Cutting the number of public employees is a problem that is not addressed. Fewer employees means fewer people paying into the system. Worse is the fact that lower-paid workers are the jobs that are being cut/privatized. Those are jobs with high turnover. When an employee leaves before retirement, the system keeps the "employer" portion of their contribution. The employee is refunded the "employee" portion. So the system makes a great profit on high turnover employees.
But those jobs are disappearing.

Anonymous said...

11:20 - If it works for Warren Buffet it should work for the State of Mississippi.

Anonymous said...

I know of at least one supervisor who was just shy of retirement from his part time gig. So what to do? Well become a basketball coach for a couple years till your fully funded.

This mess would be funny if it wasn't our money. I say our because we will all be bailing this mess out.

Anonymous said...

If you live off the tax payer dime while talking about how you are self made and pulled yourself up by your bootstraps all while trying to game PERS you might be a redneck.

Anonymous said...

Questions:
Who are these money managers?
How did they acquire the business - What and Who are the relationships they have with elected officials and state agency leaders?
How much are they making?

Not a smart guy but I can read said...

Two Smart Guys. Is there nobody on the PERS board that can figure this out? 50 advisors??? All u need to do is look at the numbers. Its not rocket science.

I wish u would put ur name so i could vote for u for governor. I cant vote for either of the dishonest idiots running as D and R.

Anonymous said...

If the advisors are really that good, why are they working for someone else?

TWO SMART GUYS said...

TWO SMART GUYS

You guys are all asking the right questions. Hopefully enough people read this forum to make change.

As for Governor (thanks for the vote of confidence), but only one person can hold that office and we find the Two Smart Guys are better than one.

Our interests are not political as we do not cling to one party. We have interests in finance, science and technology and applying our research for the greater good of Mississippians and humanity in general. At some point we may come out and start a podcast or blog of our own but until then we appreciate the forum this website provides.

Anonymous said...

Of course its broke and this article hits one of the key points. The people drawing money out of the system have been getting 3% raises annually while the people paying into the system have gotten little to no raises. Basic math problem when you compound that over 20 years or so.

One group should not get COLA while the other doesn't. They should move in lock-step.

Anonymous said...

The advisors are merely the middle man to money managers. Skip the advisor and go to the money manager and get rid of the excess fees.

Tried once to have PERS follow the same regulations as other retirement plan custodians, but you can't even get them to send you the portfolio holdings.

Anonymous said...

I remember when my father received his last 13th check after being retired for
38 years. The 13th check was greater than his retirement for the entire year. This may be an outlier but it would take legislative action to cut or even reduce the 13th check. Maybe the legislature could dissolve the double dipping
legislative retirement system and put the funds in the State employees retirement system.

Anonymous said...

As a current retiree I too am concerned. The last thing I want to happen is to be 75-80 years old and be told the system is broke and can no longer pay retirees. All current retirees should be concerned. I agree the 13th check and the way it is calculated is a big part of the problem. I also realize that making any changes that would affect current retirees is politically difficult. Changes should be made in the way cost of living adjustments are made for future retirees to make the system financially secure for all retirees and if necessary for current retirees. The choice of accepting changes or no longer having any retirement benefits at all is an easy one for me.

Anonymous said...

I'm too lazy to go back and look, but whoever said this problem won't be addressed until it blows into a million pieces was right. Reelection is WAY more important to state legislators than trying to fix PERS.

The Vanguard salesman is right as well.

Anonymous said...

Kingfish's Censorship-Radar is active this afternoon.

Anonymous said...

4;51,

You have a billion dollar shortfall, THIS YEAR. I’d say adjusting cola for current retirees is necessary.

Anonymous said...

I remember when inflation was around 6% and the retirees were begging for the COLA to be indexed to inflation. The System said, "No,no. Inflation averages 3% so that is what you will get." And when inflation comes back around (which is inevitable considering the amouts of money dumped in the economy as "stimulus") all will correct itself and the retirees will be for it and the System will have none of it.

Anonymous said...

Another thing that negatively affected PERS was the increase to benefits the legislature gave in 1999 along with the fact they made the increase retroactive to existing retirees. Someone with 40 years of service received 20% more retirement benefits than they did before.

It was an election year, PERS was close to 100% funded, and the legislature found a way to buy votes. We're still paying for it.

TWO SMART GUYS said...

TWO SMART GUYS

Vanguard makes sense as an example because they have the lowest fees in the industry. Even a 1.0% fee could erode away 30% of a portfolio over thirty years. For this reason we advocate achieving much lower fees (0.02% - 0.03%, dramatically lower than 1.0%).

Also the investors in each Vanguard fund effectively own and control the fund as opposed outside investors. We did however suggest reducing risk with similar savings by using identical holdings at Fidelity and/or BlackRock. We honestly do not work in finance or for an investment company. This subject matter is not even remotely close to our day jobs but we possess expertise in this area.

From Investopedia:

Vanguard has a fairly unique structure in terms of investment management companies. The company is owned by its funds. The company’s different funds are then owned by the shareholders. Thus, the shareholders are the true owners of Vanguard. The company has no outside investors other than its shareholders. Most of the major investment firms are publicly traded.

Vanguard's structure allows the company to charge very low expenses for its funds. Due to its scope of size, the company has been able to reduce its expenses over the years. The average expense ratio for Vanguard funds was 0.89% in 1975. That number dropped to 0.11% by 2017.

Some experts believe Vanguard’s structure allows it to avoid conflicts of interest that are present at other investment management firms. Publicly traded investment management firms must cater to their shareholders and the investors in their funds.

--
Leadership is likely reading this forum, and they are likely invested in PERS. As they themselves are PERS stakeholders, it would be self-destructive for them ignore our advice. We can only look back in ten to twenty years and say "We told you so."

Anonymous said...

When you're traveling at 74 mph and drop a car tire off the pavement for a moment, you wait a hundred feet, the problem self-corrects, the adrenaline relaxes and you're still on your way.

Some would suggest hiring contractors, tearing out a two-mile stretch of highway, hauling in concrete, hiring flagmen and people to lean on shovels, rebuilding the road and holding a press conference.

Re-read 11:56.

Anonymous said...

It hasn't been too long that I saw what the average retiree monthly check was and it wasn't much. If I remember is was around 12-13,000 annually. One thing that could be done immediately is to average all the years of service instead of the highest four. There are plenty of cases of high paid folks getting raises to help with their four highest years- the university and K12 system when they are already making 100,000 plus. A lot of those employees started off making pennies as educators so if you averaged it you would solve part of your problem immediately. The other is gradually moving the retirement age back each year until you get to 65 and therefore eliminating much of the compounding problem with the COLA. The COLA doesn't start until 55 now. Raise it to 56 this year and add a year or two every year until you get there.

And, I am in the system and married to a retiree.

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