Should Retirees Trust Legislators to Properly Handle PERS?

“If what Mississippi politicians – precisely the Legislature and then-Gov. Kirk Fordice – had agreed to in 1999 had come to fruition, the state would now have a health care trust fund of an estimated $4.79 billion with $232.6 million available to spend this year,” wrote political reporter Bobby Harrison in the Northeast Mississippi Daily Journal. Alas, he said, “as of today, the state has no health care trust fund. The Legislature has spent all the funds that would have gone into the trust fund.”

There’s another, much larger trust fund the Legislature has financial responsibility for along with the Public Employees Retirement System board of directors. That’s the PERS retirement fund.

Given what happened to the health care trust fund, should retirees be worried?

While not depleted, the PERS retirement fund is far from adequately funded. On September 23rd, Bloomberg News listed the PERS fund among the ten most under-funded retirement plans in America. PERS’ most recent financial report shows its funding level at just 60.4%.

Fitch Ratings has expressed concern about PERS’ unfunded liabilities. “Unfunded pension liabilities, measured as a percent of personal income, are among the highest of the states.”

In August, Fitch downgraded Mississippi’s credit rating for upcoming bond issues. In July, Moody’s lowered Mississippi’s credit outlook to “negative.” Budget issues were part of the rationale for the ratings issues, but both ratings services cited the state’s high debt level resulting from its huge, unfunded pension liability.

One of the big challenges PERS faces comes from growing numbers of retirees drawing money out while declining numbers of employees pay into the fund.

Because of this, Mississippi says PERS “is in serious jeopardy.” It reported that every year since 2005 the number of retirees has increased while every year since 2009 the number of active employees has decreased.

This mismatch is likely to get worse with budget woes limiting new hires and a high percentage of active employees nearing retirement age. Only 37.8% of active employees are under forty, the story reported.

The level of funded liabilities depends in large part on investment returns each year. Below target returns add to the unfunded shortfall. PERS’ targeted average return to meet its obligations is 7.75% (adjusted down this year from 8%). But PERS’ investment report for June 30, 2016, showed an annual return of just 1.15%. Its five-year average return of 7.16% was 59 basis points below the 7.75% target, indicating unfunded liabilities should increase this year.

Several years ago PERS upped employer contributions to 15.75% and employee contributions to 9% of salaries, saying these high funding rates would bring funded liabilities back to 80% within 30 years. So far, little gain has been achieved.

Meanwhile, legislators have shown great fear when it comes to making hard decisions regarding PERS’ financial stability. Given how they mishandled the health care trust fund, retirees should be wary that legislators will mishandle the PERS retirement fund too.

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