Mississippi’s defined benefit pension fund’s fiscal position worsened after worse than average investment income in 2019 and changes to the way the staff forecasts its future finances, according to the fund’s annual report released on Wednesday.

The Public Employees’ Retirement System of Mississippi — which serves most state, county and municipal employees — now has an unfunded liability of more than $17.6 billion. Last year, it was $16.9 billion.

PERS’ actuarial staff lowered the plan’s future inflation assumption and the amount of salary increases for contributing member, which helped the unfunded liabilities increase by nearly a billion dollars.

The plan’s funding ratio, which is defined as the share of future obligations covered by current assets, shrank from 61.8 percent in 2018 to 60.9 percent, just a tick below 2017 (61 percent). While the plan’s obligations won’t be due all at once, the funding ratio presents a good view of the plan’s financial health.

The general fund tax revenue for the entire proposed state budget for fiscal 2021 is $5.85 billion. Filling PERS’ present unfunded liability would take three years of that revenue.

PERS funding ratio 1998-2019

1998200220062010201420182019
85%83.4%73.5%64.2%61%61.8%60.9%

The reason for the worsening financial situation is two-fold: Less money coming in from the plan’s investments and more benefits paid out to an ever-increasing number of retirees.

PERS earned $1.701 billion or a 6.64 percent rate of return on the plan’s investments, after earning $2.385 billion or a 9.48 percent rate of return in 2018.

The plan’s annual average expectation is 7.75 percent return from its investments. 

The number of retirees increased from 104,973 to 107,844, a difference of 2,871. The number of active members largely held steady, decreasing just slightly from 150,687 in 2018 to 150,651 in 2019. The ratio of active employees to retirees remained at 1.4 for the second consecutive year.

Benefits paid by PERS to retirees increased by $138 million over last year to $2.7 billion, an increase of 5.3 percent from 2018.

With more retirees and more paid out in benefits than last year, the amount paid as a cost of living adjustment to PERS retirees increased again. 

Last year, the plan paid $650 million in COLA to beneficiaries. This year, that amount grew 7.6 percent to nearly $700 million. 

As a percentage of benefits paid, the COLA grew from 24.9 percent of benefits paid in 2018 to 25.4 this year. 

PERS provides a cost of living adjustment that amounts to three percent of the annual retirement allowance for each full fiscal year of retirement until the retired member reaches age 60.

From that point, the three percent rate is compounded for each fiscal year. Since many retirees and beneficiaries choose to receive it as a lump sum at the end of the year, the benefit is known as the 13th check.

PERS unfunded liabilities (in billions)

2009201020122014201620182019
$9.99$11.26$14.5$14.45$16.81$16.94$17.6

PERS actuaries forecast that the plan’s funding ratio — provided that the plan’s investments average 7.75 percent over the next 28 years — will be up to 83.2 percent funded by 2047. 

If the plan’s finances average 6.25 percent rate of return, the plan would dip below 50 percent on its funding ratio by 2034 and bottom out slightly above 25 percent by 2049.

Change is possible

The dire situation does not need to continue.

Lawmakers should freeze the program’s overly generous COLA for three years or more. Then either tie it to the Consumer Price Index, which has recorded a rate of inflation of 2.18 percent since 1999 or go back to the old way of computing the COLA as 2.5 percent of the original benefit. 

One alternate solution is mimic South Dakota’s approach to its COLA. This state indexes its COLA to the CPI and to the plan’s funding ratio — which is defined as the share of future obligations covered by current assets. 

South Dakota has a minimum COLA rate of 2.1, when plan funding level is below 80 percent and a maximum of 3.1 percent when the plan is funded above 100 percent. 

New hires should be transferred to a 401k plan that would increase employee contribution rates and allow them to have more control and portability over their money. 

By Increasing the employee contribution rate (which now is 9 percent), this would better balance contributions by taxpayers, which have increased eight times since 1990 versus only twice for employees. Only the legislature can authorize an employee contribution increase for PERS and haven’t done so since 2009. 

The state retirement system does not need to be unfunded. But it will require action.