There has been a lot of press lately about Mississippi’s Public Employees Retirement System (PERS) and the stability of the program. Governor Barbour appointed a special commission to study the system. Here is a recent Clarion-Ledger article on the topic.

Much of the focus—and pretty much all of the Clarion-Ledger’s focus—has been on the future stability of the “13th check”, which provides an extra check at the end of the year for a cost of living increase in retirement benefits.

Ted Carter with the Mississippi Business Journal’s report on the issue focused on the question of whether the PERS assumed rate of investment return is sustainable. I believe that Carter’s focus is correct and the investment return issue is the 600–pound gorilla with PERS—not the 13th check. MBJ’s article states:

The study commission has hired GRS Actuarial and Consulting Services of Southfield, Mich., to help with the panel’s audit recommendations and other proposals.

Schloegel said GRS and the panel will scrutinize PERS projections that the system can maintain returns of 8 percent on investments. “We want to know whether that needs to be looked at and challenged,” he said.

Tim Medley, a speaker and principal of Jackson financial advisory firm Medley & Brown, said 8 percent is “ambitious.”

The PERS Trust, the system’s policy board, should have more investment specialists serving on it and PERS itself should have at least “10” investment analysts rather than the single one it now has, Medley said.

Medley was being nice calling the 8% investment assumption ambitious. A more appropriate term would involve profanity, so I’ll call it hog-wash.

Presumably, money paid into PERS by participants is invested in a combination of stocks and bonds. Care to take a guess on the average return of the S&P 500 for January 1, 2000 through December 31, 2010? 2.4%. In fact, the S&P today is at 1162, a level hit first it in 1998. Think about that. $1,000 invested in an S&P index fund in 1998 is now worth….$1,000.

Stock market returns are fueled by economic growth. If the economy is growing at all—which is up for debate—it’s not by much. And experts predict anemic economic growth could be with us for another decade as we recover from the 2008 financial crisis.

What about bonds? The Vanguard Total Bond Market ETF currently yields 3.2%. That number is not going up unless interest rates rise. But the Fed just committed to another 2 years of interest rates close to zero. You simply can’t find consistent returns of 8% in this market. Historical returns are just that–historical.

How big of an impact does this have on the PERS system? Here is an example. A $1 million account earning 8% for 11 years will grow to $2,331,639. But if the account earns 2.4%, the total after 11 years is only $1,298,074. That’s a difference of $1,033,565. I used the calculator at this website to reach these figures.

What’s the bottom line? PERS is not sustainable at current levels unless there is a dramatic rise in interest rates or a huge turn around in the economy. Personally, I don’t see either happening in the foreseeable future.

That means Mississippi would have to make up the short-fall by allocating money from the State budget to PERS or cutting benefits. Most likely, there will be a combination of both. This should scare state employees, including those in working in the the judicial system.

But don’t blame Governor Barbour or the special commission chair George Schloegel, Mayor of Gulfport. Barbour should get credit for not sticking his head on the sand on this issue and Schloegel is a good choice to chair the commission. Schloegel is the former president of Hancock Bank, which did not have to take TARP bailout money from the government in the 2008 financial crisis. By comparison, Trustmark took $215 million and paid it back. Regions took $3.5 billion and hasn’t paid it back.

Mississippi’s pre-paid college tuition program has a similar problem, as I discussed in this post.