Courtesy of Bigger Pie Forum via Jackson Jambalaya, it seems Mississippi’s PERS system is getting reamed in management and investment fees. Here’s a list of how much area states paid in 2018 in PERS management fees:

• $103 million- Mississippi
• $5 million- Alabama
• $27 million- Arkansas

My Take:

Sounds about right.

Read a book or two (Liar’s Poker, books on the 2008 financial crisis, etc.) on how Wall Street investment banks screw their ‘fish’ customers like public pensions. Looking at the list of outside investment managers at the front of the PERS annual financial report, I assumed Mississippi PERS is a ‘mark’ in the pension investment world.

No doubt there is a steady stream of calls and visitors to the PERS investment office selling some ‘great’ investments. The commenters on Jackson Jamabalaya have it right. The investments could be cheaply managed in passive ETFS in-house.

Many broadly diversified ETF’s are so cheap from an expense ratio perspective they are nearly free. And maintaining target allocations is getting easier with companies like Betterment. It’s forcing the Schwab and Vanguards of the world into the poorly named ‘robo-advisory’ business.

I also bet these institutions who we pay an arm and a leg to have sold us some dog-crap investments that they wanted off their books. It’s the Wall Street way.

PERS needs a complete overhaul. Not surprisingly, it’s not a topic on the campaign trail for those running for statewide office.

If you’re looking for an easy way to gain insight into the investing, follow Meb Faber on Twitter and listen to his podcast the Meb Faber Show.

There has been some national news lately pertinent to the ongoing crisis with Mississippi’s public employees’ retirement system (PERS).

This Tax Foundation article contains a map showing funding levels for all states. It lists Mississippi’s funding level as 62%, which ranks 40th nationally. Kentucky is last with a funding level of 34%. You can read how Kentucky is addressing the problem here.

This Pension Plus post explains that PERS investment returns fell short of projections this year, further straining underfunded systems.

Meanwhile, the PERS crisis does not seem to be a campaign issue for candidates running for statewide office.

Mississippi will apparently wait until the next financial crisis blows up the system before making a serious run at addressing the crisis. Not good for people who like things like decent roads and bridges.

This post looks at PERS’ investment allocation. The chart below lists PERS’ target allocation for each asset class, return, and the allocations four years ago and today.

Other stats:

3 year return: 7.29%

5 year return: 5.84%

Investment assumption: 7.75%

My Take:

The investment mix seems reasonable.

The 3 and 5 year returns are unsurprising. The 10 year return benefits from the recovery from the biggest financial crisis since the Great Depression.

The 7.75% investment assumption is still unrealistic. I don’t know that you can find even a decent argument supporting a 7.75% assumption.

Everything I read says a realistic investment assumption for the next decade is around 5%. That does not include investment management fees and expenses. It’s probably safe to add 1% to the required return to cover these.

Private equity is kind of a black box. But it’s a growing asset class for pension funds. Hopefully, it will be a good long term decision.

Besides the inflated investment assumption, the biggest problem for PERS is government is shrinking and the number of retirees exceeds new participants.

PERS is going to end badly. We just don’t know when.

The week before Christmas Bigger Pie Forum looked at PERS’ cost of living adjustment (COLA), commonly known as the 13th check. PERS recipients get a 3% raise every year as a COLA. Many retirees take it in a lump sum at the end of the year–the 13th check.

PERS’ COLA exceeds commonly recognized inflation indexes. The average gain of the consumer price index since the legislature raised COLA to 3% was 2.18%. According to BPF:

Just reducing the size of the COLA payout by a third over the past 18 years would’ve saved more $2.2 billion, which would’ve helped address the plan’s $16.6 billion in unfunded liabilities….

The easiest way to stem the bleeding on PERS’ bottom line is to change the way the COLA is computed. Many states index the COLAs for their pension funds on the CPI. Others base the annual COLA percentage on the plan’s funding ratio, which is the share of future obligations covered by current assets. Some do a combination.

Legislators need to study how other states with healthier pension funds are holding down the costs on the COLA for PERS. Doing so would be an easy fix and allow retirees to continue to boost the buying power of their benefits while ensuring the plan’s future.

My Take:

Good point. Defenders of the 3% COLA need to understand that it is blowing a hole in the system. The longer the legislature waits to fill the hole, the harder it will be.

Taxpayers for sure–and likely retirees–will suffer a lot more pain because PERS and the legislature have not addressed the problem sooner.

We are now going on year nine since the Governor’s PERS Study Commission’s report. PERS and state leadership continue to ignore or downplay the magnitude of the problem.

There is an interesting case before the California on the issue of whether that state’s pension benefits are guaranteed. The Sacramento Bee reports here.

The State’s argument:

“Neither the U.S. Constitution nor the California Constitution requires the state to mismanage its affairs and continue a broken system for decades, even after the state has concluded the program is severely (if not fatally) flawed and cannot be implemented as originally intended.”

Participants disagree.

The case is a prelude to harder questions down the road for California and other states:

“When the next recession comes around, the governor will have the option of considering pension cutbacks for the first time in a long time,” ….

Pensions costs are climbing because CalPERS is billing cities more money to pay down its debts. The pension fund in 2016 acknowledged it expected to earn less money over time from its investment portfolio and made a corresponding hike in the rates it charges to its members.

Some government executives now contend those costs are “crowding out” their ability to fund basic services.

“Vital services are at risk,” the League of California Cities wrote in a brief supporting Brown in the pension case.

My Take:

Tough choices. No easy solutions. That’s a bad recipe for today’s political world.

PERS recently had a board meeting where it released its 2018 Valuation Report.

The report covers the period ending June 30, 2018. The cover letter notes that since the last valuation, the PERS board increased employer contribution rates from 15.75% to 17.40%. That translates to better funding levels for PERS and more potholes for roads.

Here are the key stats:

• active members down from 152,382 to 150,687
• retirees up from 102,260 to 104,973
• funding ratio up from 61.1% to 61.8%
• unfunded actuarial accrued liability: $16,940,458,907
• estimated investment return for 2018: 9.16%
• assumed investment return: 7.75%

It’s useful to review 10-year (2009-2018) changes to see key trends:

• participants down from 167,122 to 150,687
• retirees up from 76,143 to 104,973
• funding ratio down from 67.3% to 61.8%

Also, from the start of 2012 to June 2018, benefit payments climbed from $1,627,813,430 to $2,500,750,392.

My Take:

A ten year bull market and the funding ratio just does not improve. Imagine what will happen to it when the bull market ends.

The ship is sinking. Even if the investments do return the assumed 7.75% per year (and they probably won’t), it’s still going down because of the reduction of participants and growing number of retirees.

Raising the employer contributions rates will not stop the ship from sinking. It just prolongs it.

Nothing is going to stop the PERS ship from sinking. The only question is when and what happens to the system when it goes under.

There is an emerging view among observes with a clue that PERS systems will blow up nationwide with the next big stock market crash. Maybe that will not be for a few years. Maybe it’s already started. Really, what difference does it make?

It’s going to happen. The only question is when.

Interesting questions include how current participants will grandfather into the new system and how big will cuts be to retirees?

Should participants eligible to retire now go ahead and retire so they are locked into the system? Good question. No one knows because no one is planning the fix.

It’s the ultimate game of kick the can.

Here is an excellent blog post about the percentage of public pension income from investment returns. The average for all public pension plans is about 60% of income is from investment returns.

That’s why the investment assumption is so important. It needs to be realistic to get a true sense of how PERS will perform in the future. And as Kingfish regularly hammers on Jackson Jambalaya, the projections for future participants in the system also has to be realistic.

A lot of experts believe an investment assumption of 7.75% (which PERS uses), is not realistic. But opinions can differ on that.

Reasonable opinions can’t differ on the number of PERS participants. The trend of more retirees in the system than new hires entering the system isn’t going anywhere.

Some people might blame this on Republicans shrinking government. Perhaps. But government should not be immune from technological advances that mean it takes fewer people to perform administrative work. Regardless, it doesn’t matter.

PERS participants are decreasing. PERS’ future assumptions need to reflect it. Future investment assumptions should be realistic–not aspirational. Fixing these issues would expose how bad of shape PERS is really in and force the government to change the system.

Jeff Amy with the Associated Press wrote this article about PERS published in Monday’s Clarion-Ledger. There are three key takeaways:

1. in a sea change, PERS new leadership will no longer pretend there is not a big problem with PERS’ funding;
2. there is a big problem with PERS funding; and
3. legislators fully intend to throw former PERS Executive Director Pat Robertson under the bus by citing her history of rosy statements about PERS.

From the article:

Lawmakers also said they felt like former Executive Director Pat Robertson had promised them as late as last year that all was well with the retirement plan, and that they had been promised that no additional contribution increases would be needed after the employer rate went to 15.75 percent in 2013.

Robertson’s refusal to acknowledge the PERS crisis was a disservice to Mississippi taxpayers and set herself up to be the bad guy for a problem she didn’t create. I talked about how Robertson was making a mistake in posts dating back two years.

08/2017

12/2016

10/2016

Don’t get me wrong, lawmakers knew or should have known about the problem before now. But Robertson’s unwise statements allow them to feign ignorance.

House Speaker Philip Gunn nails why PERS is an important issue for everyone:

“When we talk about employer contributions, I don’t think it needs to be forgotten that at the end of the day, the employer is the taxpayer,” said House Speaker Philip Gunn, a Clinton Republican. “So when you’re asking for an increase, you’re asking for the taxpayers to step up and pay more.”

New PERS Executive Director Ray Higgins is taking the right approach in acknowledging and asking lawmakers to address the problem. This is good news. People should not get mad at him. They should thank him for ending the practice of ignoring the elephant in the room.

Now it’s time for the Legislature to start planning the big fix everyone knows has to happen. The PERS pension has to be grandfathered out and state employees put on 401(k) type retirement plans that reduce and cap the State’s obligations to retirees.

Oh yea, and about that 13th check….

Despite years of publicly disputing critics’ claims that there is a PERS crisis and a record 10 year bull market, PERS raised employer contribution rates in July to address the funding shortfalls. This Northside Sun editorial explains the increase and why it’s not enough.

The cost of the increase is expected to be $77 million for state government and $23 million for cities and counties.

In July Jackson Jambalya had another excellent PERS analysis.

My Take:

It’s a start. Long overdue, not enough of a fix, but a start.

How can a city like Jackson with an infrastructure crisis afford a mandatory PERS contribution increase?

There is no credible argument that PERS is going to work out. PERS cheerleaders’ argument ends after “it used to be worse” and “most other states are in the same boat we are.”

The plan is there is no plan. Pray for a miracle is a prayer, not a plan.

Yet, there is no secret where this is headed. One day, PERS will be scrapped for a 401(k) style retirement system for state workers. Current participants will be grandfathered in, but will have to take a haircut on their expected benefits. State and local governments will have to use more funds to pay PERS obligations instead of paving roads.

PERS has had some changes in leadership in the last year. Hopefully, it will become more realistic about the crisis.

As 2018 comes to a close, its getting harder for Mississippi politicians to ignore the PERS crisis. And some are not. The Sun Herald reported recently on Coast lawmakers Brice Wiggins and Michael Watson acknowleding the elephant in the room. From the article:

Lawmakers who bring up the Public Employees Retirement System do so at their own peril, members of the Coast delegation said, but they say it needs to be brought up anyway.

“We have to have that conversation,” Sen. Brice Wiggins, R-Pascagoula, told the crowd at the Pre-Legislative Briefing hosted by the Mississippi Gulf Coast Chamber of Commerce. “When Sen. Tindell filed a bill, he got death threats. That’s crazy. In his case, he was trying to tweak it, to make it better able to do what Sen. (Michael) Watson was saying, extend it.”

Watson and Wiggins told the 200 or so people at the Golden Nugget earlier this week that part of the problem is PERS officials paint too rosy a picture of the state of the retirement fund.

“The executive director comes to the Finance Committee every year,” said Watson, a Pascagoula Republican. “And I literally ask just about the same question every year. And every single year, the answer is the same: We’re going to be fine; everything is OK.

“That’s what we’re fighting. You get the executive director of PERS sending out letters to all retirees, Everything’s fine. And the Legislature over here says, wait a minute, everything is not fine.”

And Watson said he’s talked to experts in the banking and pension industries who agree with the lawmakers.

“We’re in trouble,” he said. “We signed a contract. We can’t unilaterally back out of that contract. What we can do is rework the contract with two willing parties.”

The problem is clear. PERS doesn’t have enough money to pay all the present and future retirees.

My Take:

Kudos to Wiggins and Watson.

Everything is not fine. That is said in the context of comparing Mississippi’s PERS crisis to other public pensions, which are also in an under-funded crisis. The passengers on the Titanic were not fine because others were on the same boat.

Mississippi is shrinking its government. Debate all you want about whether it should–but it’s a fact. Shrinking government payroll lowers PERS contributions. Pair that with the system’s unrealistic investment assumptions, and pretty much all experts agree that the crisis will get worse.

This is like a lot of problems. The fix gets more expensive the longer you wait to address the problem. Hoping lighting strikes in the investment markets isn’t a plan. It’s a prayer that’s unlikely to be answered.

Mississippi does not have the money to cover a huge PERS deficit. Adjustments to the system have to be made. This is not an issue that will only impact PERS participants. If you pay state taxes, your money is in play. The legislature needs to get on this in January.