The board that governs the massive Public Employees Retirement System is working to develop recommendations for the Legislature to consider in 2024 in an effort to ensure the long-term financial viability of the pension plan.

PERS will provide or already is providing a pension to about 10% of the state’s population — people who worked or are working for local or state government entities.

For new hires, those legislative recommendations could include:

• No longer guaranteeing the annual 3% cost of living increase. Under a new system, the increase could be contingent on whether the system can afford to pay the cost of living increase any particular year and tied to the consumer price index, meaning it might be lower some years than the 3% increase.
• Creating a hybrid system where some of the benefits — a lower amount than under the current system — would be guaranteed while others would be provided through some type of investment portfolio.
• Lowering the amount of the benefits.

Such recommendations, which would have to be approved by the Legislature to be enacted, would not impact current employees. Instead, the changes would be for future employees. The Legislature would establish when the changes would go into effect for new hires.

Another recommendation could be a change to the payout method for the cost of living increase for both current and future employees.

Under the current system, many people take the annual 3% cost of living increase as one lump sum payment at the end of the year. PERS could recommend the increase be provided to retirees as part of their monthly retirement checks. Another option would be to make the “default” choice for retirees to receive the cost of living increase divvied up as part of their retirement checks. The employees would have to request specifically for the cost of living increase to be paid as a 13^th check instead of monthly.

Changing the payout method from a lump sum to monthly one for the annual 3% cost of living increases would not result in less money for retirees. But it would give more flexibility since the system would not be taxed with paying the entire total at one time at the end of the year.

“These are recommendations and still a work in progress,” Ray Higgins, PERS executive director, said during a recent interview with Mississippi Today. “PERS is such a great system. It is important we work together to find solutions for generations to come.”

During an at times contentious 2023 session between legislative leaders and PERS, Higgins committed to providing recommendations to lawmakers on steps they could take to improve the financial viability of the system.

The contentiousness surfaced because before the 2023 session began, the PERS governing board voted by a 7-3 margin in December 2022 to increase the rate paid by state agencies, school districts and local governments from 17.4% of employees’ paycheck to 22.4%. The decision caused consternation with legislators and local governmental entities because of the additional cost of the rate increase.

The decision to increase the amount paid by governmental entities to support the pension program rests solely with the board and not with the Legislature or any other entity. But in the 2023 session, House leaders introduced a bill to strip some of the authority of the board that oversees the Mississippi Public Employees Retirement System.

After that bill was introduced, the board through Higgins committed to postponing the increase in the employer contribution rate and to introduce a long-term PERS fix for the Legislature to consider.

The PERS Board is working on those recommendations now and Higgins said he believes they will be finalized later this year before the 2024 session begins in January.

The effect of those recommendations, though, would be “long term in nature” and “does not alleviate the need for the increase in the employee contribution rate.”

As it stands now, that increase from 17.4% to 22.4% of an employee’s retirement check paid by the governmental entity is set to go into effect July 2024. The board’s original plan was to enact the increase in October of this year, meaning local government entities would be hit with an additional major expense during the midst of an election year.

The action of the board to increase the rate by 5% will cost state and local governmental entities, including school districts and public colleges and universities, $345 million annually, including $265 million for state agencies and education entities.

Higgins said the PERS Board of Directors could opt to phase in the that increase instead of enacting it all in July 2024.

The system’s current funding ratio is about 61%, meaning it has the assets to pay the benefits of 61% of all the people in the system, ranging from the newest hires to those already retired. Of course, all of the people in the system will not retire at once. Theoretically, though, it is recommended that retirement systems have a funding ratio of 80% or more.

The system has $30 billion in assets and is underfunded by about $20 billion.

Most state, city and county employees and public educators are in the system that currently has about 325,000 members, including current employees, retirees and others who used to work in the public sector but no longer do.

Employees in the system pay 9% of their salary toward their retirement. It was increased from 7.25% in the late 2000s. The average yearly benefit from the plan is $26,258.

Part of the issue causing the system financial woes is a decline in the number of governmental workers.

A study by the Mississippi Legislative Performance Evaluation and Expenditure Committee pointed out that between 2010 and 2020, the ratio of active employees to retired employees decreased about 33%, from 2.02 active to 1 retiree, to 1.35 to 1.

“As a result of the decrease, the payroll of fewer active members must fund future pension obligations, a factor made more important because contributions from active members and their employers comprise approximately 46% of PERS revenues” as of 2020, the report pointed out.

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