The possibility of temporarily pausing or reducing the annual 3% cost of living increase Mississippi’s state and local government retirees receive was discussed recently by legislative leaders.
The discussions came during a recent meeting the 14 members of the Legislative Budget Committee held with Ray Higgins, the executive director of the Public Employee Retirement System. After the meeting, legislators indicated that they do not favor limiting or changing the annual 3% cost of living increase, though the fact it was discussed highlights the trouble legislators face grappling with ensuring the financial viability of the public employee retirement system.
Some key legislative leaders indicated that they are reluctant to allow taxpayer funds to be pumped into the public pension program at the level members of the governing board say may be needed to ensure its long-term financial viability.
Sen. Dean Kirby, R-Pearl, asked if suspending the annual 3% cost of living increase for three years would solve the financial woes facing PERS, which provides pensions for most state and local government employees, including educators.
“I wouldn’t use the phrase solve all the problems, but it definitely would have a major impact,” said Higgins. “… Something like that has a direct impact on the unfunded liability.”
Afterwards, Kirby said he was only gathering information, but said that any such suspension, “I don’t think is on the table,” and that he personally would not support it.
Making any changes to reduce or suspend the annual 3% cost of living increase most likely would create an uproar among current employees and retirees. Many of the retirees take the annual 3% increase as a so-called “13th check” at the end of the calendar year.
The 10-member board of trustees of the Public Employee Retirement System has voted to increase the amount the state and local governments contribute to employees’ paychecks for retirement from 17.4% to 19.4% beginning on July 1, with another planned 2% increase. The board left open the possibility of increasing the amount the governmental entities contribute to each paycheck for retirement to 27% over a period of time.
Various legislative leaders said the increases could be difficult for the government entities to sustain, particularly local governments. They predict local governments would have to lay off employees and cut services to sustain such an increase in the amount they contribute to employees’ retirement.
House Pro Tem Jason White, R-West, said other options much be considered. White also asked had the Board looked at some type of reduction in the annual cost of living increases.
“I think there has been a commitment at least around the coffee pot … that we (legislators) want to fix this long term and we want your board to be part of the solution,” White told Higgins“… For myself, I would say we are not going to just increase it (the amount of government money put into the plan) 5%, 10% and hope it gets better.”
After the meeting, White told Mississippi Today: “I am not advocating for any specific change to PERS. My concern is for its long-term sustainability. We’ve had good conversations with Ray Higgins. He understands our cities and counties cannot afford a 50% increase in their employer contribution. Also, taxpayers are asking lots of questions on the subject during the campaign season so it’s a hot topic as you already know.”
In recent years, efforts have been made to improve the system’s financial viability that has been negatively impacted by multiple factors, including a decrease in the number of government employees. A reduction in the public sector workforce means less funds for the system.
Higgins stressed that PERS does not face immediate financial woes, but that the governing board has “a fiduciary responsibility” to ensure the pension plan remains solvent. He said the longer officials wait to address financial issues with the system, the more difficult it will be to do so.
The PERS board has also advocated for an annual payment into the system in state funds in addition to the payment contributed to each employee paycheck. Kirby said he was not enamored with the possibility of an “infusion” of additional state funds into the system. Kirby also said he understands the concerns expressed by the board about the possible financial stress facing PERS, but he questioned whether the issues facing the system are as dire as some believe they are.
PERS is providing or will provide benefits to about 325,000 members, including current employees, retirees and others who used to work in the public sector but no longer do.
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 is underfunded by roughly $20 billion.
While legislators expressed concern about pumping a large sum of additional funds into the retirement plan, they also indicated they understand the importance of the system that impacts roughly 10% of the state’s population.
“This is a state obligation, and we are damn well going to fund it,” said Lt. Gov. Delbert Hosemann, who is chair of the Legislative Budget Committee.
White said, “My parents are retired Mississippi educators. My wife also is a state retiree. I understand and appreciate the retirees and the duty we owe them. However, we cannot ignore the $19 billion hole that exists. My comments are pointed toward all stakeholders having an adult conversation on this issue and trying to collectively put PERS on a path to viability and sustainability. No other motivation.”
The PERS board plans to recommend to the Legislature changing the benefits for new hires, including even limiting cost of living increases at times based on the financial condition of the plan.
But it is not clear whether legislators could change the cost of living increases that the governmental entities committed to for current employees and retirees.
Rep. Percy Watson, D-Hattiesburg, asked if the state could legally make a change in the cost of living increases for current employees and retirees.
“Historically, the legal comment generally speaking no you cannot make changes,” Higgins said. “… Other states have made changes to current benefits. The landscape might have changed. But the prevailing and historical comment is you cannot make those changes.”
There have been court decisions, including in Mississippi, ruling that to make changes in benefits for current employees and retirees would be breaking a contractual commitment.
Higgins stressed, “anytime we (PERS Board members) have … analyzed the COLA always (it has been) in the context only if needed to maintain the fiscal integrity of the plan.”