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Cost of living increases taking a bigger bite of state pension fund's bottom line

UPWARD: COLA payments for PERS are on an upward trajectory since 1999. Graph by Steve Wilson

Since a big change in 1999, the cost of living adjustment for the state's defined benefit pension fund has become a huge downward pull on the plan's finances.

The cost of living adjustment or COLA paid to retirees by the Public Employees' Retirement System of Mississippi has increased 484.25 percent since 1999, going from $103,263,000 to $ 603,318,841 in 2017.

Thanks to an aging workforce, the problem only promises to get worse absent a change by the Legislature.

In the 1999 session, House Bill 472 was passed by the Democrat-dominated Legislature and signed into law by the late Gov. Kirk Fordice. HB 472 changed the way PERS computes the COLA, which is designed to help retirees' benefit checks keep up with the rate of inflation. Originally, it was computed at the rate of 2.5 percent of the original benefit.

Under the new law, the COLA 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 sump at the end of the year, the benefit is known as the 13th check.

UPWARD: PERS COLA payments are increasing rapidly every year. Graph by Steve Wilson

The actual rate of inflation nationally, as computed by the Consumer Price Index from the U.S. Bureau of Labor Statistics, from 1999 to the present has increased an average of 2.18 percent.

This COLA system gives Mississippi one of the most generous inflation adjustments when compared to other public pension funds nationwide.

South Dakota's COLA is indexed 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.

Tennessee's retirement system is linked to the CPI and has a maximum of 3 percent. Alabama, Oklahoma and North Carolina are among several states where retirees are reliant on their state legislatures for ad hoc increases, which often have requirements regarding the plan's funding ratio, investment income and the CPI.

When HB 472 was signed into law, PERS was in good financial shape from investment gains from the 1990s boom. The plan's funding ratioimproved from 60 percent fully funded in 1992 to 85 percent fully funded by 1998.

The new COLA was "funded" by stretching out the amortization or payback period of the pension fund.

The COLA was only $103,263,000 in 1999. In 2000, the first year after HB 472's passage, PERS COLA payments added up to $123,849,000, an increase of nearly 20 percent.

The reason why the COLA is becoming an ever-bigger chunk of the benefits paid out to retirees is there are more retirees receiving benefits and fewer state, municipal and county employees paying into the system.

DEMOGRAPHICS: The number of PERS retirees continues to grow. Graph by Steve Wilson

The number of retirees increased in 2017 to more than 102,000, up 59.9 percent from 2005, when the system supported more than 63,000 retirees. The number of contributing employees has decreased to more than 152,000, down nearly 2,000 employees from last year.

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