Another PERS Bombshell: Funding Level Drops Again, More on the Unrealistic Investment Returns Assumption
Kingfish with Jackson Jambalaya dropped another PERS bombshell yesterday in this post. JJ links the latest PERS actuary report, which states that PERS' funding level has dropped to 62.2%. The post includes a lot of relevant data regarding PERS. 
I found these figures to be particularly frightening:
Asset allocations:
47.8% in US equities
25.4% in debt securities
4.6% in real estate
19.5% in non-US equities
That is a very aggressive asset allocation, with almost 70% invested in stocks and only 25% invested in bonds (I am assuming that “debt securities” are bonds). Having 70% invested in the stock market is great in years where the market rises dramatically. But in bad years—years like 2008 (-8.2%) and 2009 (-19.4%)–-investment performance gets killed.
More importantly, the growing global sovereign debt crisis means that future growth of the world economy—and the stock market that follows the economy up and down—is far from a sure thing. The world borrowed its way into the current debt crisis. The bill is now due in Europe and will be due here in the U.S. soon. That means more bad years in the stock market and fewer great years. And the great years the market does have will likely be on the heels of a horrendous year.
The bottom line on this is that Mississippi is playing Russian Roulette with the stock market. Russian Roulette is dangerous. Currently, PERS is dangerous.
I previously wrote here and here that the PERS 8% investment assumption is not realistic. A passage from the Chris Martenson book The Crash Course explains why unrealistic investment assumptions are so dangerous:
State and municipal pensions are in horrible shape, and in 2010 were found to be underfunded by $3 trillion and more than $500 billion, respectively. This happened for two reason. First, various governmental administrations regularly made the decision to defer funding of these promises until some later date….Second, the plan administrators were allowed to make absurd projections of future rates of return sometimes as high as 11 percent per year. These were clearly not achievable, yet the assumptions remained in place. The attractiveness of this practice is that the higher the assumed rate of return, the less money had to be placed into the account.
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The problem with using such wrong assumptions is that instead of working for you, compounding works against you. Even a slight miss in returns a few years back will mushroom into a very large future shortfall. That's just how compounding works, and that's exactly where hundreds of underfunded pension plans now find themselves.
Mississippi is one of those pension plans. This is something that will have huge and profound ramifications in our State in the coming years. One day soon this will be the biggest news story in Mississippi.
State political leaders are going to have to deal with the problem—and the sooner the better. They don't want to because there are only two solutions, both of which will make people mad: (1) require higher contributions from participants; and (2) reduce benefits. That sucks, but that's how it is. The Republican leadership needs to step up and start dealing with this problem in January. The longer they wait the greater the political backlash will be when PERS blows up.
What's wrong with letting State employees keep their income and be responsible for it themselves?