Mississippi’s already troubled defined benefit pension system could be facing an even larger fiscal hole as the economic effects of the coronavirus pandemic continue to manifest.

The Public Employees’ Retirement System of Mississippi serves most state, city, and municipal employees in the state. The pension fund’s finances were already in trouble before the COVID-19-related economic downturn, as it is only 60.9 percent fully funded and now has an unfunded liability of more than $17.6 billion.

Two recessions — the first after the 9/11 terrorist attacks and the second after the great mortgage meltdown — could portend what might be ahead for PERS. Both times the plan’s investments lost money and a key metric known as the funding ratio, which is defined as the share of future obligations covered by current assets, suffered as a result.

Losses on the investment front for PERS could be considerable. According to a report by the Mercatus Center at George Mason University, the U.S. gross domestic growth rate will decline 5 percent for every month of economic shutdown. 

Since August 1980, PERS has been investing in the stock market, which promised larger returns than the bonds that represented most pension fund investments up to that point. The plan’s investment assets have grown from $15.4 billion in 2009 to $28.6 billion in 2019, an 85.7 percent increase. 

The downside for PERS and other defined benefit pension plans is the increased volatility. 

In 2001, PERS’ investments lost 7.1 percent and 6.6 percent in 2002 before rebounding in 2003 with a 3.5 percent rate of return. 

In 2001, the plan was 87.5 percent fully funded, but that slipped to 79 percent by 2003. The plan’s funding ratio never caught up despite several years of strong returns and by 2008, the plan was only 72.9 percent funded.

In 2008, PERS lost 8.2 percent on its investments and a ruinous 19.4 percent in 2009 before a rebound to 14.1 percent in 2010. Despite bounce-back years from the market in the following years, PERS bottomed out in 2012 with a 58 percent funding ratio that has only ticked up slightly since then despite investment returns of 13.4 percent (2013), 18.6 percent (2014), 14.96 percent (2017) and 9.48 percent (2018). 

The PERS staff uses an expected annual rate of return for 7.75 percent for planning purposes. The PERS board lowered the expectation from an unrealistic 8 percent in 2015.

The reason why the plan loses ground even when investment returns are above expectation is primarily demographic. In 2005, there were 157,101 employees contributing into the system and 69,939 retirees.

By 2019, the number of employees contributing to PERS had shrunk to 150,651, while the number of retirees was up to 107,844. This represents a 54 percent increase in 15 years.