Pennsylvania Took Familiar Path to Pension Underfunding

Pennsylvania’s pension underfunding stems from a series of policy decisions – a mix of contribution holidays and benefit increases – made in the 1990’s and early 2000’s.

Pennsylvania’s choices mirror the shortsighted path that many states, such as Illinois and New Jersey, have taken.

TribLive outlines the key policy decisions that played a part in the state’s current pension funding situation:

Legislators and past governors contributed to the problem significantly, records show. About 70 percent of the liability arose from policy decisions in 2001 and 2004, according to data from the House Democratic Appropriations Committee.

Experts say the crisis began even before that, in the 1990s.

[…]

Chronic underfunding began between 1995 and 1999 when a booming economy, with good returns on investments, caused officials to lower contributions, according to a study by the National Association of State Retirement Administrators. The required contribution rate dropped as low as zero for some plans.

Before 9/11 sent financial markets tumbling, the pension funds for public employees were overfunded. In May that year, lawmakers and former Gov. Tom Ridge passed Act 9 of 2001 to raise benefits for employees by about 25 percent, in the future and retroactively.

The law required employees to contribute more to help cover costs. It gave lawmakers a 50 percent pension boost.

“The stock market had been going up and everybody was pretty giddy about that, and they lost track of reality for a while,” said Leckrone. “… They basically increased the amounts of pension payouts and lowered the amount they were requiring districts and governments to put into the pension fund.”

Then the terror attacks cut investment returns dramatically, and the state struggled to find money for retirement plans.

In the ensuing years, to fill budget gaps, Gov. Ed Rendell’s administration made the fateful choice to artificially reduce employer contributions, compounding the problem. In 2004, the rate slipped beneath 100 percent-funded for the first time since the 1980s.

The 2008 recession exacerbated the mounting pension problem. That year alone, the PSERS net investment loss was $19.5 billion.

The state’s pension systems are currently 58 percent funded.

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