New Jersey, Pennsylvania Really, Really Stink at Pension Funding

They've got America's two most-underfunded public employee pension systems — and it's not really close.

New Jersey and Pennsylvania have America’s most-underfunded public employee pension systems, says a new report from the National Association of State Retirement Administrators. In fact, the report suggests, the two states have fallen so short of making the annual required contributions to the funds that they’ve managed to separate themselves from the pack.

Political battles are being waged in both states over how best to deal with the underfunding — Chris Christie versus the teachers unions in New Jersey, while House Republicans in Pennsylvania say pension reform must be part of any budget deal with Gov. Tom Wolf — but the report traces the underfunding back to the flush days of the late 1990s.

For both states, the chronic underfunding began when required contributions had dropped to very low levels by historical standards, including to as low as zero for some plans, chiefly as a result of strong investment gains experienced from 1995 to 1999. When required contribution rates rose, chiefly as a result of the 2000-02 market decline, the states experienced great difficulty in restoring the stream of pension funding payments that had previously been in place.

In other words: Neither state saved for a rainy day, choosing not to make contributions to the system when returns were strong enough to keep the pot growing anyway. When the economy went south with the “dot com bust” at the end of the Clinton Administration, the pension funding fell behind and officials haven’t caught up since. Philly Mag’s Patrick Kerkstra in 2012 demonstrated what that underfunding has meant for other portions of the Philadelphia municipal budget.

The result? “The average percentage drop in funding level from FY 01 to FY 13 for the five total plans in New Jersey and Pennsylvania that are included in this study was 47 percent, which is nearly twice the size of the decline in the funding level for the full group.”

The plans include the State Employee Retirement System and School Employees Retirement System in Pennsylvania; and New Jersey’s state and local funds for police and fire, state and local funds for public employees, and the single statewide fund for teachers.

New Jersey is making just 38 percent of its annual required contributions to the fund, the report says, while Pennsylvania is making just 41.2 percent. Pennsylvania has made some progress in recent years, the report suggested, but New Jersey Gov. Christie scuttled that state’s progress last year by refusing to make the annual contribution to the pension funds, despite a previous agreement to get the funds fully funded over a seven-year period.

Full report below.