In the aftermath of the 2008 financial crisis, nearly every state enacted reforms designed to stabilize funding of their public pensions and improve their long-term sustainability. But now lawmakers in several states are putting plan funding and government budgets at risk by moving to roll back the very same reforms that have helped pension finances slowly recover over the past 15 years.

The changes approved throughout the 2010s included a mix of benefit reductions, contribution increases and investment-assumption changes that — in combination with strong market performance — improved aggregate nationwide pension funding levels from 62 percent in 2009 to over 80 percent today. Yet despite these improvements, plan funding remains below pre-2008 levels, and the gains could be quickly reversed by a market correction mirroring the 20 percent loss experienced in 2008.

To fully appreciate the risks associated with the policy changes under consideration today, it’s worth pausing to look at how public pensions fared in the decade preceding the Great Recession. On average, plans entered the 2000s fully funded, thanks to strong investment performance throughout the 1990s. However, rather than using these strong funding levels as a buffer against a future market downturn, some states used them to finance benefit increases for workers while others lowered contribution requirements.

Then, in 2000, the dot-com bubble burst, resulting in a recession that drove pension-funding levels below 100 percent and kicked off an era of rising pension contributions for state and local governments. The markets rebounded relatively quickly, which helped restore funding levels into the 90 percent range by 2007. But this also reduced some of the pressure on policymakers to enact smart structural changes that would have put pensions in a better position to weather the next economic downturn. Unfortunately, that downturn happened the next year.

The severity of the 2008 crisis and the resulting funding declines gave lawmakers across the country no real choice but to take action, including requiring contribution increases from taxpayers and workers to pay down pension debt as well as the enactment of new benefit tiers to curb pension liability growth. But benefit changes some states are now considering could set the stage for another damaging round of funding declines and contribution increases when the next economic contraction occurs.

Read the full article about pension reforms by Chris McIsaac at Governing.