Brooks: Commitment Credibility in Funding Public-Employee Pensions (2001-2011)

ABSTRACT:

State governments have utilized defined benefit (DB) pensions to compensate public employees while keeping visibility and taxes low. Pensions somewhat recently have entered the political problem stream, though, as funding has declined. Absent a lack of strong national regulation, state politics might contribute to variation in plan performance. I utilize fixed effects and seemingly unrelated regression approaches to jointly examine variation in funding, liabilities, and assets. I focus on political independent variables, while controlling for economic and actuarial factors. Funding appears to operate at arm’s length from legislative politics and union membership. However, more politicized boards have lower funding ratios, as well as greater assets and liabilities, suggesting they are less credible. Additionally, pensions in states with more conservative legislatures tend to have especially large liabilities in comparison to general budget revenue. Thus, while it appears that pensions are quite robust to many political forces, increased insulation protects them from short-term political decision-making. Politics do appear to matter for these public plans, influencing credibility, credit ratings, and future politics.

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