Funding Discipline for U.S. Public Pension Plans: An Empirical Analysis of Institutional Design

Author:Natalya Shnitser
Position:David and Pamela Donohue Assistant Professor, Boston College Law School
Pages:663-714
SUMMARY

Using newly collected data on over 100 state-administered pension plans, this Article shows that previously overlooked differences in institutional design are associated with the striking variation in funding discipline across U.S. public pension plans. As state and local governments grapple with unfunded pension obligations, this Article presents a timely examination of public plan governance... (see full summary)

 
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Funding Discipline for U.S. Public
Pension Plans: An Empirical Analysis of
Institutional Design
Natalya Shnitser
ABSTRACT: Using newly collected data on over 100 state-administered
pension plans, this Article shows that previously overlooked differences in
institutional design are associated with the striking variation in funding
discipline across U.S. public pension plans. As state and local governments
grapple with unfunded pension obligations, this Article presents a timely
examination of public plan governance across two key dimensions: the
allocation of control over funding decisions and the transparency with respect
to funding liabilities. It shows empirically that greater constraints on
legislative control over funding decisions—typically through the delegation of
control to pension-system boards—have been associated with better funding
discipline. Conversely, liability-pooling arrangements that have shrouded
individual employer responsibility for underfunding have been associated
with worse funding discipline. These findings should inform current reform
efforts to address the multi-trillion dollar shortfall in pension funding. To
date, such state and local government efforts have focused primarily on
scaling back benefits for public employees but have overlooked the role of
institutions in explaining why some public employers have consistently
contributed to the pension funds while others have failed to set adequate
contribution rates or have withheld promised funds.
David and Pamela Donohue Assistant Professor, Boston College Law School. I would
like to thank Rick Antle, Ian Ayres, Shuky Ehrenberg, Yan Epelboym, Henry Hansmann, John
Langbein, Amy Monahan, John Morley, James Naughton, Joshua Rauh, Roberta Romano, Maxim
Pinkovskiy, Brick Susko and the participants of the Federal Reserve Bank of Cleveland 2013
Conference on Public Pension Underfunding, the 2013 American Law & Economics Association
Annual Meeting, the 2013 Netspar International Pension Workshop, the 2013 American Law &
Economics Association Annual Meeting, and the Brandeis University 2013 Municipal Finance
Conference for helpful comments on earlier drafts. All errors are my own .
664 IOWA LAW REVIEW [Vol. 100:663
I. INTRODUCTION ............................................................................. 665
II. FUNDING DISCIPLINE .................................................................... 667
A. OVERVIEW OF PUBLIC PENSIONS ............................................... 667
B. VARIATION IN FUNDING DISCIPLINE .......................................... 669
C. PRIOR SCHOLARSHIP ............................................................... 674
III. INSTITUTIONAL VARIATION .......................................................... 677
A. VARIATION IN THE ALLOCATION OF CONTROL OVER FUNDING
DECISIONS ............................................................................... 677
1. Local Employers vs. State Employers ........................... 677
2. Pension System Trustees vs. State Legislatures ........... 678
3. Delinquent Employers vs. Pension System Trustees ... 685
4. State Legislatures and Pension System Trustees vs.
Constitutional Amendments ........................................ 687
B. TRANSPARENCY REGARDING UNFUNDED LIABILITIES ................. 688
1. Liability Sharing Arrangements ................................... 688
2. Disclosure Requirements .............................................. 689
IV. EMPIRICAL DESIGN ........................................................................ 691
A. DATA ...................................................................................... 691
B. ANALYTICAL APPROACH .......................................................... 692
V. RESULTS AND DISCUSSION ............................................................ 695
A. RESULTS ................................................................................. 695
B. CONTROLS AND ROBUSTNESS CHECKS ...................................... 700
VI. POLICY IMPLICATIONS ................................................................... 704
A. 2012 GASB REFORMS ............................................................. 704
B. STATE-LEVEL SOLUTIONS ......................................................... 706
C. STATE ADMINISTRATION OF MUNICIPAL PLANS ........................ 707
VII. CONCLUSION ................................................................................ 708
APPENDIX A .................................................................................. 710
APPENDIX B ................................................................................... 711
2015] FUNDING DISCIPLINE FOR U.S. PUBLIC PENSION PLANS 665
I. INTRODUCTION
In recent years, the underfunding of public pension plans across the
United States—totaling between $1 and $3 trillion dollars in the aggregate1
has contributed to ballooning budget deficits, municipal bankruptcies,2 and
increasingly dramatic calls for public pension reform.3 The lack of funding
discipline on the part of some public employers, as measured by the failure of
such employers to meet the annual contribution benchmarks recommended
by the Governmental Accounting Standards Board (“GASB”), has been a
significant culprit.4 Despite the widespread consensus that meeting these
benchmark contribution targets is essential for the responsible management
of long-term pension liabilities, U.S. public employers have exhibited
tremendous variation in funding discipline, with some consistently making
the recommended pension payments but others habitually skipping or
underpaying the target contributions.
Using newly collected data on 110 state-administered public pension
plans, this Article shows that previously overlooked differences in plan-level
1. Joshua Rauh, The Pension Bomb, MILKEN INST. REV., Jan. 2011, at 28, 32, available at
http://assets1c.milkeninstitute.org/assets/Publication/MIReview/PDF/26-37.mr49.pdf. See generally
ALICIA H. MUNNELL ET AL., CTR. FOR RET. RESEARCH AT BOS. COLL., THE FUNDING OF STATE AND LOCAL
PENSIONS: 2012–2016 (2013), available at http://crr.bc.edu/wp-content/uploads/2013/07/slp_32-
508.pdf.
2. In recent years, a number of municipalities, including Vallejo, California, in 2008,
Central Falls, Rhode Island, in 2011, Stockton, California, and Mammoth Lakes, California, in
2012, and Detroit, Michigan, in 2013, have filed for bankruptcy in part due to the burden of
pension obligations. See, e.g., Monica Davey & Mary Williams Walsh, Billions in Debt, Detroit Tumbles
into Insolvency, N.Y. TIMES (July 18, 2013), http://www.nytimes.com/2013/07/19/us/detroit-
files-for-bankruptcy.html; Elizabeth Trotta, Stockton Teeters on Bankruptcy Edge, but City’s Not Alone,
THE EXCHANGE (June 27, 2012, 3:00 PM), http://finance.yahoo.com/blogs/the-exchange/
stockton-teeters-bankruptcy-edge-city-not-alone-190026487.html.
3. In the same period, most states scal ed back pensions for new employees, and a number
of states reduced pension obligations to current employees and retirees. See U.S. GOVT
ACCOUNTABILITY OFFICE, STATE AND LOCAL GOVERNMENT PENSION PLANS: ECONOMIC DOWNTURN
SPURS EFFORTS TO ADDRESS COSTS AND SUSTAINABILITY 21 (2012), available at http://www.gao.
gov/assets/590/589043.pdf; see also John W. Schoen, Pandemic of Pension Woes Is Plaguing the
Nation, CNBC (Nov. 19, 2013, 6:00 AM), http://www.cnbc.com/id/100929269; Christine
Williamson, Motor City as a Motivator: Detroit’s Woes Seen Likely to Push Others to Resolve Their Pension
Underfunding, PENSIONS & INV S. (Aug. 5, 2013), http://www.pionline.com/article/20130805/
PRINT/130809965/motor-city-as-a-motivator. In July of 2013, Senator Hatch proposed “a way
for states and cities to exit the pension business.” Mary Williams Walsh, Pension Proposal Aims to Ease
Burden on States and Cities, N.Y. TIMES (July 9, 2013, 12:01 AM), http://dealbook.nytimes.com/
2013/07/09/pension-proposal-aims-to-ease-burden-on-states-and-cities. Under the proposal, local
governments would hold annual auctions to purchase annuity contracts for their employees. In the
course of the working years, an employee would collect a series of annuity contracts that, in the
aggregate, would substitute for a pension. The public employer’s liability would consist only of the
upfront payment to the insurer. Id.
4. The GASB is a private, not-for-profit entity that sets standards for accounting and financial
reporting by state and local governments. Facts About GASB, GOVT ACCT. STANDARDS BOARD, http://
www.gasb.org/jsp/GASB/Document_C/GASBDocumentPage&cid=1176163065939 (last visited
Oct. 29, 2014).

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