Political Embeddedness of Public Pension Governance: An Event History Analysis of Discount Rate Changes

• Published date: 01 September 2018
• Date: 01 September 2018
• DOI: http://doi.org/10.1111/puar.12968
• Author: Qiushi Wang,Jun Peng

Political Embeddedness of Public Pension Governance: AnEvent History Analysis of Discount Rate Changes 785

Abstract: State governments are frequently said to manipulate the discount rate assumption to make pension funding

look better, reduce employers’ and employees’ pension contributions, or relieve fiscal stress. Building a model from the

political embeddedness perspective and applying an event history analysis to the 81 largest state-administered pension

plans in the United States, the authors found that more politically embedded pension boards were actually more

likely to reduce their plan’s discount rate. Public union coverage and government political ideology, however, had

no significant impact on discount rate changes. These findings reveal the effect of political embeddedness on pension

planning decisions and provide useful insights into the intricate process of setting pension discount rates in a new era of

more muted investment return expectations. This article points to both political and financial pressures facing pension

boards and state governments for many years to come.

Evidence for Practice

• Facing severe fiscal stress, more public pension plans have chosen to reduce rather than increase their

discount rate assumption to reflect the much lower average investment return since 2001.

• More politically embedded pension boards are more likely to reduce the discount rate than plans with more

elected board members.

• Regardless of their composition, public pension boards face both political and financial pressures to take a

piecemeal approach to reducing the discount rate.

• Because of the gap between the current discount rate and muted investment return expectations in the

future, public pension plans will continue to face pressures for the foreseeable future.

Defined benefit pension plans cover most

state and local government employees (U.S.

Bureau of Labor Statistics 2017),1 and

they are a major variable affecting state and local

governments’ fiscal sustainability (Chapman 2008).

Since 2001, and especially since the Great Recession,

the underfunding of public pension plans and the

increasing costs of financing pension benefits for state

and local public employees have become important

public policy issues (Anzia and Moe 2017), capturing

the attention of scholars in public finance and

public administration. Some scholars have explored

the economic and institutional factors behind the

underfunding of public pension plans (Chaney,

Copley, and Stone 2002; Chen 2018; Eaton and

Nofsinger 2004; Novy-Marx and Rauh 2011; Wang

and Peng 2016). Others have focused on the broader

implications and serious consequences of deteriorating

pension health for the public sector. They suggest

that increasing pension costs put pressure on the

funding of other major government programs such as

education, public safety, and health care (Coggburn

and Kearney 2010; Stalebrink 2014), make it harder

for governments to borrow money or plan their

budgets (Brooks 2017), push some governments to

make changes to public pension benefit design that

may affect public sector employment and turnover in

the workforce (Lewis and Stoycheva 2016), and drive

some states to enact defined contribution or hybrid

plans in order to lower employer contributions and

divert investment risk to employees (Thom 2013,

2015).

One of the most frequently mentioned culprits for the

current pension problems is the assumed rate of return

on pension investment, or the discount rate, which is

used to calculate the present value of pension assets

and liabilities. As we will explain later, the discount

rate is the most important assumption determined

by a pension board (Brooks 2017), and it plays a key

role in pension financing. It has long been noted that

the setting of a plan’s discount rate is not simply a

result of expert financial and actuarial advice but also

involves significant political considerations from the

perspectives of various actors and interest groups,

such as the state legislature, executive branch (through

Qiushi Wang

Sun Yat-sen University, China

Jun Peng

University of Arizona

Political Embeddedness of Public Pension Governance:

An Event History Analysis of Discount Rate Changes

Research Article

Jun Peng is associate professor in the

School of Government and Public Policy

at the University of Arizona. His research

focuses on state and local government

financial management in the United States,

such as budgeting, debt management,

and pension management. His book

State

and Local Pension Fund Management

was

published by Taylor & Francis in 2008. He

holds a PhD in public administration from

the State University of New York at Albany.

E-mail: junpeng@arizona.edu

Qiushi Wang is associate professor in

the School of Government and Center for

Chinese Public Administration Research

at Sun Yat-sen University, China. His

research interests include public pension

management, municipal bonds and debt

policy, government accounting, and

nonprofit finance. He holds a PhD in public

administration from the University of

Nebraska Omaha.

E-mail: wangqsh3@mail.sysu.edu.cn

Public Administration Review,

Vol. 78, Iss. 5, pp. 785–794. © 2018 by

The American Society for Public Administration.

DOI: 10.1111/puar.12968.