The effect of financial constraints and political pressure on the management of public pension plans

This study reviews the funding status of state-administered pension plans and their impact on state credit quality. As the fund ratio (actuarial assets/actuarial accrued liability) of state-administered pension plans decreases, states are more likely assigned a lower rating. Moreover, rating outlooks are sensitive to the fund ratio, especially for migration between stable and negative outlooks for states with lower fund ratios. These results are a timely pretest to the 2013/2014 implementation of GASB Statements No. 67 and 68, serving as a benchmark to assess whether new reporting requirements will yield information to alter the market's response to unfunded pension liabilities.

Section: Public Sector Pensions: Structure and Challengesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Impact of Unfunded Pension Obligations on Credit Quality of State Governments

Martell

Kioko²,

Moldogaziev

2013

“…Others suggest that the selection of actuarial inputs is affected by political pressure (Romano ). Eaton and Nofsinger () found that governments under political pressure and fiscal constraints decreased their salary growth rate assumptions, increased their amortization periods, and increased their discount rates. Chaney, Copley, and Stone () found that states with balanced budget requirements increased their discount rates when facing fiscal stress.…”

Section: The Actuarial Processmentioning

confidence: 99%

“…For example, Chaney, Copely, and Stone () created a standardized measure of pension benefit obligations by assuming that every 25 basis point change in discount rates will change pension benefit obligations by 4 percent. Eaton and Nofsinger () create a standardized measure of annual required contributions (ARCs) by estimating the predicted ARC for each of the pension systems in their sample as the linear function of their discount rates, salary growth rates, and amortization periods. Because the extant research has only attempted to estimate a linear relationship between the financial condition of public pensions and their actuarial inputs, we know little about potential nonlinear or interactive effects from actuarial inputs.…”

Section: Introductionmentioning

confidence: 99%

Actuarial Inputs and the Valuation Of Public Pension Liabilities and Contribution Requirements: A Simulation Approach

Chen¹,

Matkin²

2017

There are significant concerns about the financial condition of public pensions in U.S. state and local governments. To date, studies of public pensions have given limited attention to the effect of actuarial inputs on the valuation of pension liabilities and contribution requirements. This paper uses a simulated public pension system to examine the sensitivity of actuarial input changes on funding ratios and contribution requirements. We examine instantaneous and lagged effects, marginal and interactive effects, and effects under different funding conditions and demographic profiles. The findings emphasize the difficulty of conducting cross‐sectional analysis of public pension systems and point to several important considerations for future research.

“…A common way of measuring state contributions is by comparing them to the ARC (Eaton and Nofsinger ; Munnell et al ). ARC (sometimes referred to as the actuarially required contribution) is the amount that actuaries have determined a state must contribute on an annual basis if it is to cover the benefits earned by current employees as well as unfunded liabilities that have accrued.…”

Section: Budget Stabilization Funds State Pension Funding and Fiscamentioning

confidence: 99%

The Impact of Budget Stabilization Funds on State Pension Contributions

Clair¹

2013

Despite the shortfalls in public employee pension funds, there is little known about the effect of fiscal institutions on pension funding. This paper focuses attention on the link between pension contributions and budget stabilization funds (BSFs) over the period 1997–2008. It employs the Blundell–Bond (1998) estimator in order to address the concern that the deposit and withdrawal rules that drive the management of BSFs may be endogenous to state pension contributions. Empirical results suggest that BSFs with strict deposit rules are associated with higher pension contributions, while strict withdrawal rules are associated with lower contributions.