Political Effects on Pension Underfunding

Erick M. Elder

Department of Economics & Finance
College of Business
University of Arkansas-Little Rock
Little Rock, AR 72204
Email: emelder@ualr.edu
Phone: 501-569-8879

Gary A. Wagner*

Department of Economics
College of Business & Public Administration
Old Dominion University
Norfolk, VA 23529
Email: gwagner@odu.edu
Phone: 757-683-3500


February 15, 2014

Abstract
Pension underfunding in the public sector has received considerable attention recently and is
often cited as the next looming crisis. The majority of recent research has focused on
appropriately measuring the underfunding. In this paper, we employ a political economy
framework to show that increases in partisan polarization and electoral uncertainty may both lead
to greater underfunding. Using an unbalanced panel of individual pension plans, we find robust
empirical evidence that higher legislative turnover rates, more electoral competition, and term
limits all lead to more pension underfunding. This confirms that political environments play a
pivotal role in pension underfunding.


JEL classification codes: H3, H7, H75
Keywords: pensions, polarization, political economy, term limits, electoral competition




* We would like to thank David Mitchell, Tom Garrett, Bo Zhao, Mario Villarreal, and participants at the National
Tax Association and Southern Economic Association annual conferences for many valuable suggestions that have
improved the paper. We are also grateful to Gary Moncrief for graciously providing us with the state legislative
turnover rate data. Any remaining errors are the sole responsibility of the authors.
1

Political Effects on Pension Underfunding

I. Introduction
Since the Pew Charitable Trust's Trillion Dollar Gap attracted mainstream attention to
the financial health of state and local government pension plans and identified them as the next
potential crisis, the majority of research has largely focused on measuring the severity of the
underfunding and proposing solutions to the problem. In this paper, we utilize and test a simple
two-period political economy framework to broaden our understanding of public pension
funding decisions. The model assumes that legislators, who face uncertainty concerning re-
election, optimize by selecting the mix of pension funding and two public goods to provide.
Since even a severely underfunded pension will have sufficient assets on hand to make benefit
payments for at least some period of time into the future, we assume that the incumbent
government chooses a level of pension funding in the first period that serves as the source of
income for retired workers in the second period.
1
The governments may value the two public
goods they provide differently due to partisan polarization. Since the incumbent government
faces electoral uncertainty, the model predicts that more electoral uncertainty (which may
include term limits) and more partisan polarization between the governments will result in lower
pension funding. This is because the incumbent government optimally chooses to expand their
provision of their preferred public goods mix while political control is certain.
Using an unbalanced panel of 91 distinct state-administered pension plans from 47 states
over the period from 2001 to 2010, we find very robust empirical evidence that higher legislative
turnover rates, more electoral competition, and the presence of term limits all lead to more
pension underfunding. This confirms that state political environments and institutions play a

1
According to the Congressional Budget Office (2011), in 2010, the 100 largest state and local public pensions had
assets of $2.6 trillion, which was 14 times the benefit payments paid in that year.
2

pivotal role in pension funding. Understanding the causes of pension underfunding will clarify
paths to better solutions in the future.
The following sections of the paper provide background information on the
underfunding issues, develop the theoretical framework, describe our data and empirical
methodology, present the empirical results, and offer concluding remarks.

II. Background and Previous Research
In 1979, nearly 70 percent of (full-time) private sector employees worked for employers
that sponsored defined benefit retirement systems.
2
Presently, only about 18 percent of private
sector employees participate in a defined benefit system, compared to 78 percent of public sector
counterparts.
3
Pension sponsors bear the risk of being able to pay the promised future benefits to
retirees in a defined benefit system, whereas an individual employee bears the risk of
accumulating a sufficient amount of assets for retirement in a defined contribution system.
A pension plans level of funding is the most common metric for gauging whether a
plans current stock of assets is sufficient to pay the future liabilities. In basic terms, a pension is
underfunded when the present value of the pensions liabilities exceed the current stock of the
pensions assets. Conversely, a pension is overfunded if the present value of the pensions
liabilities is less than its current stock of assets. Pensions in the private sector are governed by
the federal standards established in the Employee Retirement Income Security Act of 1974
(otherwise known as ERISA), while individual states have complete autonomy over how plans in
their jurisdictions operate. Since 1984, the Governmental Accounting Standards Board (GASB)

2
Munnell, Fraenkel, and Hurwitz (2012).

3
U.S. Department of Labor, Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in the
United States, March 2011 (Washington, D.C.: 2011).

3

has issued statements to guide the administration of public sector pensions. However, the GASB
has no formal authority or enforcement powers, so individual states are not bound by its
guidelines.
4

Underfunded public pensions have implications for current retirees, current employees,
and future employees who may be subject to plan changes. From 2008-2011 for example, the
Government Accountability Office (2012) found that 24 states adjusted benefit formulas, 29
states raised the retirement age or increased service requirements, 18 states reduced or eliminated
post-retirement increases (a total of 35 states have done at least one of the previous three
actions), and 25 states increased employee contributions. In most states, any changes apply only
to future and non-vested employees (GAO, 2012).
Pension members now have an additional reason to worry. While Brown and Wilcox
(2009) reference the long held belief that pension benefits are protected by constitutional,
statutory, or common law guarantees, a recent ruling in Detroit's bankruptcy case casts doubt on
this view. Since federal law supersedes state law, a federal bankruptcy judge ruled in December
2013 that pension benefits do not receive any heightened protections even though Michigan's
constitution expressly protects them.
5
Given this ruling, the full extent to which a subnational
government remains liable for pension obligations will likely remain unresolved for several more
years.
Underfunding may also negatively impact the pension sponsors, who may face higher
borrowing costs and lower credit ratings because of underfunding. In 2012, Standard & Poors

4
In practice, many of the public sector pension plans generally follow the GASB guidelines. See Munnell, Aubry,
Hurwitz, and Quinby (2011) and Brown and Wilcox (2009) for a discussion of pension underfunding and recent
changes in the GASB guidelines.

5
Detroit Ruling on Bankruptcy Lifts Pension Protections. The New York Times, December 3, 2013.

4

downgraded the credit rating for Illinois and specifically cited the states weak pension funding
levels as one of the reasons.
6

Although pension funding ratios depend on the valuation of assets and liabilities, the
measurement of liabilities is far more contentious and has received more attention in recent
years.
7
The primary issue is how plans should discount future liabilities. The most common
method is to discount future liabilities based on the expected return of the plans assets, which
for most plans is around 8 percent. The rationale is that if a pension earns this return each year
over the amortization period and is fully funded, then the initial assets will be able to exactly
cash flow the future liabilities.
There are two fundamental problems with this approach. First, asset returns are random
so there is a very small probability that a pension will actually earn exactly 8 percent each year.
Moreover, even if the average return is 8 percent over the amortization period, there is still less
than a 50 percent probability the pension assets will be sufficient to pay all future liabilities. This
is because 50 percent of the return sequences will average below 8 percent so plans that
experience those sequences of returns will have insufficient initial assets to cash flow all of the
benefits. Finally, of the return sequences that do average 8 percent or higher, a small fraction
may also not be able to cash flow all of the benefits due to the possibility of an early sequence of
poor returns that exhausts the assets before all of the benefits can be paid.

6
S&P Lowers Illinois Credit Rating Over Pensions. The Chicago Tribune, August 29, 2012.

7
For an excellent review of the various pension accounting methods see Clark et al. (2011). On the asset side, each
plans investment smoothing period is also an important determinant of the funding ratio. Most plans use smoothing
periods between 3 and 10 years. Plans with a longer smoothing period count a smaller fraction of annual investment
gains or losses as assets so their funding ratios are less volatile. As a consequence of this accounting method
however, the severe decline in equity prices in 2008-2009 will continue to deteriorate pension funding levels until
2013 or 2014.

5

The second issue regarding the discount rate is that finance theory suggests that a
sequence of cash flows should be discounted by a rate that reflects the riskiness of those cash
flows rather than by the expected returns of the assets that are dedicated to finance those cash
flows. The intuition behind this is that any level of assets would be sufficient to finance any level
of future liabilities as long as the assets were invested in risky-enough assets. In other words,
discounting any sequence of future liabilities by a higher rate will reduce the present value of
those liabilities and improve the plans funding position even though the sequence of future
payments remains unchanged. Hence, investing in riskier assets or using a higher discount rate
will make a pension appear to be more funded in an expected value sense.
Following this line of reasoning, Novy-Marx and Rauh (2009, 2011) propose valuing
future liabilities at the risk-free rate because pension benefits have historically been viewed as
virtually guaranteed, at least before the Detroit ruling. Brown and Wilcox (2009) cite examples
where Orange County and New York City had significant financial troubles but pension benefits
were paid in full. Therefore, if one assumes that pension payments will occur with a high degree
of certainty, pension liabilities increase dramatically and funding ratios drop to levels that are
well below self-reported levels. Novy-Marx and Rauh estimate the aggregate pension shortfall to
be as high as $3.25 trillion, which is larger than the total explicit debt for all state and local
government agencies. In order to remedy the shortfall, Rauh (2010) estimates that pension
contributions will have to increase by 75 percent in the next decade.
8


8
Discounting future liabilities at a risk-free rate may be more appropriate than current practices but it does not
guarantee that public pensions will have sufficient funds to cash flow future liabilities. This is because if pension
plan investment strategies do not change, the randomness in asset returns will ensure that there is some positive
probability that a plans assets will not be sufficient to cash flow all future liabilities even if the pension is initially
fully-funded. Additionally, discounting at a risk-free rate would create another issue to consider because if a pension
is or ever becomes fully funded, there would be a reasonably high probability that the plan will generate a
significant surplus of funds because of the randomness in investment returns.

6

Although Novy-Marx and Rauh (2009, 2011) have increased awareness of the pension
problem, Biggs (2011) suggests that the critical issue may not be a plans funding level per se,
but whether or not sufficient assets exist to cash flow the plans future obligations. Clearly, the
level of funding is positively related to the ability of a pension to cash flow its future liabilities,
but the level of funding is still only a proxy for what Biggs argues is a more important measure.
After all, a slightly underfunded pension and a slightly overfunded pension will have virtually
the same probability of being able to cash flow their future liabilities.
Given the current allocation of pension assets and that asset returns are random, Biggs
(2011) estimates the cost to guarantee all currently accrued future liabilities. One way for a
pension sponsor to guarantee a sufficient amount of funds in the future is to buy put options
that gives the holder of the options the right to sell their assets at a specific price (the strike price
would be a price sufficient to pay their future obligations). Using this method, Biggs estimates
the aggregate level of underfunding to be $4.6 trillion, or nearly 5 times the self-reported level.
While the valuation of liabilities has dominated recent research, several studies have
examined the factors that affect funding levels.
9
Mitchell and Smith (1994), Mitchell and Hsin
(1997), Chaney et al. (2002), Yang and Mitchell (2008), and Munnell et al. (2011) find that
economic conditions and plan governance structures are important funding determinants. For
example, increases in a states unemployment rate and higher levels of debt result in lower
funding ratios. Funding ratios are also lower in pension plans with more members on the
governing board and in plans that use higher discount rates and longer amortization periods.
More recently, Munnell et al. (2011) find that plans are better funded when they make their
required annual contribution and have a separate investment council.

9
A number of early pension studies, such as Testin (1984, 1986), Testin and Snell (1989), and Dulebohn (1995)
were descriptive in nature and lacked any regression-based analysis.
7

The evidence regarding other state-level factors is more mixed. Mitchell and Smith
(1994) and Kelley (2014) find pensions to be more underfunded when more public sector union
members are present, whereas Chaney et al. (2002) find systems to be better funded in states that
allow collective bargaining for public sector workers. Similarly, Mitchell and Hsin (1997) find
that prohibiting states from carrying over a budget deficit into the next fiscal year has no effect
on funding ratios, while Chaney et al. (2002) find funding levels to be lower in states with
stringent balanced budget rules.
A limitation of many previous studies, including Mitchell and Smith (1994), Mitchell and
Hsin (1997), Chaney et al. (2002), and Munnell et al. (2011), is that they are cross-sectional and
are unable to control for unobserved heterogeneity or changes over time. Moreover, while
Johnson (1997), Yang and Mitchell (2008), and Kelley (2014) employ a panel framework, none
has fully exploited their panel design. For instance, Yang and Mitchell (2008) estimate a
simultaneous equations model of 566 pooled individual pension plan observations to investigate
the relationship between funding levels, annual required funding, and the plans investment
returns. Their models do not include either fixed year effects or fixed plan effects because
governance and accounting rules often do not vary much over time. Similarly, Kelley (2014)
aggregates state and local pension plans within a state to explore differences in the level of per
capita underfunding. Aggregating individual pension plan data within a state also requires him to
omit individual plan characteristics that may be important determinants of funding ratios.

III. Theoretical Framework
As an alternative to theories underlying standard pension accounting, we extend a
political economy framework to model the pension funding decision. Since even a severely
8

underfunded pension will have a very high probability of being able to cash flow liabilities for at
least some period of time, fully funded and underfunded pensions will appear to be identical (or
nearly identical) if the time horizon is short enough. In other words, public pensions may be
viewed as being similar to public investment projects in the sense that providing additional
funding today yields a payoff in some future period by extending the time horizon over which
the pension can cash-flow its liabilities.
One of the earliest political economy models of public investment, Besley and Coate
(1998), demonstrated that it may be optimal for policy makers to forgo investments that would
provide a future benefit (and be Pareto improving) because future political control is uncertain.
More recent theoretical models developed by Darby et al. (2004), Robinson and Torvik (2005),
Bohn (2007), Fiva and Natvik (2013), and Azzimonti (2013) share the general theme that
political uncertainty and/or polarization may lead to policies that favor short-term payoffs over
longer-term payoffs.
10

We model the effects of electoral uncertainty and partisan polarization on pension
funding by extending Bohns (2007) simple two-period, two-sector model. The government
discounts the future by and provides two public goods in each period, G
t
and F
t
for t = 1, 2.
There is also a private consumption good in each period, C
t
, and the governments total expected
utility (W) depends on the current and future provision of the public goods and the current and
future level of private consumption. The governments utility function may be expressed as:

10
Recent empirical studies by Uppal (2011) and Uppal and Glazer (2011) on legislative turnover rates and policy
outcomes are also consistent with this framework. Uppal (2011) finds that per capita government spending is higher
in Indian states with higher turnover rates and skewed more toward short-term consumption rather than long-term
investment. Likewise, Uppal and Glazer (2011) find that spending and income taxes are higher in US states that
have higher legislative turnover rates, which they attribute to legislators being more short-sighted when facing low
survival odds.

9

) * ,

)- + , (1)
where both () and () are assumed to be concave and continuously twice differentiable and
is the expectation operator.
There are two types of governments, i and k, and each government provides both types of
public goods (but not necessarily in the same amounts). There are also two social groups and
each group has a preference for a specific type of government. Each social group derives utility
from each of the public goods, but has a preference for a particular public good (either F or G).
We assume that each type of government optimally chooses their provision of public goods and
that their utility from that provision is given by:

for . (2)
For simplicity, we follow Bohn (2007) and assume that each type of government derives
the same level of utility from their own optimal provision of public goods:

). (3)
The degree of partisan polarization between the two types of governments is manifested
in terms of the allocation and division of the public goods and is assumed to be measured by an
exogenous parameter, . The utility that a type-i government receives from a type-k
governments provision of public goods is assumed to be suboptimal for the type-i government
(and vice versa). This can be expressed formally as:
11

. (4)

11
Without loss of generality, it is assumed that [

]. As Bohn (2007) notes, the governments are identical

and have the same preferences when

. If =1, then we have the extreme case in which a type-i government

receives zero utility from the type-k governments optimal provision of public goods (and vice versa).
10

Government spending in the first period is assumed to be allocated between the provision
of the two public goods and pension funding, X
p
. The government collects taxes using a constant
and proportional tax rate, , that is exogenous. All members of the private sector work in the first
period and receive an exogenous endowment equal to

.
In the second period, a fraction of the population does not work and receives pension
benefits equal to X
p
. As is the case in the real world, pension benefits are taxed like ordinary
income. Therefore, the governments period-by-period budget constraints are given by:

(5)

( )

.
Period-by-period budget constraints for the private sector are therefore:

( )

(6)

( )( )

( )

.
The governments first period utility function can be obtained by substituting the first
period private sector and government budget constraints into (1). This yields:

) (( )

(7)
(( )

.
Electoral uncertainty is incorporated by assuming that the incumbent government has an
exogenous probability of losing office equal to . If the current government remains in office in
the second period, which will occur with probability 1-, then it will have utility equal to
11

(

). Alternatively, if the current government loses office in the second period

(with probability ), then its utility will be given by (

)
()

). Therefore, the
second period expected utility for the incumbent government is:
*,

)-+ 0( )((

)) (

)
()

)1. (8)
Substituting the second periods private and government budget constraints into (8) yields:
*,

)-+ 0 .( )( )

( )

/ ( )( )

( )

1, (9)
where ( ) ( )

. Bohn (2007) refers to as political instability. Clearly,

decreases as increases or as increases, implying in our context that the incumbent
government effectively discounts the benefits received by pension recipients (X
p
) in the second
period when partisanship increases or the odds of electoral survival diminish.
Summing equations (7) and (9) produces the incumbent governments two-period
objective function with pension funding as the only choice variable. This is:
(( )

0 .( )( )

( )

/ ( )( )

( )

1 (10)
The first-order condition from maximizing (10) with respect to X
p
is therefore:
.( )( )

( )

/ ( ) ( ) . (11)
For analytical purposes, assuming () has a log utility functional form, we can then solve for
the optimal level of pension funding as:

()(())()()

(())()
. (12)
12

Since it is straightforward to show that

, this simple model produces several

intuitive and testable implications.
12
For instance, as the turnover rate increases ( increases) or
as partisan polarization increases ( ), pension funding decreases. This is because the
incumbent government effectively discounts the future more highly so it elects to provide more
of their preferred mix of public goods in the first period rather than funding pensions. Of course,
if both governments have identical preferences (

), then electoral uncertainty will have no

effect on pension funding because both governments derive the same level of utility from the
provision of public goods. The level of pension funding will also be unaffected if the incumbent
government is re-elected with certainty ( ) Finally, since pension benefits accrue in the
future, the model also predicts that legislative term limits ( ) will reduce pension funding as
long as the two governments have different preferences over the provision of public goods.

IV. Data and Empirical Specification
Our pension data are from the Public Plans Database, which begins in 2001 and provides
annual data on 126 individual state and local defined benefit plans collected from certified
annual financial reports, actuarial valuations, and plan member handbooks and administrators.
The 107 state-level plans represent more than 90 percent of all state government pension
members and assets, while the 19 local plans cover approximately 20 percent of all local
government pension members and assets.
13
In general, more than 90 variables are available

12
This result can be seen by defining

()
()
and using the quotient rule, where

( )(
)

and

( ) .

13
The Public Plan Database is co-sponsored by the Center for Retirement Research at Boston College and the
Center for State and Local Government Excellence. Coverage statistics are reported on the Center for State and
Local Government Excellences website, which is located at: http://slge.org/research/public-plans-database. The
database itself is accessible at: http://pubplans.bc.edu.
13

annually for each plan, including key characteristics such as the plans actuarial methods,
assumptions, and asset and liability valuations. Detailed information on each plans membership
and retirees, asset allocation, asset returns, and governance are also provided.
Since legislative turnover rates for local governments are not readily available, we limit
our analysis to the plans that have statewide jurisdiction and administration. We exclude
Nebraskas lone pension plan because their unicameral legislature makes it impossible to
determine the controlling political party. Two pension plans for Washington, DC are also
excluded because of the Districts fiscal arrangement. We omit all observations in which any
pension plan reports using the aggregate cost funding method because this accounting method
does not recognize an unfunded liability and always reports a funding ratio of 100 percent. After
excluding observations that have missing or incomplete data, our largest possible sample is an
unbalanced panel of 782 observations covering 91 distinct pension plans from 47 states over the
period from 2001 to 2010. Unfortunately, we cannot include any plans from Massachusetts or
Vermont due to missing data. Appendix Table 1 links the individual pension plan observations in
our sample directly to the Public Plan Database.
While the average funding ratio in our sample is 82.8 percent, there is considerable
variation across individual plans and over time. Seven plans Delaware State, Florida
Retirement System, Maine Local, North Carolina Teachers and State Employees, Texas Law
Enforcement and Custodial Officers Service, the University of California, and Washingtons
Law Enforcement and Fire Fighters Retirement System Plan 1 all have an average funding
ratios above 100 percent, with Washingtons plan having the highest average ratio at 120
percent. In terms of all of the plans, 6 plans in our sample have average funding ratios below 60
percent, 8 plans average in the 60s, 20 plans average in the 70s, 28 plans average in the 80s, and
14

22 plans have average funding ratios in the 90s. The two most underfunded plans are the Indiana
and West Virginia Teacher's plans, with average funding ratios of 44.1 and 31.1 percent
respectively.
In general, funding ratios declined during our sample period. Starting from a peak
average funding ratio of 97.7 percent in 2001, the mean ratio declined steadily to around 83
percent by 2004 and remained near this level until 2007. However, between 2007 and 2010 the
mean funding ratio for all plans decreased sharply from 82.4 percent to just over 68 percent.
Formally, we can express our empirical model as:
, ,..., 1 ; 1,..., ; ,..., 1 : T t J j N i Ratio Funding
ijt k t jt ijt ijt
Z X (13)
where Funding Ratio
ijt
is the self-reported funding ratio of plan i in state j at time t using their
own actuarial methods, X
ijt
denotes a vector of time-varying characteristics of plan i in state j at
time t, Z
jt
denotes a vector of time-varying economic and political control variables in state j at
time t,
ijt
is the error term, and is the constant term. Since our objective is to explore how
turnover and polarization affect funding levels, we use each plans self-reported funding level as
the dependent variable because this is the metric that decision-makers would use in practice.
Each specification includes year fixed effects (
t
) to control for aggregate shocks. We
also explore the robustness of our results by including plan-specific fixed effects in some
specifications and state-specific fixed effects in others. The non-year fixed effects are
represented by

in (13), where k=i,j for plan- and state-specific fixed effects respectively. Both
plan- and state-specific fixed effects cannot be included in the same regressions because the
state-specific effects fully absorb the plan-specific effects. State-specific fixed effects will
control for time-invariant factors that are correlated with pension funding within a given state,
such as unique state laws or different budget cycles, while the plan-specific fixed effects will
15

control for time-invariant factors that are unique to a given plan. Examples of time-invariant
plan-specific factors include the number of members on the plans board, the accrual rate, and
the method employed to establish employer contributions.
We include a number of variables to control for plan-specific factors. These include the
percentage of the plans annual required contribution that is actually remitted, the employees
share of total plan contributions, the increase/decrease in the fair market value of the plans
investment returns, and the percentage of plan investments that are invested in equities. Variable
definitions, descriptive statistics, and sources for all of the variables in our empirical
specifications are provided in Table 1.
[Table 1 here]
Each plans assumed rate of inflation, rate of return (or discount rate), and amortization
period are also included as regressors. Based on previous studies, longer amortization periods
and higher assumed inflation rates should lead to lower funding ratios, while higher discount
rates are expected to result in higher funding ratios. The average discount rate in our sample is
7.98 percent, but this varies from a high of 9 percent in Arizonas Public Safety Personnel plan
to a low of 7 percent in Texass Municipal plan.
Finally, we include two indicator variables that equal unity if the plan uses a closed
period or a fixed period for amortizing any unfunded liability, respectively. Relative to the
omitted category of an open amortization period, in which case any unfunded liability is
reamortized annually using the plans full amortization period, plans using the fixed and closed
periods reamortize any unfunded liability over a declining number of years. The open approach
will reduce the year-to-year variability in required pension contribution rates by construction and
16

should result in lower funding ratios. Thus, we expect fixed and closed period plans to have
higher funding ratios relative to open period plans.
For the state-level economic controls, we include the unemployment rate, level of per
capita personal income, debt outstanding as a share of personal income, general fund revenue as
a share of personal income, total state population, and the fraction of the states population age
65 and older. Consistent with previous studies, we expect funding ratios to fall in difficult
economic times and to be lower in states with higher debt-to-income ratios.
In terms of the political regressors, separate party control indicator variables are included
that equal unity if Democrats (Republicans) have unified political control of the states
legislature and governorship at time t. We measure the turnover rate in each states lower house
and upper house using the election-to-election methodology of Moncrief et al. (2004). This
approach, which computes turnover rates as the difference between the number of new members
from the current and previous elections, treats midsession replacements as a seat that has turned
over. Since election cycles vary from state-to-state and between chambers, turnover rates are
only observed in election years and are zero in non-election years. Consistent with our
theoretical model, increases in legislative turnover rates are expected to result in lower pension
funding ratios. Turnover rates in lower houses average just over 25 percent in election years (and
roughly 12 percent when averaged over all observations), which means that most state lower
houses replace 25 percent of their membership every two years (the most common election
cycle). Over the period from 2001 to 2010, Louisiana had the highest average turnover rate in the
lower house at 48.1 percent during election years, while North Dakota had the lowest at 11.5
percent. Similarly, the mean turnover rate in the upper house is just over 24 percent in election
years (and just over 10 percent when averaged over all years). Again, Louisiana had the highest
17

average turnover rate in state upper houses at 61.4 percent during election years, while Delaware
had the lowest election year average rate at 7.6 percent.
We also differentiate between turnover and competition/polarization by including a 4-
year average of each states folded Ranney index to measure electoral competition (Ranney,
1976; Bibby and Holbrook, 2004). The traditional or unfolded Ranney index is computed by
averaging, over a given period of time, the Democratic Partys share of the gubernatorial vote,
the fraction of seats held by the Democratic Party in both the house and senate, and the
percentage of time the Democratic Party controlled both the governorship and legislative
majority. The folded Ranney index modifies the traditional index so that the values range
between 0.5 and 1, where 0.5 indicates one-party domination and scores approaching unity
reflect increasing party competition, regardless of party affiliation.
14
To the extent that partisan
differences are adequately captured by the folded Ranney index, we expect more electoral
competition to result in more pension underfunding.
Since the folded Ranney index is based on party membership numbers rather than
ideology, we also construct an ideology-based measure for each state using the DW-Nominate
scores from the states Congressional delegation to assess polarization (Poole and Rosenthal,
2007). The DW-Nominate scores are available for each member of Congress in each
Congressional session, are based on the members roll-call voting history, and range from -1
(very liberal) to +1 (very conservative). For the 107
th
through the 111
th
Congresses, each states
ideology-based polarization measure is constructed as the sum of the squared deviations in each

14
The traditional Ranney index varies from 0 to 1, with 0 representing absolute Republican control and 1
representing absolute Democratic control. The folded Ranney index is calculated as 1-abs(.5 Ranney index). See
Bibby and Holbrook (2004) for more information.

18

members DW-Nominate score from the state delegations median score.
15
This measure is non-
negative and larger values reflect more ideology-based partisan variation in roll-call voting.
Consistent with our theory, we expect additional partisan polarization to reduce pension funding.
Finally, we include an indicator variable that equals unity if the state has a legislative
term limit in place in year t. Our model predicts that term limits should reduce pension funding
in favor of public goods. Several previous studies have also found empirical evidence that term
limits lead to higher government spending (Alt et al., 2011; Erler, 2007; Besley and Case,
1995).
16
In our sample, seventeen states had an active term limit in place at some point between
2001 and 2010, with most states having some law in place during the entire sample period.

V. Empirical Results
Baseline Results
The results of our baseline regressions are presented in Table 2. Models 1, 2, and 3 are
estimated with plan-specific fixed effects and include only the lower and upper house turnover
rate variables (Model 1), only the term limit indicator (Model 2), and the turnover rate variables
and term limit indicator (Model 3). Models 4, 5, and 6 are estimated with state-specific fixed
effects instead of plan-specific fixed effects. Standard errors for each model are clustered at the
individual pension plan level.
[Table 2 here]
The models with plan-specific fixed effects (1, 2, and 3) explain roughly 32 percent more
of the variation in funding ratios than the models with state-specific fixed effects (4, 5, and 6).

15
Since sessions are two years in length, we assume each states ideology-based polarization measure is constant for
a given Congressional session since members receive only one score per session.

16
See Mooney (2009) for a review of the research investigating term limits.
19

This implies that unobserved plan-specific factors, such as the presence of an investment council
and composition of the plans board are more important in explaining funding ratios than
unobserved state-specific factors.
In terms of the pension characteristics, we find that plans with higher employee
contribution shares and plans that remit more of their required annual contribution have
significantly higher funding ratios. Specifically, increasing the employees contributions by 1
percentage point raises funding ratios by 0.12 to 0.25 percentage points. Since the average
employee contribution share is 39 percent, a more equitable 50-50 split would significantly boost
funding ratios. In addition, plans that utilize longer amortization periods have lower funding
ratios, while plans that assume higher discount rates report significantly higher funding ratios.
Using Models 1, 2, and 3, our estimates imply that every 100 basis point increase in the plans
assumed discount (or investment rate of return) rate leads to a 4.6 percentage point increase in
the self-reported funding ratio.
Consistent with previous research, we also find that funding ratios fall during difficult
economic times. Other factors constant, a 1 percentage point increase in a states unemployment
rate lowers pension funding ratios by 1.3 to 1.8 percentage points. Higher income states are
found to have lower pension funding ratios on average, while states with more revenue capacity
have plans with significantly higher funding ratios.
Turning our attention to the political variables, our results show that while increased
partisan polarization is negatively related to pension funding in each specification, the estimated
effect is not statistically different from zero. However, we find very strong evidence that funding
levels are significantly lower in states with greater electoral competition. Although the folded
Ranney index is difficult to interpret cleanly because it is a 4-year average of four different
20

dimensions of party control, our results imply that an increase in the index from, say, 0.65 to
0.75 would lower pension funding ratios by 2.0 to 2.5 percentage points, other factors constant.
This result is consistent with our theoretical argument that legislators will divert funding away
from pensions when their electoral environment is more uncertain.
In addition to competition, we also find that a higher turnover rate in a states upper
house results in greater pension underfunding. Specifically, we estimate that a 1 percentage point
increase in the upper house turnover rate lowers pension funding ratios between 0.045 and 0.062
percentage points. While this estimate may appear to be small, turnover rates are quite volatile
and often increase/decrease dramatically in election cycles. For example, the mean upper house
turnover rate during election years in our sample is just over 24 percent, with Michigan having
the highest single upper-house turnover rate in our sample at 84.2 percent in 2002.
17
Given the
mean turnover rate and our estimated coefficients, our results imply that pension funding levels
fall between 1.1 and 1.5 percentage points in a typical state during upper house election years.
This reduction is non-trivial and is similar in magnitude to a one percentage point increase in the
states unemployment rate. Moreover, of the 202 upper-house election observations in our
sample period, 26 of those elections had turnover rates over 40 percent and 10 had turnover rates
in excess of 50 percent. Thus, in nearly 13 percent of upper house election observations (26 out
of 202), our empirical models predict that pension funding levels will fall by a minimum of 2.1
percentage points due to political turnover, other factors constant.
Our finding that only turnover rates in the upper house appear to reduce pension funding
may arise from several factors. First, Asako et al. (2013) find that average seniority tends to be
higher for members of state upper houses. This may give members of that chamber a

17
Despite the fact that election cycles vary from state-to-state and from chamber-to-chamber, there are no years in
our sample in which all state level turnover observations are zero for either chamber.
21

disproportionate influence over policy outcomes because of their experience and expertise,
agenda setting authority, or logrolling and distributive politics advantages (Cummins, 2013;
Squire and Moncrief, 2010). Moreover, Chen and Malhorta (2007) find that since lower house
districts tend to overlap upper house districts, the pork-barrel benefits are smaller for lower
house districts. This suggests that members of the upper house may have a stronger incentive to
divert spending away from public pensions and toward pork-barrel pet projects.
Finally, with regard to term limits, our results indicate that the presence of a term limit is
correlated with funding ratios that are between 9 and 11 percentage points lower, other factors
constant. Given that previous research suggests that term limits may lead to greater government
spending, this result is consistent with our model and implies that policymakers in term-limited
states may be increasing spending at the expense of funding their pensions.
Overall, our findings indicate that state political structures and institutions play a pivotal
role in the unfunded liability problem that is plaguing so many state and local pension plans.
While increasing employee contributions or transitioning employees to a defined contribution
system is always an option (that would likely carry a host of new policy concerns), our results do
suggest policy options that may ease underfunding concerns. For instance, eliminating legislative
term limits should boost pension funding considerably. Obviously, this has the potential to create
other unintended effects that would also need to be considered. However, an alternative strategy
is to restrict legislative discretion and make it more difficult for policymakers to alter pension
funding. A simple example of such a policy, emulating elements from the tax and expenditure
limitation laws in place in many states, would be to stipulate that annual pension funding occur
automatically and to require a legislative supermajority vote in order to reduce the (automatic)
funding.
22


Robustness Checks
We explore the robustness of our baseline regression results by estimating the standard
errors using Cameron et al.s (2011) multi-way clustering and by including additional regressors
that have been identified in previous studies as important determinants of state policy decisions.
The results in Table 2 report pension-clustered standard errors, so they are robust to
within-plan serial correlation and heteroskedasticity. It is possible, and perhaps even likely, to
expect the regression errors to be correlated within an individual state over time. This could
occur, for example, if a state changed a law or regulation governing the pension plans during our
sample period because this state-level clustering would not be captured by the fixed effects.
Cameron et al. (2011) demonstrate that the estimator for the cluster-robust covariance matrix
may be expressed as (using their notation):
[7]

,
where X is the full matrix of regressors and

), is the vector of residuals, .*

denotes element-by-element multiplication, and S is a (NT x NT) matrix in which the ij
th
element
is equal to unity if the i
th
and j
th
elements belong in the same cluster and is equal to zero
otherwise. For the plan-clustered errors in Table 2, the i
th
and j
th
elements in S equal unity if both
observations are from the same pension plan.
For two-way clustered errors, which could be plan-state clusters or plan-year clusters,

in [7] is replaced with

) +

) -

). In this
example,

dentifies the observations that share the same pension plan,

identifies the
observations that share the same state, and

identify the observations that share the same
23

plan and state.
18
Three-way clustered standard errors that are robust to plan-specific, state-
specific, and year-specific correlation and heteroskedasticity are a straightforward extension of
two-way clustering. We omit the three-way formula to conserve space.
[Table 3 here]
The regressions in Table 3 reflect our baseline regressions using plan fixed effects that
we re-estimated with plan-state clustered standard errors (Models 7, 8, and 9 in Table 3) and
plan-state-year clustered errors (Models 10, 11, and 12 in Table 3). As one would generally
expect, the multi-way clustered standard errors in Table 3 tend to be larger than the plan-
clustered standard errors from Table 2. However, the statistical significance of our political
variables of interest is unchanged, demonstrating the robustness of our findings.
As a final robustness check, we re-estimate our broadest specification (Model 3 in Table
2) with additional regressors that may affect state policy decisions. These variables include the
dynamic citizen and government ideology measures developed by Berry et al. (1998), the
fraction of a states public sector employees that are covered by a collective bargaining
agreement (to control for union strength), the share of the states voting age population that is
registered to vote, the states fiscal surplus (general fund + rainy day fund) to proxy their current
fiscal health, and an indicator variable that equals unity if the states governor is a lame duck in
her last term.
19

[Table 4 here]

18
We follow Cameron et al. (2011) and adjust each term of

with the appropriate finite sample correction to inflate

the standard errors given by

, where G is the number of unique clusters in that dimension, NT is the sample

size, and k is the number of regressors. In addition, Cameron et al. discuss the possibility of having negative
diagonal elements on the covariance matrix when estimating standard errors in more than one dimension, which they
claim is likely to be the result of very few clusters in a given dimension or no need to cluster in multiple dimensions.
We experienced a few instances of negative variances in the three-way clustered errors and we replaced those
estimated variances with the largest estimated variances from all of the possible two-way clusters following
Cameron et al.s suggestion.

19
The state level union membership data are from the Union Stats database (http://www.unionstats.com).
24

The regressions with additional control variables are reported in Table 4. The
specifications vary by how the standard errors were clustered and whether the regression
includes plan-specific or state-specific fixed effects. Again, we find that the estimated magnitude
and statistical significance of our political variables of interest to be virtually unchanged from
our baseline specifications in Table 2.

VI. Conclusion
Widespread attention has been directed toward understanding the magnitude and causes
of pension underfunding in state and local governments in recent years. Depending on the
assumptions that are used to calculate liabilities, estimates of the aggregate shortfall between
assets and liabilities may be as high as $5 trillion. This is roughly 5 times the self-reported
unfunded liabilities and has triggered a powerful response from both bond rating agencies who
have lowered, or threatened to lower, government credit ratings and from policymakers in both
parties who are seeking reforms. Since 2008, roughly 40 states have enacted at least one major
pension reform to help restore balance to their pension systems.
This paper develops a simple political framework that aids our understanding of the
causes of pension underfunding by investigating the extent to which political factors such as
legislative turnover, partisan competition, and the presence of term limits affect funding levels.
Since even a severely underfunded pension will have sufficient assets on hand to make benefit
payments for at least some period of time, incumbent governments facing increased political
instability will rationally choose to lower pension funding in favor of funding their desired mix
of public goods while political control is certain. This implies that states with more electoral
competition and higher turnover rates will have more pension underfunding.
25

Using a sample of 91 pension plans from 2001 to 2010, our results confirm that higher
upper house turnover rates, more electoral competition, and legislative term limits all lead to
greater pension underfunding, which is consistent with the model. Term limits reduce average
pension funding ratios by roughly 10 percentage points, while funding ratios decline 1.5
percentage points in a typical upper house election year. Our key findings are robust to numerous
specifications with additional regressors and to alternative methods for estimating the standard
errors.
Short of transitioning employees to defined contribution systems, our results suggest that
limiting or reducing legislative discretion over pension funding would enhance the funding levels
of state and local pension plans. Similar to tax and expenditure limitation laws, this could
potentially be accomplished by assigning pension funding to an elevated or automatic status and
to require supermajority approval in order to reduce funding levels.


26

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30

Table 1 Descriptive Statistics and Data Sources
Sample Mean
(Std. Dev.)
Description Source(s)
Funding ratio (dependent variable) 82.842 pension plans self-reported funding ratio
(ratio *100)
Public Plan Database
(17.609)
Employee contributions
(share of total)
39.245
employee share of total pension
contributions (share*100)
Public Plan Database
(20.451)
Pension plan members
(as a share of state's registered voters)
8.036
(5.841)

Total number of pension plan members as a
share of the state's registered voters. Plan
members include actives, retirees, and
surviving spouse and dependent members
Public Plan Database and Statistical
Abstract of the US
Percentage of annual required
contribution
93.390 Percentage of plans self-reported annual
required contribution paid (*100)
Public Plan Database
(69.041)
Assumed rate of inflation

3.592 pension plans assumed nominal rate of
inflation (rate*100)
Public Plan Database
(0.698)
Assumed investment rate of return

7.981 pension plans assumed long-term rate of
return on investments (discount rate)
Public Plan Database
(0.403)
Amortization period

27.733 pension plans remaining amortization
period for unfunded liabilities (in years)
Public Plan Database
(12.020)
Closed period for funding unfunded
liability (1=yes)

0.368
(0.482)
=1 if the plan uses a closed period for
amortizing any unfunded liability (open
period is omitted category)
Public Plan Database

Fixed period for funding unfunded
liability (1=yes)

0.078
(0.268)
=1 if the plan uses a fixed period for
amortizing any unfunded liability (open
period is omitted category)
Public Plan Database

Investment appreciation/depreciation
(share of market value of assets)


-0.522
(13.336)
Net increase or decrease in the fair value of
the plans investments as a share of the
plans self-reported market value
(share*100)
Public Plan Database

Percentage of investment in equities

57.251 percentage of all plan investments in
equities (share*100)
Public Plan Database
(9.961)
Unemployment rate (rate*100)

5.740 average annual unemployment rate
(rate * 100)
Bureau of Labor Statistics
(1.831)
Per capita personal income

34.623 nominal per capita personal income in
thousands
Bureau of Economic Analysis
(5.609)
Debt outstanding
(share of personal income)
8.429 outstanding debt level as a share of personal
income
Statistical Abstract of the US and
Bureau of Economic Analysis (4.029)
Unified Democrat control (1=yes)

0.262 =1 if state Legislature and Governorship are
controlled by Democrats, =0 otherwise
Book of States
(0.440)
Unified Republican control (1=yes)

0.112 =1 if state Legislature and Governorship are
controlled by Republicans, =0 otherwise
Book of States
(0.316)
General fund revenue
(share of personal income)
13.592 states general fund revenue as a share of
state personal income (share*100)
Statistical Abstract of the US and
Bureau of Economic Analysis (4.371)
Total state population
(in millions)
7.253
(7.428)
total state population in millions Bureau of Economic Analysis
Fraction of state's population age 65
& older
12.599
(1.773)
Fraction of the state's total population age
65 & older (share *100)
Bureau of Economic Analysis
Folded Ranney index of electoral
competitiveness

0.881
(0.078)
Index of the 4-year average of the state's
electoral competitiveness. The index ranges
from 0.5 to 1.0, with higher values
representing more electoral competition.
Klarner Politics. Accessible online at:
http://www.indstate.edu/polisci/klarne
rpolitics.htm
State political polarization




3.090
(3.987)



Sum of the squared deviation of each
member of each state's Congressional
delegations DW nominate score from the
states median score. Higher values indicate
more polarization.
voteview.com
Turnover rate lower house

12.281 legislative turnover rate in states lower
chamber (rate *100)
Moncrief et al. (2004)
(15.408)
Turnover rate upper house 10.199 legislative turnover rate in states lower
chamber (rate *100)
Moncrief et al. (2004)
(14.686)
Term limits (1=yes) 0.349 =1 if the state has any legislative term limit
enacted as part of current law, =0 otherwise
National Conference of State
Legislatures (NCSL) (0.476)
Notes: Our sample is an unbalanced panel of 91 distinct state-administered pension plans across 47 states over the period from 2001 to 2010,
which resulted in a total of 782 observations.
31

Table 2 Funding Ratio Regressions
Dependent variable: pension plans self-reported funding ratio (*100)



Constant 175.410 *** 194.136 *** 192.818 *** 227.374 *** 242.698 *** 240.868 ***
(63.234) (57.456) (57.876) (69.243) (65.770) (65.804)
Employee contributions (share of total) 0.118 *** 0.118 *** 0.120 *** 0.247 *** 0.246 *** 0.248 ***
(0.031) (0.031) (0.030) (0.069) (0.069) (0.069)
Pension plan members 0.132 -0.029 -0.038 -0.266 -0.279 -0.279
(as a share of registered voters in the state) (0.349) (0.289) (0.290) (0.208) (0.207) (0.207)
Percent of annual required contribution 0.011 * 0.011 * 0.011 * 0.027 * 0.028 * 0.028 *
(0.006) (0.007) (0.007) (0.015) (0.016) (0.016)
Assumed rate of inflation -2.786 * -2.947 * -2.900 * -1.476 -1.566 -1.543
(1.579) (1.543) (1.550) (3.205) (3.187) (3.198)
Assumed investment rate of return 4.708 ** 4.628 ** 4.678 ** -5.450 -5.569 -5.509
(1.862) (1.832) (1.845) (5.237) (5.256) (5.250)
Amortization period (years) -0.067 ** -0.069 ** -0.070 ** -0.126 ** -0.128 ** -0.128 **
(0.029) (0.030) (0.029) (0.052) (0.053) (0.052)
Closed period for funding unfunded liability 0.279 0.013 0.089 2.510 2.294 2.384
(1.838) (1.838) (1.844) (3.024) (3.024) (3.035)
Fixed period for funding unfunded liability 7.280 7.293 7.305 3.793 3.972 3.970
(9.915) (9.655) (9.717) (7.639) (7.508) (7.532)
Investment appreciation/depreciation 0.044 0.042 0.044 0.081 ** 0.079 ** 0.082 **
(as a share of the market value of assets) (0.031) (0.031) (0.030) (0.032) (0.033) (0.032)
Percentage of investments in equities -0.053 -0.040 -0.041 0.186 * 0.193 ** 0.191 **
(0.057) (0.056) (0.056) (0.096) (0.095) (0.095)
Unemployment rate (*100) -1.808 *** -1.740 *** -1.767 *** -1.399 ** -1.314 ** -1.348 **
(0.695) (0.667) (0.667) (0.698) (0.659) (0.658)
Per capita income (thousands) -1.485 ** -1.574 *** -1.553 *** -0.992 -1.113 * -1.089 *
(0.603) (0.567) (0.567) (0.666) (0.615) (0.615)
Debt oustanding as a share of personal income (*100) -0.624 -0.493 -0.478 -0.772 -0.577 -0.558
(0.493) (0.465) (0.463) (0.530) (0.493) (0.493)
Unified Democrat control of legislature and governorship -1.673 -1.912 -1.925 -1.230 -1.543 -1.557
(1.385) (1.360) (1.357) (1.403) (1.372) (1.365)
Unified Republican control of legislature and governorship -1.696 -1.921 -1.747 -0.777 -1.204 -0.992
(1.966) (1.924) (1.944) (1.969) (1.948) (1.945)
General fund revenue as a share of personal income 0.397 ** 0.471 ** 0.462 ** 0.474 ** 0.562 *** 0.550 ***
(0.193) (0.195) (0.195) (0.201) (0.202) (0.203)
Total state population (in millions) -1.218 -1.047 -1.229 -2.013 -1.696 -1.923
(1.798) (1.804) (1.802) (1.791) (1.812) (1.797)
Fraction of state's population age 65 & older -2.783 -3.542 -3.471 -3.704 -4.353 * -4.248 *
(2.693) (2.576) (2.589) (2.550) (2.468) (2.475)
Folded Ranney index of electoral competition -23.526 ** -24.726 *** -25.081 *** -20.684 ** -22.596 ** -22.991 **
(9.473) (9.271) (9.287) (10.364) (9.900) (9.980)
State political polarization -1.064 -1.068 -0.982 -0.962 -0.999 -0.888
(0.861) (0.862) (0.849) (0.964) (0.973) (0.958)
Turnover rate in state's lower house 0.039 0.040 0.045 0.047
(0.028) (0.028) (0.035) (0.036)
Turnover rate in state's upper house -0.045 ** -0.049 ** -0.058 ** -0.062 **
(0.019) (0.019) (0.026) (0.026)
Term limit inidcator (=1 if any term limit is in place) -8.988 ** -9.126 ** -11.079 *** -11.235 ***
(3.515) (3.557) (3.311) (3.325)
Plan level fixed effects
State fixed effects
Year fixed effects
Overall F-statistic
Adjusted R-squared
Not es: St andard errors are report ed in parat heses and are clust ered at t he individual pension plan level. *** denot es significance at t he 1 percent level, ** at t he 5 percent level, and * at t he 10 percent level.
Fixed effect s are not report ed. Our sample is an unbalanced panel of 91 dist inct st at e-administ ered pension plans across 47 st at es. The t ot al number of observat ions is 782.
yes
Model 1 Model 2 Model 3 Model 4 Model 5
no yes
no
yes
51.825
***
0.888
yes
no
yes
Model 6
14.670
***
0.573 0.889
yes
no
yes
52.285
***
0.889
53.101
***
yes
no
yes
yes
14.291
***
0.573
no
yes
yes
14.343
***
0.571
32

Table 3 Robustness Check Using Alternative Methods for Clustering Standard Errors
Dependent variable: pension plans self-reported funding ratio (*100)





Constant 175.410 ** 194.136 *** 192.818 *** 175.410 ** 194.136 *** 192.818 ***
(73.508) (68.759) (69.492) (73.508) (68.759) (69.492)
Employee contributions (share of total) 0.118 *** 0.118 *** 0.120 *** 0.118 *** 0.118 *** 0.120 ***
(0.035) (0.035) (0.035) (0.037) (0.037) (0.037)
Pension plan members 0.132 -0.029 -0.038 0.132 -0.029 -0.038
(as a share of registered voters in the state) (0.369) (0.324) (0.323) (0.385) (0.324) (0.323)
Percent of annual required contribution 0.011 * 0.011 * 0.011 * 0.011 * 0.011 ** 0.011 *
(0.006) (0.006) (0.006) (0.006) (0.006) (0.006)
Assumed rate of inflation -2.786 -2.947 -2.900 -2.786 -2.947 -2.900
(1.958) (1.920) (1.922) (2.216) (2.136) (2.154)
Assumed investment rate of return 4.708 *** 4.628 *** 4.678 *** 4.708 *** 4.628 *** 4.678 ***
(1.482) (1.466) (1.474) (1.192) (1.203) (1.221)
Amortization period (years) -0.067 ** -0.069 ** -0.070 ** -0.067 ** -0.069 ** -0.070 **
(0.032) (0.033) (0.033) (0.033) (0.034) (0.034)
Closed period for funding unfunded liability 0.279 0.013 0.089 0.279 0.013 0.089
(1.744) (1.763) (1.763) (1.838) (1.838) (1.844)
Fixed period for funding unfunded liability 7.280 7.293 7.305 7.280 7.293 7.305
(10.837) (10.532) (10.615) (10.837) (10.532) (10.615)
Investment appreciation/depreciation 0.044 0.042 0.044 0.044 0.042 0.044
(as a share of the market value of assets) (0.035) (0.035) (0.035) (0.043) (0.042) (0.043)
Percentage of investments in equities -0.053 -0.040 -0.041 -0.053 -0.040 -0.041
(0.069) (0.068) (0.066) (0.073) (0.070) (0.071)
Unemployment rate (*100) -1.808 ** -1.740 ** -1.767 ** -1.808 ** -1.740 ** -1.767 **
(0.798) (0.770) (0.771) (0.798) (0.770) (0.771)
Per capita income (thousands) -1.485 ** -1.574 ** -1.553 ** -1.485 ** -1.574 ** -1.553 **
(0.698) (0.665) (0.664) (0.698) (0.665) (0.664)
Debt oustanding as a share of personal income (*100) -0.624 -0.493 -0.478 -0.624 -0.493 -0.478
(0.606) (0.579) (0.578) (0.606) (0.579) (0.578)
Unified Democrat control of legislature and governorship -1.673 -1.912 -1.925 -1.673 -1.912 -1.925
(1.814) (1.813) (1.812) (1.855) (1.856) (1.864)
Unified Republican control of legislature and governorship -1.696 -1.921 -1.747 -1.696 -1.921 -1.747
(2.469) (2.377) (2.420) (2.469) (2.377) (2.420)
General fund revenue as a share of personal income 0.397 0.471 * 0.462 * 0.397 *** 0.471 *** 0.462 ***
(0.243) (0.247) (0.246) (0.042) (0.081) (0.067)
Total state population (in millions) -1.218 -1.047 -1.229 -1.218 *** -1.047 *** -1.229 ***
(1.660) (1.677) (1.649) (0.241) (0.289) (0.273)
Fraction of state's population age 65 & older -2.783 -3.542 -3.471 -2.783 -3.542 -3.471
(3.262) (3.144) (3.167) (3.262) (3.144) (3.167)
Folded Ranney index of electoral competition -23.526 ** -24.726 ** -25.081 ** -23.526 ** -24.726 ** -25.081 **
(10.207) (10.061) (10.052) (10.207) (10.076) (10.074)
State political polarization -1.064 -1.068 -0.982 -1.064 *** -1.068 *** -0.982 **
(0.821) (0.823) (0.801) (0.383) (0.379) (0.428)
Turnover rate in state's lower house 0.039 0.040 0.039 *** 0.040
(0.032) (0.031) (0.007) (0.055)
Turnover rate in state's upper house -0.045 ** -0.049 ** -0.045 ** -0.049 ***
(0.022) (0.022) (0.021) (0.018)
Term limit inidcator (=1 if any term limit is in place) -8.988 ** -9.126 ** -8.988 ** -9.126 **
(3.934) (3.974) (3.934) (3.974)
Plan level fixed effects
State fixed effects
Year fixed effects
Standard error cluster
Adjusted R-squared
Not es: St andard errors are report ed in parat heses. *** denot es significance at t he 1 percent level, ** at t he 5 percent level, and * at t he 10 percent level.
Fixed effect s are not report ed. Our sample is an unbalanced panel of 91 dist inct st at e-administ ered pension plans across 47 st at es. The t ot al number of observat ions is 782.
Model 10 Model 11 Model 12
no no no no no no
yes yes yes yes yes yes
Model 7 Model 8 Model 9
yes yes yes yes yes yes
0.887 0.889 0.889 0.887 0.889 0.889
plan, state plan, state plan, state plan, state, year plan, state, year plan, state, year
33

Table 4 Robustness Check Using Additional Regressors and Alternative Standard Error Clusters
Dependent variable: pension plans self-reported funding ratio (*100)


Constant 191.983 *** 191.983 *** 191.983 *** 235.991 *** 235.991 ** 235.991 ***
(53.742) (63.373) (63.373) (66.992) (92.103) (42.926)
Employee contributions (share of total) 0.115 *** 0.115 *** 0.115 *** 0.248 *** 0.248 *** 0.248 ***
(0.029) (0.032) (0.034) (0.071) (0.080) (0.080)
Pension plan members 0.020 0.020 0.020 -0.277 -0.277 -0.277
(as a share of registered voters in the state) (0.309) (0.350) (0.350) (0.209) (0.286) (0.286)
Percent of annual required contribution 0.011 0.011 * 0.011 * 0.027 * 0.027 ** 0.027 **
(0.007) (0.006) (0.006) (0.016) (0.012) (0.011)
Assumed rate of inflation -2.512 * -2.512 -2.512 -1.387 -1.387 -1.387
(1.400) (1.686) (1.830) (3.225) (4.428) (4.428)
Assumed investment rate of return 4.218 ** 4.218 ** 4.218 *** -5.700 -5.700 -5.700
(1.828) (1.818) (1.066) (5.160) (6.866) (6.866)
Amortization period (years) -0.075 ** -0.075 ** -0.075 ** -0.133 ** -0.133 ** -0.133 **
(0.030) (0.033) (0.034) (0.053) (0.062) (0.062)
Closed period for funding unfunded liability -0.267 -0.267 -0.267 2.275 2.275 2.275
(1.971) (1.814) (1.971) (3.094) (3.117) (3.117)
Fixed period for funding unfunded liability 7.231 7.231 7.231 3.692 3.692 3.692
(9.126) (9.804) (9.804) (7.128) (4.808) (4.837)
Investment appreciation/depreciation 0.048 0.048 0.048 0.086 *** 0.086 ** 0.086
(as a share of the market value of assets) (0.030) (0.034) (0.041) (0.033) (0.039) (0.055)
Percentage of investments in equities -0.048 -0.048 -0.048 0.194 ** 0.194 0.194
(0.058) (0.069) (0.070) (0.096) (0.128) (0.128)
Unemployment rate (*100) -1.756 *** -1.756 ** -1.756 ** -1.371 ** -1.371 * -1.371
(0.678) (0.772) (0.772) (0.651) (0.707) (0.835)
Per capita income (thousands) -1.653 *** -1.653 ** -1.653 ** -1.137 * -1.137 -1.137 **
(0.570) (0.667) (0.667) (0.599) (0.753) (0.518)
Debt oustanding as a share of personal income (*100) -0.450 -0.450 -0.450 -0.630 -0.630 -0.630
(0.458) (0.543) (0.543) (0.477) (0.576) (0.799)
Unified Democrat control of legislature and governorship -0.909 -0.909 -0.909 -0.271 -0.271 -0.271
(1.549) (1.852) (1.860) (1.645) (2.086) (2.649)
Unified Republican control of legislature and governorship -2.148 -2.148 -2.148 -1.549 -1.549 -1.549
(1.935) (2.343) (2.343) (1.948) (2.104) (2.633)
General fund revenue as a share of personal income 0.490 ** 0.490 * 0.490 * 0.619 *** 0.619 ** 0.619
(0.222) (0.284) (0.284) (0.212) (0.277) (0.385)
Total state population (in millions) -1.659 -1.659 -1.659 *** -2.511 -2.511 -2.511 *
(1.722) (1.580) (0.400) (1.741) (2.130) (1.437)
Fraction of state's population age 65 & older -2.889 -2.889 -2.889 -3.962 -3.962 -3.962
(2.411) (2.910) (2.910) (2.467) (3.071) (3.126)
Folded Ranney index of electoral competitiveness -24.028 ** -24.028 ** -24.028 ** -21.765 ** -21.765 ** -21.765 *
(9.709) (9.946) (9.946) (9.787) (10.173) (12.411)
State political polarization -0.955 -0.955 -0.955 * -0.870 -0.870 -0.870
(0.844) (0.774) (0.489) (0.955) (0.884) (1.072)
Turnover rate in state's lower house 0.052 * 0.052 0.052 *** 0.058 0.058 0.058
(0.029) (0.033) (0.016) (0.038) (0.037) (0.085)
Turnover rate in state's upper house -0.060 *** -0.060 *** -0.060 *** -0.074 ** -0.074 ** -0.074
(0.020) (0.022) (0.023) (0.029) (0.032) (0.060)
Term limit inidcator (=1 if any term limit is in place) -8.117 ** -8.117 ** -8.117 ** -10.551 *** -10.551 *** -10.551 ***
(3.541) (3.851) (3.851) (3.312) (3.530) (0.630)
Public sector employees covered by collective bargaining agreement -1.199 -1.199 -1.199 -0.920 -0.920 -0.920
(as a share of total public sector employment) (0.979) (1.153) (1.286) (1.130) (1.427) (1.939)
Citizen ideology measure -0.108 -0.108 -0.108 -0.091 -0.091 -0.091
(0.120) (0.156) (0.180) (0.132) (0.175) (0.192)
Government ideology measure -0.019 -0.019 -0.019 -0.024 -0.024 -0.024
(0.026) (0.026) (0.017) (0.030) (0.035) (0.049)
General fund surplus/deficit + rainy day fund balance 0.040 0.040 0.040 0.014 0.014 0.014
(0.034) (0.042) (0.030) (0.038) (0.043) (0.060)
Governor is a lame duck in last term indicator 0.157 0.157 0.157 0.873 0.873 0.873
(0.920) (1.133) (1.133) (1.112) (1.514) (0.605)
Registered voters as a share of voting age population (*100) 0.032 0.032 0.032 0.102 0.102 0.102
(0.217) (0.266) (0.266) (0.222) (0.253) (0.208)
Plan level fixed effects
State fixed effects
Year fixed effects
Standard error cluster
Adjusted R-squared
Not es: St andard errors are report ed in parat heses. *** denot es significance at t he 1 percent level, ** at t he 5 percent level, and * at t he 10 percent level.
Fixed effect s are not report ed. Our sample is an unbalanced panel of 91 dist inct st at e-administ ered pension plans across 47 st at es. The t ot al number of observat ions is 782.
yes
Model 13 Model 14 Model 15
yes yes
0.571 0.571 0.571
Model 16
yes yes yes
no no no
plan plan, state plan, state, year
yes
plan plan, state plan, state, year
yes yes yes
0.889 0.889 0.889
Model 17 Model 18
no no no
yes yes
34

Appendix Table 1 Pension Plan Observations in Unbalanced Panel (Page 1)
Notes: The pension plan number and name match those used in the Public Plan Database, Boston College Center for Retirement Research.







Plan # Plan Name State 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total Obs
1 Alabama ERS AL 1 1 1 1 1 1 1 1 1 9
2 Alabama Teachers AL 1 1 1 1 1 1 1 1 1 9
3 Alaska PERS AK 1 1 1 1 1 1 1 1 1 9
4 Alaska Teachers AK 1 1 1 1 1 1 1 1 1 9
5 Arizona Public Safety Personnel AZ 1 1 1 1 1 1 1 1 1 1 10
6 Arizona SRS AZ 1 1 1 1 1 1 1 1 1 9
7 Arkansas PERS AR 1 1 1 1 1 1 6
9 California PERF CA 1 1 1 1 1 1 1 1 1 9
10 California Teachers CA 1 1 1 1 1 1 1 1 8
111 University of California CA 1 1 1 1 1 1 1 1 1 9
13 Colorado Municipal CO 1 1 1 1 1 1 1 1 1 9
14 Colorado School CO 1 1 1 1 1 1 1 1 1 1 10
15 Colorado State CO 1 1 1 1 1 1 1 1 1 1 10
16 Connecticut SERS CT 1 1
17 Connecticut Teachers CT 1 1 1 1 1 5
21 Delaware State Employees DE 1 1 1 1 1 1 1 1 1 9
26 Florida RS FL 1 1 1 1 1 1 1 1 1 1 10
27 Georgia ERS GA 1 1
28 Georgia Teachers GA 1 1 1 1 1 1 1 1 1 1 10
29 Hawaii ERS HI 1 1 1 1 1 1 1 1 1 1 10
31 Idaho PERS ID 1 1 1 1 1 1 1 1 1 1 10
32 Illinois Municipal IL 1 1 1 1 1 1 1 1 1 9
33 Illinois SERS IL 1 1 1 1 1 1 1 1 1 1 10
34 Illinois Teachers IL 1 1 1 1 1 1 1 1 1 1 10
35 Illinois Universities IL 1 1 1 1 1 1 1 1 1 1 10
36 Indiana PERF IN 1 1 1 1 1 1 1 1 1 1 10
37 Indiana Teachers IN 1 1 1 1 1 1 1 1 1 1 10
38 Iowa PERS IA 1 1 1 1 1 1 1 1 1 1 10
39 Kansas PERS KS 1 1 1 1 1 1 1 1 1 1 10
40 Kentucky County KY 1 1 1 1 1 1 1 1 1 1 10
41 Kentucky ERS KY 1 1 1 1 1 1 1 1 1 1 10
42 Kentucky Teachers KY 1 1 1 1 1 1 1 1 1 1 10
44 Louisiana SERS LA 1 1 1 1 1 1 1 1 8
45 Louisiana Teachers LA 1 1 1 1 1 1 1 7
46 Maine Local ME 1 1 1 1 1 1 1 1 1 1 10
47 Maine State and Teacher ME 1 1 1 1 1 1 1 1 1 1 10
48 Maryland PERS MD 1 1 1 1 1 1 1 1 1 1 10
49 Maryland Teachers MD 1 1 1 1 1 1 1 1 1 9
52 Michigan Municipal MI 1 1 1 1 1 1 1 1 8
53 Michigan Public Schools MI 1 1 1 1 1 1 1 1 1 1 10
54 Michigan SERS MI 1 1 1 1 1 1 1 1 8
56 Minnesota PERF MN 1 1 1 1 1 1 1 1 1 1 10
58 Minnesota Teachers MN 1 1 1 1 1 1 1 1 1 9
59 Mississippi PERS MS 1 1 1 1 1 1 1 1 1 1 10
35

Appendix Table 1 Pension Plan Observations in Unbalanced Panel (Page 2)
Notes: The pension plan number and name match those used in the Public Plan Database, Boston College Center for Retirement Research.
Plan # Plan Name State 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total Obs
60 Missouri DOT and Highway Patrol MO 1 1 1 1 1 1 1 1 1 9
61 Missouri Local MO 1 1 1 1 1 1 1 1 1 1 10
62 Missouri PEERS MO 1 1 1 1 1 1 1 1 1 9
63 Missouri State Employees MO 1 1 1 1 1 1 1 1 1 1 10
64 Missouri Teachers MO 1 1 1 1 1 1 1 1 1 9
65 Montana PERS MT 1 1 1 1 1 1 1 7
66 Montana Teachers MT 1 1 1 1 1 1 1 1 8
69 Nevada Regular Employees NV 1 1 1 1 1 1 1 1 1 9
70 New Hampshire Retirement System NH 1 1 1 3
71 New Jersey PERS NJ 1 1 1 1 1 1 1 1 1 9
72 New Jersey Police & Fire NJ 1 1 1 1 1 1 1 1 1 9
73 New Jersey Teachers NJ 1 1 1 1 1 1 1 1 1 9
74 New Mexico PERF NM 1 1 1 1 1 1 1 1 1 9
75 New Mexico Teachers NM 1 1 1 1 1 1 1 1 1 9
78 New York State Teachers NY 1 1 2
80 NC Teachers and State Employees NC 1 1 1 1 1 1 1 1 1 9
81 North Dakota PERS ND 1 1 1 1 1 1 1 1 1 1 10
82 North Dakota Teachers ND 1 1 1 1 1 1 1 1 1 1 10
85 Ohio PERS OH 1 1 1 1 1 1 1 1 8
86 Ohio Police & Fire OH 1 1 1 1 1 1 1 1 1 9
87 Ohio School Employees OH 1 1 1 1 1 1 1 1 1 9
88 Ohio Teachers OH 1 1 1 1 1 1 1 1 1 9
89 Oklahoma PERS OK 1 1 1 1 1 1 1 1 1 1 10
90 Oklahoma Teachers OK 1 1 1 1 1 1 1 1 1 9
91 Oregon PERS OK 1 1 1 1 1 1 1 1 1 9
92 Pennsylvania School Employees PA 1 1 1 1 1 1 1 1 1 9
93 Pennsylvania State ERS PA 1 1 1 1 1 1 1 1 1 9
95 Rhode Island ERS RI 1 1 1 1 1 1 1 1 1 1 10
96 Rhode Island Municipal RI 1 1 1 1 1 1 1 1 1 1 10
99 South Carolina Police SC 1 1 1 1 1 1 1 1 8
100 South Carolina RS SC 1 1 1 1 1 1 1 1 1 9
101 South Dakota PERS SD 1 1 1 1 1 1 1 1 1 9
110 TN State and Teachers TN 1 1 2
104 Texas County & District TX 1 1 1 1 1 1 1 1 1 9
105 Texas ERS TX 1 1 1 1 1 1 1 1 1 1 10
106 Texas LECOS TX 1 1 2
107 Texas Municipal TX 1 1 1 1 1 5
108 Texas Teachers TX 1 1 1 1 1 1 1 7
112 Utah Noncontributory UT 1 1 1 1 1 1 1 1 8
115 Virginia Retirement System VA 1 1 1 1 1 1 1 1 1 1 10
116 Washington LEOFF Plan 1 WA 1 1 1 1 1 1 1 7
118 Washington PERS 1 WA 1 1 1 1 1 1 1 1 1 9
121 Washington Teachers Plan 1 WA 1 1 1 1 1 1 1 1 1 9
123 West Virginia PERS WV 1 1 1 1 1 1 1 1 1 9
124 West Virginia Teachers WV 1 1 1 1 1 1 1 1 1 9
125 Wisconsin Retirement System WI 1 1 1 1 1 1 1 1 1 9
126 Wyoming Public Employees WY 1 1 1 1 1 1 1 1 1 1 10
782 Total Obs