We explore the interaction of state pension systems with state fi nances. We fi nd that changes in pension assets are an important source of funding for state governments, but that states face incentive problems that impede funding efforts with the result that many plans are underfunded. We analyze the substantive differences between defi ned benefi t and defi ned contribution plans for public employees and state governments. Regression analysis using a panel of 85 state public pension plans indicates some evidence of actuarial assumption manipulation to reduce funding pressure. Plan demographics and state tax revenues are signifi cant infl uences on funding ratios, while plan features are not.

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