The Impact of Budget Stabilization Funds on State Pension Contributions

Abstract

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.

Toward a Theory of Fiscal Slack

“…State rainy day fund balances may be used to address ad hoc fiscal needs and achieve political goals of elected officials rather than budget stabilization (Navin and Navin ; Rose ; Wagner and Sobel ). Design features of state budget stabilization funds, such as withdrawal and deposit rules, were also found to matter for state ability to save (Hou and Brewer ; Rose ), improve revenue management (Rose and Smith ), and even fund pensions (St. Clair ). Overall, state literature suggests that fiscal reserves should be a function of state fiscal risk and finds that they are used for counter‐cyclical budget stabilization, but may also be used for political gains and be affected by fiscal institutions and ad hoc non‐recurring spending needs.…”

The Governance of Public Pensions: An Institutional Framework

“…Second, the conventional model assumes that the institutional environment (political, fiscal, legal, etc.) is exogenous to the financial performance (Johnson, 1997;Marks et al, 1988;St. Clair, 2013;Thom, 2013) Union representation (Chaney, Copley, & Stone, 2002;Coggburn & Kearney, 2010;Kelley, 2014;Marks et al, 1988;Mitchell & Smith, 1994; St. Clair, 2013) Number of employees and payroll size (Giertz & Papke, 2007;Kelley, 2014;Mitchell & Smith, 1994;Rich & Zhang, 2014;Schneider & Damanpour, 2002;Thom, 2013) Employee classifications of plan participants (Eaton & Nofsinger, 2008;Giertz & Papke, 2007;Schneider & Damanpour, 2002;Thom, 2013) Median voter proxies (per capita income or median household income) (Coggburn & Kearney, 2010;Johnson, 1997;Kelley, 2014;Marks et al, 1988;Rich & Zhang, 2014;St.…”

“…is exogenous to the financial performance (Johnson, 1997;Marks et al, 1988;St. Clair, 2013;Thom, 2013) Union representation (Chaney, Copley, & Stone, 2002;Coggburn & Kearney, 2010;Kelley, 2014;Marks et al, 1988;Mitchell & Smith, 1994; St. Clair, 2013) Number of employees and payroll size (Giertz & Papke, 2007;Kelley, 2014;Mitchell & Smith, 1994;Rich & Zhang, 2014;Schneider & Damanpour, 2002;Thom, 2013) Employee classifications of plan participants (Eaton & Nofsinger, 2008;Giertz & Papke, 2007;Schneider & Damanpour, 2002;Thom, 2013) Median voter proxies (per capita income or median household income) (Coggburn & Kearney, 2010;Johnson, 1997;Kelley, 2014;Marks et al, 1988;Rich & Zhang, 2014;St. Clair, 2013) Political intervention in pension system management (Eaton & Nofsinger, 2004;Marks et al, 1988;Mitchell & Smith, 1994;Schneider & Damanpour, 2002;Thom, 2013) Fiscal stressors and constraints Fund balance (Chaney et al, 2002) Credit rating (Chaney et al, 2002) Unemployment rate (Johnson, 1997;Mitchell & Smith, 1994; St. Clair, 2013) Budget stabilization fund (St. Clair, 2013) Balanced budget requirement (Chaney et al, 2002;Hsin & Mitchell, 2014; St. Clair, 2013) Tax bu...…”

“…In recent years, the governance of public pension systems has become a major policy issue, and a considerable amount of attention has focused on explaining the financial performance of those systems (Chaney, Copley, & Stone, 2002; Coggburn & Kearney, 2010; Dulebohn, 1995; Eaton & Nofsinger, 2004, 2008; Johnson, 1997; Kelley, 2014; Marks, Raman, & Wilson, 1988; Peng, 2004; Schneider, 2005; Schneider & Damanpour, 2002; Sneed & Sneed, 1997; St. Clair, 2013).…”

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

“…One significant limitation of the extant literature on public pension research is that it often entirely overlooks actuarial inputs. The clearest examples are the many studies that model the financial condition of public pensions without including any controls for actuarial inputs (Coggburn and Kearney ; Kelley ; Marks, Raman, and Wilson ; Schneider and Damanpour ; St. Clair ; Thom ). Another way that the literature overlooks actuarial inputs is by failing to include several influential assumptions and methods in their models.…”