Panel Paper: Effects of Intergovernmental Aid and Local Revenue Diversification On Pension Liability Funding

Thursday, November 7, 2013 : 3:20 PM
DuPont Ballroom F (Washington Marriott)

*Names in bold indicate Presenter

Evgenia Gorina, University of Texas, Dallas
Studies of local government fiscal health have traditionally focused on financial performance variables as indicators of fiscal health (e.g. revenue wealth, budgetary balance)and financial structure and institutional variables as predictors of interest (e.g. revenue diversity, balanced budget requirements, tax and expenditure limits). In this paper I use local government pension plan liability funding as a measure of fiscal health. Compared to other financial ratios, pension liability funding ratio is less prone to annual fluctuations and reflects a longer-term fiscal sustainability of a government – its ability to fulfill benefit obligations now and in the future. While some local pension plans are state-administered, all local governments act as plan sponsors and make annual required contributions (ARC). Whereas local governments do not decide on the amount of annual pension contributions (APC) that they should be making (these amounts are determined by actuaries), government officials do use discretion in deciding whether to make APCs in full. If a government is experiencing fiscal stress, resources designated for pension funding may be redirected to operating expenditures, bridging revenue gaps but at the same time negatively affecting the government’s long-term fiscal health. Intergovernmental aid and own source revenue diversification are two mechanisms on the revenue side that may be used by governments to counteract the effects of fiscal stress. To study if these mechanisms affect pension liability funding I look at five years of financial and accounting records of 200 city governments in the U.S. and run multilevel models accounting for observation clustering at the city level and for city nesting within a county and within a state. Preliminary results indicate that cities receiving higher levels of intergovernmental aid tend to have lower levels of pension liability funding. This finding suggests that intergovernmental transfers do not adequately compensate for the fiscal disparities at the local level. The effects of revenue diversification away from the property and sales tax are positive but moderated by local economic base and government size.