Indiana University SPEA Edward J. Bloustein School of Planning and Public Policy University of Pennsylvania AIR American University

Panel Paper: State Pension Liabilities: Reforms Aimed at Ignoring, Papering over, or Addressing the Problem

Friday, November 13, 2015 : 9:30 AM
Pearson II (Hyatt Regency Miami)

*Names in bold indicate Presenter

Jeffrey Diebold and Vincent Reitano, North Carolina State University
States with high pension costs or large unfunded liabilities have several options for reform. Some of these reforms are intended to resolve these issues while others simply conceal them. We are interested in understanding why and when states adopt a specific type of reform. States can use accounting reforms to paper over their pension liabilities in the short-run and adopt benefit reforms to reduce their debt in the long-run. What makes a state more or less likely to engage in one or both of these strategies? We are also interested in whether states with pension problems “learn the wrong lessons” of how to resolve these issues from other states in similar circumstances. Specifically, what are the mechanisms behind the diffusion of more and less effective reform policies? We model the diffusion process as the ideological, rather than geographical, distance between the state governments of adopting and non-adopting states. To examine these issues and answer these questions, we combine data from several sources and estimate several discrete time hazard models. The principal data sources include the Public Plans Database, the Bureau of Labor Statistics, the Book of States, and multiple state-level data sets containing measures of the political and the ideological composition of state governments, to name a few. We focus on several popular pension reform options that we classify into two distinct reform areas: (1) benefit reforms and (2) accounting reforms. There are six major benefit reform types included in our analysis: changes in (1) benefit levels; (2) employee contributions; (3) vesting requirements; (4) the retirement age; (5) the cost-of-living adjustment; and (6) pension type. We examine four major accounting reforms: changes in (1) the actuarial cost method; (2) investment return assumptions; (3) the amortization schedule as well as the (4) issuance of pension obligation bonds.