The Determinants of Public Pension Debt in U.S. States

Abstract

State and local governments across the United States of America (USA) were hit hard by the recent recession. The fiscal stress alerted the public to the increasing amount of public pension debt for which, despite snowballing levels of pension debt, the causes are unclear. This article examines the factors contributing to annual changes in unfunded public pension ratios, focusing in particular on public pension management (including investment performance, investment assumptions, and accounting practices). The data on pension debt for state defined benefit plans comes from the Pew Charitable Trusts for the period 2005 to 2015. Two methods (random-effects and general estimating equation) were used to verify the consistency of the results. These results showed that investment return decreases the annual change in the public pension debt while using a project unit credit method, and the implementation of the Government Accounting Standards Board (GASB) Statement 67 increase the annual change in the public pension debt. These findings illustrate the importance of public pension management in explaining public pension debt.