Abstract

http://ssrn.com/abstract=2170046
 


 



Who's Afraid of Good Governance? State Fiscal Crises, Public Pension Underfunding, and the Resistance to Governance Reform


Thomas James Fitzpatrick IV


Federal Reserve Bank of Cleveland

Amy Monahan


University of Minnesota - Twin Cities - School of Law

November 1, 2012

FRB of Cleveland Working Paper No. 12-23
Minnesota Legal Studies Research Paper No. 12-64

Abstract:     
Much attention has been paid to the significant underfunding of many state and local employee pension plans, as well as efforts by states and cities to alleviate that underfunding by modifying the benefits provided to workers. Yet relatively little attention has been paid to the systemic causes of such financial distress — such as chronic underfunding that shifts financial burdens to future taxpayers, and governance rules that may reduce the likelihood that a plan’s trustees will make optimal investment decisions. This article presents the results of a qualitative study of the funding and governance provisions of twelve public pension plans that are a mix of state and local plans of various funding levels. We find that none of the plans in our study satisfy the best practices that have been established by expert panels, but also that the strength of a plan’s governance provisions does not appear correlated with a plan’s financial health. Our most important finding is that, regardless of the content of a plan’s governance provisions, such provisions are almost never effectively enforced. This lack of enforcement, we theorize, has a significant, detrimental impact on plan funding and governance. If neither plan participants nor state taxpayers are able to effectively monitor and challenge a state’s inadequate funding or improper investment decisions, public plans are very likely to remain underfunded. We conclude by offering several possible reform options to address the monitoring and enforcement problems made clear by our study: automatic benefit haircuts, automatic tax increases, a low-risk investment requirement, and market monitoring through the use of modified pension obligation bonds.

Number of Pages in PDF File: 52

Keywords: public pensions, governance, public pension reform

JEL Classification: H55, H75, K31

Accepted Paper Series





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Date posted: November 3, 2012  

Suggested Citation

Fitzpatrick, Thomas James and Monahan, Amy, Who's Afraid of Good Governance? State Fiscal Crises, Public Pension Underfunding, and the Resistance to Governance Reform (November 1, 2012). FRB of Cleveland Working Paper No. 12-23; Minnesota Legal Studies Research Paper No. 12-64. Available at SSRN: http://ssrn.com/abstract=2170046

Contact Information

Thomas James Fitzpatrick IV (Contact Author)
Federal Reserve Bank of Cleveland ( email )
PO Box 6387
Cleveland, OH 44101-1387
United States
Amy Monahan
University of Minnesota - Twin Cities - School of Law ( email )
229 19th Avenue South
Minneapolis, MN 55455
United States
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