The Impact of Public Pension Board of Trustee Composition on State Bond Ratings

Abstract

The declining financial health of public pension systems is increasingly becoming a budget concern for many state and local governments. While the academic literature has identified several factors behind the growth in unfunded state and local public pension liabilities, there is mixed evidence on how the composition of a pension system’s board of trustees affects a pension’s financial health. This article contributes to this literature by evaluating how differences in state public pension board composition affect state bond ratings. We argue that this provides an appropriate measure of the impact that boards of trustees have on the financial health of public pensions. With a panel dataset of state pensions between 2001 and 2014 our results indicate that outside (or elected) board members are consistently associated with lower bond ratings (and thus higher borrowing costs) while inside (or appointed and ex-officio) members are associated with higher bond ratings. These results are robust to a number of specifications.

Keywords: Unfunded Liabilities, Public Pensions, Pension Governance, Board of Directors, Bond Ratings, Public Finance, Corporate Governance

JEL Classification: D78, H75, L22, G32