What Factors Affect the Underfunding of Local Pensions? Evidence from Indiana

Abstract

Our study focuses on the funded status of local public pension plans. We use data from Indiana to examine the determinants of unfunded local pension liabilities. We test three hypotheses considered in the literature. The first is that declining economic conditions and corresponding demographic changes decrease funds available for pension liabilities leading to greater unfunded liabilities. The second hypothesis is that conditions related to differences in local fiscal environment contribute to unfunded pension liability. The third hypothesis is that special interests create pressure to maintain higher levels of public services while deferring costs to future taxpayers. We find limited support for each hypothesis. Economic and demographic factors such as per capita income and migration, fiscal factors such as the average tax levy and state aid, and broad interest group influences such as per capita retirement income are the major determinants of pension underfunding among local governments in Indiana.