Political budget cycle and unfunded pension liabilities in states in the USA

Abstract

IMPACT Evidence shows that gubernatorial elections affect pension funding in US states. Contrary to expectations, this article shows that pension plans in election and post-election years tend to be better funded. Other political factors, such as partisanship and unionization, also play a role in funding state employees’ pension plans—the higher the level of unionization, the lower the pension funding. Institutional factors, including tax and expenditure limits (TELs), ‘rainy day funds’ (RDFs), and balanced budget requirements (BBRs), also affect pension funding. TELs positively affect pension funding, while the level of RDFs and the stringency of BBRs tend to reduce pension funding. These findings caution state fiscal administrators and state-level policy-makers as they indicate that political factors along with fiscal institutions are important to consider for their long-term impacts on the viability of pension plans. This article informs policy-makers in the USA and in other countries to exercise more caution during election years as electoral politics may affect pension funding. Political factors are critical in making fiscal decisions, and while this study focuses on the USA states, the lessons are equally important for pension administrators and policy-makers in other countries.