The Effects of Tax and Expenditure Limits on Municipal Pension and Opeb Funding during the Great Recession

Abstract

The Great Recession of 2008–09 caused an array of fiscal challenges for state and local governments in the US, including the underfunding of pensions and retiree health benefits (Joyce, 2013). It is estimated that in 2009 the 61 largest cities in the US had unfunded pension and retiree health benefits liabilities equal to $217 billion (The Pew Charitable Trusts, 2013). Given these constraints, we are primarily interested in understanding the effects of institutional factors, more specifically the role of tax and expenditure limitations (TELs), on pension and other post-employment benefit (OPEB) funding. Recent studies have examined the effects of pension liabilities on bond ratings (Martell, Kioko and Moldogaziez, 2013), the effects of state budget stabilization funds on pension contributions (St. Clair, 2013) and political and institutional effects on pension plan management (Gehl, Willoughby and Bell 2013); (Chen, Ebdon, Kriz and Laforge, 2013). What is less understood is the role played by institutional structures such as form of government and state-imposed tax and expenditure limitations on pension or OPEB funding before, during and after the recession. Our findings suggest that municipal TELs are statistically associated with OPEB funding, meaning that municipalities with stricter TELs had lower OPEB funding ratios. Just as importantly, we find that during this period, municipalities with mayor-council forms confronted with stricter TELs had better funded pensions and OPEBs than in cities with similar TELs but with manager-council forms of government.