The Invisible Hand of Institutions: Who Governs State and Local Public Pensions?

Abstract

Public pension systems represent a critical piece in the puzzle of public financial sustainability. Unfunded pension liabilities deserve additional scrutiny in the post Great Recession environment of sluggish economic growth, high unemployment, an aging population and increased debt burdens at all levels of government. Left unaddressed, these liabilities are an added social and economic challenge, mortgaging capacity of state and local governments to provide essential public services to their constituencies and ensure secure retirement of their employees. Formal and informal institutional arrangements have a large role in shaping public pension policy at the state and local level. It is critical that these institutions remain transparent, representative and that policy process be conducted in a manner publicly accountable to all stake holders, including pension beneficiaries and taxpayers. Appropriate incentives, such as congruence between policy costs and benefits, are critical to long-term financial sustainability of public pensions. This dissertation identifies key actors influencing public pension policy at the state and local level, their respective incentives, and quantifies the impact of their decisions on the financial sustainability of public pension systems. This research uses the Institutional Analysis and Development (IAD) framework to evaluate the consequences of formal and “invisible” institutions on pension policy, identifying “design principles” conducive to creating financially sustainable public pension systems. This study also examines the applicability of the IAD framework to the policy sphere of public pensions more broadly. These issues are examined in a detailed case study of the City of Houston (COH). The COH had over $2.6 billion in fiscal 2012 unfunded pension liabilities. The case study is based on original interviews with major policy stake holders, a field study of the Financial Management T ask Force assembled to assess long-term financial hurdles facing COH, and an intervention time-series analysis of the COH unfunded pension liabilities. This study finds that beneficiaries’ interests are overrepresented in all pension governance structures at the expense of those of taxpayers;; politicians’ electoral horizons discourage tackling long-term issues such as pensions; split state-local governance design discourages sustainable solutions; and current pension institutions lack in both transparency and public accountability.