Toward Understanding the Determinants of Pension Underfunding in the Public Sector

Currently, there is no integrating theory which specifies why governmental pension plans are so significantly underfunded. In this study, we test several hypotheses concerning such underfunding in a cross-sectional regression model for state-administered pension plans. The conceptual model underlying our empirical tests is based on states' economic and political incentives for pension underfunding and incorporates alternative public sector monitoring mechanisms (including the quality of financial reporting). Several empirical regularities are documented for the first time as the result of this study. In light of the Governmental Accounting Standard Board's (GASB, 1987, p. 22; Ives, 1987, p. 134) stated position that financial reports should demonstrate "interperiod equity" as a key element of public sector accountability, these empirical results should help refine our theoretical understanding of governmental pension underfunding