Type of Document Dissertation Author Doyle, Carter Arnold URN etd-06282005-184242 Title Governance and Pensions: Essays on the Investment Practices and Funding Levels of State and Local Public Pension Plans Degree Doctor of Philosophy Department Economics, Department of Advisory Committee
Advisor Name Title David Macpherson Committee Chair David Peterson Committee Member Frank Heiland Committee Member Patrick Mason Committee Member Keywords
- Pension Plans; Investment Practices; Funding Level
Date of Defense 2005-06-07 Availability unrestricted AbstractThis dissertation consists of three essays that examine the nature of state and local pension plans in the United States over the 1992 to 2000 period. The first essay examines the determinants of the investment rate of return for state and local public pension plans. Among the factors that are found to enable plans to enjoy greater investment returns – in a statically significant sense, were: 1) weighting their portfolio more toward equities; 2) allowing active employees to elect more of the plan board members; 3) following prudent investor rules; 4) having an investment policy that is more open to considering equities; and, lastly, 5) managing their portfolio in-house as opposed to outsourcing this task to Wall Street. While some things public pension did augmented returns, other investment practices were not as conducive; namely: 1) tactical investing – trying to take advantage of short-term movements in capital markets as opposed to a long-term investment perspective; 2) the board setting the asset allocation for the plan; and 3) larger boards.
The second essay tests for the presence of performance persistence in the investment returns of state and local public pension plans. Through the analysis it was found that there was evidence of performance persistence in the investment returns of state and local pension plans in the years 1994 and 1998. To further test for performance persistence, Probit models are estimated which controlled for the asset allocation of each plan and important governance characteristics which are thought likely to affect whether or not a pension plan may outperform its peer group. This analysis also finds evidence of performance persistence in the investment returns of state and local pension plans in the years 1994 and 1998. Additionally, it was discovered that some governance practices; namely; 1) tactical investing and 2) boards setting the asset allocation both led to a lower probability of a public pension plan performing above the median return. On the other hand, increased exposure to equity tended to increase the probability of a plan having a return above the median. This increased exposure to equity, furthermore, allowed plans to earn a higher return than the predicted efficient real return.
The third essay provides some understanding of pension plan funding levels and how their governance structure and the economic and demographic environment they operate in shapes those funding levels. Among the factors that contributed to lower plan funding levels were: 1) the plan being unionized; 2) the locale having a higher ratio of debt to income; and 3) the area experiencing a higher unemployment rate. The pension plan being subjected to a third-party independent performance evaluation and the locale receiving a larger percent of revenue from the federal government affects funding levels positively.
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