Central Policies for Local Debt: The Case of Teacher Pensions

The recent debt crises in New York City and Cleveland, the deterioration of public infra-structures in certain of our states and larger cities, and the occasional bankruptcy of smaller pension plans suggest that not all of local finance stands on a sound fiscal base. This paper examines the trends in funding for one form of state and local government debt--teacher pensions underfundings -- and asks what a central government might do to check any unwanted growth in these liabilities. The analysis concludes (i) that this form of state-local debt is sizeable and growing, (ii) that state and local governments have an implicit pay-as-you-go bias in pension financing which encourages the growth of debt, but (iii) central government benefit and funding regulations or debt relief policies can slow, or even reverse, that growth.