Governance and pensions: Essays on the investment practices and funding levels of state and local public pension plans

This dissertation consists of three essays that examined the nature of state and local pension plans in the United States. The first essay examines the determinants of the investment rate of return for state and local public pension plans. Among the factors that were found to enable plans to enjoy greater investment returns 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. While some things public pensions did augmented returns, other investment practices were not as conducive; namely: (1) tactical investing; (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. 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 increase 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.