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J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 27 (4), 455-481 WINTER 2015

THE CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION

SYSTEMS IN U.S. STATES
David S. T. Matkin and Gang Chen*

ABSTRACT. There is significant variation in the way state-administered

pension systems are structured in the United States. Some states, for
example, consolidate their pension activity into a few larger systems while
others sponsor several smaller ones. In this paper we (1) identify arguments
in favor of and against system consolidation, (2) measure levels of
consolidation in state-administered pension systems, and (3) use logistic
regression to examine whether levels of consolidation are associated with
indicators of the financial health of state pensions. Our results provide
preliminary support for claims that the size and concentration of pension
activity are positively associated with measures of the financial health of
state pensions.

INTRODUCTION
There is significant and growing concern that many public pension
systems are underfunded and placing excessive budgetary burdens
on state and local governments. Efforts to study the financial and
political dimensions of this concern often use aggregate state-level
measures of pension conditions in order to conduct cross-sectional
analysis (Chaney, Copley, & Stone, 2003; Eaton & Nofsinger, 2004;
Giertz & Papke, 2007; Johnson, 1997; Kelley, 2014; Marks, Raman,
& Wilson, 1988; Sneed & Sneed, 1997; Thom, 2013). The Pew
------------------------------
* David S. T. Matkin, Ph.D., and Gang Chen, Ph.D., are Assistant Professors,
Rockefeller College of Public Affairs & Policy, University at Albany, State
University of New York. Dr. Matkin’s teaching and research interests are in
public financial management, public retirement systems, and financial
accountability in state and local governments and nonprofits. Dr. Chen’s
teaching and research interests are in state and local budgeting and
finance, public pension management, fiscal stress management, and
comparative public administration.

Copyright © 2015 by PrAcademics Press

456 MATKIN & CHEN

Center on the States’ influential pension reports are examples of that

approach, where data on 233 state pension plans are aggregated to
produce a single measure for each U.S. state (Pew 2007, 2010,
2012). Aggregate state-wide measures, however, obscure potentially
important information on the variation of pension system structures
between and within states.
There is significant variation in the structure of pension systems
across states. Illinois, for example, has six state-administered
pension systems; five of those systems are poorly funded, they have
between 18.5 and 42 percent of the assets necessary to cover their
liabilities (Illinois SRS, 2013), but the sixth system is in much better
financial condition, with 84 percent of the assets necessary to cover
its accrued actuarial liability (Illinois MRF, 2012). The State of
Washington’s Department of Retirement Systems oversees eleven
separate state-level pension systems, each serving a different
occupational group (Washington DRS, 2013). The State of Florida has
a single state-level pension system covering nearly all its state
workers, school district and county employees, and some of its
municipal workers (Florida DMS, 2013). The State of New York has a
state-level pension system for teachers and another for state and
local police, firefighters, and general employees (U.S. Census, 2012).
Despite substantial variation in pension structures, little attention has
been given to understanding the reasons for these differences and
the potential effects that structural characteristics may have on
aggregate measures of the financial health of public pensions in U.S.
states.
In this paper, we seek to further our understanding of structural
differences in U.S. state-administered pension systems. One of the
important structural features in state pensions is how pension plans
consolidate their members and assets. Consolidation was a major
trend in the 1960s and 1970s, with small systems merging into large
ones and local systems joining state systems, but states approached
pension system consolidation differently. We focus on four measures
of the consolidation of pension activity in U.S. states: (1) the number
of pension systems, (2) the aggregate size of state pension systems,
(3) the extent to which pension activity is concentrated in a few
systems or distributed over many, and (4) the degree to which state-
administered pension systems are supported by funding from local
governments.
CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 457

This research is focused on state-administered systems because

they are the dominant providers of retirement benefits in state and
local governments in the United States. Nearly 90 percent of state-
and local-government employees are covered by state-administered
pension systems. There are also many locally-administered pension
systems (3,771); but, most of those are very small and 80 percent
are in just six states (U.S. Census, 2012).1 This research is intended
to be a first step toward examining pension system consolidation and
its effects on the performance of public pensions.
In the next section, we briefly review the basic features of public
pension systems. That is followed by a description of arguments in
favor and against the consolidation of public pensions. We then
present four measures of consolidation and report the values of
those measures for each U.S. state. Then, we examine whether our
measures of consolidation are associated with the Pew Center on the
States’ indicators of the financial health of state pensions. The paper
concludes with a summary of our key findings and suggestions for
further research.

PUBLIC SECTOR PENSION SYSTEMS

A defined-benefit pension plan is the most common type of
retirement assistance provided to state and local government
workers. Eighty-seven percent of full-time state employees and 83
percent of full-time local government employees have access to
defined-benefit pension plans and approximately 90 percent of those
employees participate in one (US BLS, 2011). In contrast, only about
43 percent of state workers and 24 percent of local workers have
access to defined-contribution plans (such as 401(k) and 403(b)
plans) and only about 50 percent participate in defined-contribution
plans when they are offered (US BLS, 2011). This paper, therefore,
focuses on defined-benefit pensions. While defined-contribution plans
and other types of retirement benefits are also technically considered
“pensions,” this paper uses the term to refer to defined-benefit plans.
Pensions provide workers with contractual annuities upon their
retirement. The annuities are usually calculated as the product of
three variables: (i) employees’ salary levels prior to retirement, (ii) the
number of years of employment the employees served (i.e., their
service credits), and (iii) a multiplier rate that weights how much of
employees’ final salaries are multiplied by their service credits. The
458 MATKIN & CHEN

dollar values of the annuities are fixed at retirement, though benefit

payments often receive cost-of-living adjustments and increase
somewhat throughout retirement. Pension systems are obligated to
pay the annuities, regardless of whether the sponsoring employers
have adequately saved enough money to finance the benefits at the
time their employees retire. This obligation places the market risk of
investing pension assets and the budgetary volatility of pension
contributions on plan sponsors (i.e., employers) and tax payers.
Many pension terms are used loosely in the media but require
some definition. The term “pension fund” refers to the account where
assets are accumulated to satisfy pension obligations. The term
“pension plan” refers to benefits that are available to a group of
eligible participants. The term “pension system” refers to a legal
fiduciary entity that administers a single pension plan or a group of
pension plans (Peng, 2008). It is easy to confuse the terms “pension
systems” and “pension plans.” Smaller pension systems often only
provide a single pension plan. In those situations, the terms are
functionally equivalent. Larger pension systems, like many state-
administered pension systems, usually provide several pension plans
to different types of workers, depending on their occupational
classifications and, sometimes, when they were hired.

Background on the Development of Pension Systems

The early growth of public pension systems in the United States
occurred alongside civil service reforms in the late nineteenth and
early twentieth centuries (Clark, Craig, & Wilson, 2003). Large local
governments, starting with New York City, took the lead in providing
retirement assistance for police officers, firefighters, and teachers
(Mitchell, McCarthy, Wisniewski, & Zorn, 2001). The first state-
administered pension plans were consolidated teacher plans and
rarely included state employees. The consolidation of local pension
plans into state-wide systems and the pooling of different
occupational groups into unified pension systems began in earnest in
the years following the Great Depression and continued into the mid-
twentieth century (Clark, Craig, & Sabelhaus, 2011; Peng, 2008).
In the 1960s and 1970s, smaller pension systems continued to
consolidate into larger ones in order to take advantage of economies
of scale and technological upgrades (Mitchell et al., 2001). Many
local pension systems merged with state-level systems. As a result,
CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 459

the number of pension systems substantially decreased but the

average number of employees and the size of pension funds in each
system significantly increased.
As of 2012, according to the U.S. Census Bureau, there are 227
state-administered retirement systems with defined-benefit plans in
the United States, covering 17.5 million public employees (12.6
million active and 4.9 million inactive) and managing $2.53 trillion in
cash and investment holdings. At the local level, there are 3,771
locally-administered pension systems, including systems in counties,
municipalities, townships, special districts, and school districts,
covering 2 million public employees (1.7 million active and .3 million
inactive) and managing $521 billion in cash and investment holdings
(U.S. Census, 2012).

CONSOLIDATION OF PENSION SYSTEMS

In this section, we first describe arguments in favor of and against
the consolidation of public sector pension systems. We then present
four measures of pension consolidation: (1) the number of pension
systems, (2) the aggregate size of state pensions, (3) the extent to
which pension activity (i.e., membership, assets, and benefit
provisions) is concentrated in a few systems or distributed over many,
and (4) the degree to which state-administered pension systems are
funded by local governments.

Arguments for Consolidation

There are four arguments for consolidating pension systems: (1)
to take advantage of economies of scale in system administration; (2)
to take advantage of economies of scale in asset investment; (3) to
improve the oversight of pension systems; and, (4) to facilitate labor
force mobility.
The first argument in favor of consolidation is the expectation of
managerial efficiencies by combining multiple smaller pension
systems into a few larger ones. Such mergers are expected to reduce
the duplication of services from actuarial, legal, accounting, and
benefits professionals. Mergers also make it possible to dedicate
more full-time staff to the pension system, rather than rely on workers
who may only spend a few hours per month administering the system.
Larger systems may also be better able to recruit more
460 MATKIN & CHEN

knowledgeable financial experts to their boards of trustees

(Stalebrink, 2012). Also, they may be better able to train their
employees and trustees on the arcane technical components of
pension administration. This argument suggests that, all else equal,
large pension systems should be in better financial condition than
smaller ones.
The second argument in favor of consolidation is that larger
systems are able to diversify their investment portfolios better than
smaller ones. According to a recent report from the Center for
Retirement Research (Munnell, Aubry, & Hurwitz, 2013), during the
1990s and 2000s, state pension funds realized investment returns
that were approximately 50 basis points more than those of local
government funds. The report suggests that a major reason for lower
investment returns in local funds is the lack of diversification into
riskier assets. Larger pension funds are thought to be better able to
diversify their investment risks. The Center’s report also indicates that
lower investment returns may be partly responsible for lower funding
ratios (defined as the ratio of system assets to system liabilities) in
locally-administered systems (72 percent funded in 2011) compared
to state-administered systems (81 percent funded in 2011). This
argument also suggests that, all else equal, large pension systems
should be in better financial condition than smaller ones.
A third argument in favor of consolidation is that the
heterogeneity of fragmented pension structures increases the
complexity and difficulty of overseeing pension systems and holding
their governing bodies accountable for plan performance. Financial
reporting is an important mechanism for holding pension
administrators accountable for their actions, as well as disclosing
information to the public. As such, consolidated pension structures
may improve the ability of observers to understand the true costs of
pension systems and reduce the likelihood of fiscal illusion (Sneed &
Sneed, 1997; Wagner, 1976). This argument suggests that the
systems in states with consolidated pension activity should be in
better financial condition than those in states with several systems,
even when holding size constant.
A fourth argument in favor of consolidation is that it facilitates
labor mobility because government workers are better able to change
their employer without risking a decline in their retirement benefits.
One way fragmentation creates a disincentive for workers to change
CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 461

their employers is when they have not satisfied their vesting and
minimal years of service requirements and changing employers will,
thereby, result in the loss of some or all of the pension benefits they
may have earned. Another way fragmentation creates a disincentive
for mobility is when workers are unable to apply future pay increases
from their new employers to the service credits from their prior
employers. In consolidated systems, therefore, workers are more
likely accumulate additional service years, qualify for benefits, and
maximize their benefits. Because increased benefits lead to larger
aggregate liabilities, this argument suggests that the systems in
states with consolidated pension systems, especially those that
include many local government employers, are more likely to have
weaker financial conditions.

Arguments against Consolidation

We also identify three arguments against consolidation: (1) that
fragmented pension systems improve labor market efficiency; (2) that
consolidation can create an incentive for sponsors to transfer the
costs of some workers to other employers; and, (3) that consolidation
may lead to diseconomies of scale.
The first argument against consolidation is that fragmentation
improves the labor market efficiency of public sector compensation
systems. Fragmentation incentivizes local governments and
bargaining units to determine the level of compensation that is
necessary to meet potentially-unique demands in local labor markets.
This may include: cost-of-living adjustments, preferences for
retirement assistance versus other forms of compensation, and
different levels of competition between private and public employers.
A fragmented structure is likely, therefore, to produce heterogeneous
benefit levels. This may lead to lower aggregate liabilities if most
governments provide less generous benefits than would be provided
by a larger state-wide system. It may also lead to higher aggregate
liabilities if fragmentation leads governments to engage in zero-sum
competition for quality employees. As such, this argument does not
clearly suggest whether fragmentation will improve or harm the
financial condition of pension systems.
The second argument against consolidation is that fragmentation
promotes an equitable and efficient allocation of employer and
employee contribution rates. In consolidated cost-sharing systems,
462 MATKIN & CHEN

employers have an incentive to increase their employees’ benefits

(e.g., through spiking salaries prior to retirement) and pass most of
the costs of the increase onto the other employers in the system. In a
consolidated system, costs and risks are equally shared among
participating employers, but benefits can differ, which creates a
situation similar to a common-pool resource problem (Farah, 2012).
By contrast, fragmented pension systems clearly define the
responsibility of employers to cover the full cost of the pension
obligations created by their own employees.
A related concern with consolidation is that pension systems that
include various types of workers have an incentive to shift the
contribution costs of workers who receive more generous benefits
onto other employee groups. For example, according to a recent
Moody’s report (2013), a significant factor in the size of state pension
liabilities is the cost of covering teacher pensions. Fragmentation
reduces the opportunity for sponsors to increase the contribution
rates of all employees in order to finance the benefits for a select
group of employees. These arguments suggest that consolidated
state-level systems which include more employers (i.e., many local
governments) and multiple plans for different employee
classifications are likely to have weaker financial conditions.
The third argument against consolidation is that the effect of
scale is negatively related to the average cost, which is called
diseconomies of scale. If certain fixed costs increase as a result of
consolidation, but the size of the system is not large enough to realize
the economies of scale, the average cost will follow a “U-shape” curve
(Bikker, 2013). In public pensions, activities such as administration,
investment, monitoring, and reporting incur fixed costs. Economies of
scale and diseconomies of scale could interactively affect the pension
system’s financial condition depending on the size of the systems.

Argument with Mixed Support for Consolidation

Another important way that consolidation may affect public
pensions is through its influence on interest group politics. There are
many interest groups in the pension policy arena; most notably:
public employees, unions, local governments, the business
community, municipal bond investors, and tax payers. Fragmented
systems separate the interests of public workers into smaller groups.
When this happens, issues that may be of particular concern to
CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 463

firefighters, for example, may or may not affect other groups of

workers (either positively or adversely). Not all local government
employees exert equal voice in state politics. This may be especially
true where certain employee groups, such as public safety workers
and teachers, enjoy higher levels of public support than other
workers. As such, fragmented systems can promote competition
between interest groups and diffuse the influence of interest groups
on decision makers. These arguments do not suggest whether
consolidation is likely to lead to stronger or weaker financial
conditions.

Empirical Research on Pension System Consolidation

Previous studies describe the trend of pension system
consolidation (Mitchell et al., 2001; Peng, 2008) but have not
examined the effect of consolidation on the financial condition of
pension funds. Those studies use the size of plans and number of
systems as indicators for consolidation, which largely neglects the
variations in the methods of consolidation. Studies provide mixed
findings on the effects of plan size, types of employee, and
jurisdiction types on the financial condition of public pensions
(Schneider & Damanpour, 2002; Munnell, Aubry, & Haverstick, 2008;
Yang & Mitchell, 2005). Most of these studies only looked at
structural variables as controls, rather than variables of interest.
Some other scholars examine the scale of pensions and its effects on
operational costs. Those studies focus on the existence of economies
of scale in pension investment and administration and try to find the
optimal size of pension funds (Bikker, 2013; NEA, 2009). Our
research is informed by studies on the economies of scale in pension
management. Further, we continue the inquiry to make a connection
between the scale of the plan and its financial condition.

Measuring Consolidation
As noted above, we use four measures of pension consolidation:
(1) the number of state-administered pension systems in a state, (2)
the aggregate size of state pension systems, (3) the extent to which
states concentrate their pension activity (i.e., membership, assets,
and benefit provisions) into a single system or many systems, and (4)
the degree to which state-administered pension systems are
supported by local-government funding. Each of these measures is
described and operationalized in the following paragraphs.
464 MATKIN & CHEN

Measure 1: The Number of Systems

The first measure of consolidation is the number of state-
administered pension systems in a state. The U.S. Census reports the
number of state-administered pension systems in each state. All else
being equal, a state with one pension system is more consolidated
than a state with four systems. However, state pension systems can
have different sizes, levels of coverage, and funding sources. The rest
of our measures are used to capture those characteristics.

Measure 2: Aggregate Size of State Pension Systems

Our second measure of consolidation is the aggregate size of
state pension systems. This measure is important because a state
with large pension systems is better able to achieve the size-related
advantages of consolidation than a state with small systems. For
example, the State of New York’s smallest state-administered
pension system has more than 280,000 active members and $88
billion in cash and investment holdings (U.S. Census, 2011) and is
larger than the aggregate size of pension systems in 43 other states.
We measure the aggregate size of state pensions as the sum of their
cash and investment holdings and the total number of their active
members. We use the natural log of our size measures to mitigate the
leveraging effect of especially large states, such as California and
New York, in our analysis. We also include a squared value of our
measures to account for the non-linear influence of size; that is: that
the benefits of scale may increase exponentially with the growth in
the aggregate size of state systems or begin to produce diseconomies
of scale.

Measure 3: Concentration of Pension Activity

Our third measure of consolidation is the concentration of
pension activity in a few pension systems or spread out across
multiple pension systems of relatively equal size. To measure
concentration, we calculate the Hirschman-Herfindahl Index (HHI) for
the three types of pension activities in each state (i.e., size of asset
holdings, number of active members, and size of benefit payments)
and then average the results to calculate a single HHI measure for
each state.
The Hirschman-Herfindahl Index calculation (Hirschman, 1964,
1980; Rosenbluth, 1955) was originally developed to measure the
CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 465

concentration of firms in markets. The index ranges between 0 and 1;

it approaches 0 when market activity is evenly spread over multiple
firms (a highly competitive market) and approaches 1 when market
activity is dominated by a few firms (a monopolistic market).
The HHI allows us to create a measure of pension system
concentration that recognizes the relative concentration of pension
activity within one or more pension systems in a state. HHI is
calculated with the following formula:

where si is the portion of pension activity in each state-administered

pension system (i) in a state and N is the number of state-
administered pension systems in the state. For example, if a state
has four pension systems that each has 25 percent of the total
pension membership, the HHI is calculated as .252 + .252 + .252 +
.252 = .25. In contrast, if a state has four pension systems and one
system has 85 percent of the pension membership and the others
each have 5 percent, the HHI is calculated as .852 + .052 + .052 +
.052 = .73. States with HHI measures that approach “1” concentrate
their pension activity in a few systems—which is a form of
consolidation. States with HHI measures that approach “0” do not
concentrate their pension activity. In other words, if a state has six
pension systems and five are especially small, the HHI will measure
this state to be more similar to a state with a single system.
Because there is significant variation in the number of pension
systems in each state, we normalized our HHI measure with the
following adjustment:

where HHI* is the normalized HHI value, HHI is the original HHI
calculation, and N is the number of state-administered pension
systems in the state. The normalization formula results in an
undefined outcome for states with a single state-administered
pension; we replace those outcomes with the value “1”, fully
concentrated.
466 MATKIN & CHEN

We calculated the normalized HHI values for the size of asset

holdings, number of active members, and size of benefit payments in
each state. Those three HHI values are highly correlated (between .96
and .99). We then calculated the arithmetic means of the three HHIs
as an indexed measure of the concentration of state-administered
pension system activity in each state.

Measure 4: Percent of Funding from Local Governments

Another form of consolidation is the level to which state-
administered pensions are composed of state or local workers. Local
pensions merging into state pension systems has been observed by
Peng (2008), but there is substantial variation in the degree to which
state and local pensions are consolidated. For example, all of the
cities in Mississippi, Montana, and Nevada participate in their states’
state-wide pension systems (Munnell, Aubry, & Hurwitz, 2013). In
other states, such as Florida, local government workers make up a
significant portion of the system membership and local government
employers contribution a large share of the annual required
contributions. Our preferred measurement of this form of
consolidation is the share of state and local government membership
but that information is not available, so we use the percent of total
government contributions that come from local governments,
measured as a linear continuum from 0 percent to 100 percent local-
government annual support. A greater share from local contributions
indicates a higher degree of consolidation.

LEVELS OF CONSOLIDATION IN U.S. STATES

This section reports the levels of pension consolidation in U.S.
states. The data is from the 2011 U.S. Census Annual Survey of
Public Pensions, which the Census Bureau conducts with all state-
administered pension systems. All the pension systems in the survey
are defined-benefit plans. The survey provides information on system
revenues, expenditures, investments, and membership. Consistent
with the four consolidation measures described above, we use the
survey data to examine the number of pension systems, the size of
pension activity, the concentration of pension activity, and the levels
of local government funding in each U.S. state. The results are
presented in Table 1.
CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 467

TABLE 1
State-Administered Systems
Total
% Contributions
Number of Investment Total # of HHI
State from Local
Systems Holdings Members Index
Governments
(Billions)
AL 4 23.9 215,132 0.38 83.7
AK 4 9.5 38,431 0.37 48.8
AZ 4 33.8 250,264 0.59 82.4
AR 6 20.3 134,358 0.31 62.8
CA 5 433.3 1,350,062 0.30 49.9
CO 2 41.6 221,647 0.71 70.3
CT 6 25.1 110,950 0.34 3.6
DE 1 7.6 42,904 1.00 20.1
FL 1 134.0 540,701 1.00 78.0
GA 9 67.5 348,694 0.49 38.9
HI 1 12.0 65,310 1.00 25.2
ID 2 11.5 65,849 0.98 74.3
IL 6 89.3 482,115 0.17 18.2
IN 8 26.7 236,892 0.37 27.7
IA 4 25.9 169,185 0.83 78.8
KS 1 13.2 157,919 1.00 30.2
KY 6 26.8 223,311 0.25 25.3
LA 14 34.6 204,700 0.23 11.0
ME 1 10.8 49,620 1.00 4.5
MD 2 38.4 197,865 0.96 8.2
MA 13 44.8 202,240 0.37 10.7
MI 6 51.9 293,809 0.49 71.5
MN 8 46.8 281,072 0.21 77.6
MI 4 24.2 162,392 0.95 63.3
MO 10 47.4 238,659 0.26 62.8
MT 9 7.8 53,014 0.33 53.5
NE 5 8.6 64,546 0.54 64.9
NV 2 25.4 99,951 1.00 84.9
NH 2 5.9 49,788 0.98 82.5
468 MATKIN & CHEN

TABLE 1 (Continued)
Total
% Contributions
Number of Investment Total # of HHI
State from Local
Systems Holdings Members Index
Governments
(Billions)
NJ 7 73.9 481,806 0.27 0.0
NM 5 22.2 116,335 0.35 35.2
NY 2 235.3 825,186 0.07 49.3
NC 6 75.1 490,373 0.51 34.8
ND 2 3.5 30,832 0.05 79.6
OH 5 150.3 687,368 0.21 42.9
OK 6 22.4 146,879 0.27 42.0
OR 1 56.4 183,349 1.00 82.1
PA 3 78.6 396,764 0.34 35.8
RI 1 7.5 32,671 1.00 35.5
SC 4 26.8 217,147 0.71 68.4
SD 2 8.0 38,490 0.98 67.6
TN 1 34.1 214,950 1.00 59.0
TX 7 165.6 1,322,761 0.43 44.8
UT 6 21.0 104,467 0.62 0.0
VT 3 3.3 24,366 0.11 0.0
VA 1 54.2 339,740 1.00 72.4
WA 6 57.4 244,437 0.24 8.5
WV 1 10.2 73,852 1.00 29.2
WI 1 81.6 266,629 1.00 73.2
WY 6 6.4 41,636 0.72 79.1
Source: 2011 Annual Survey of Public Pensions: State & Local Data, U.S.
Bureau of Census.

There is significant variation in our four measures across U.S.

states. As previously noted, there is high correlation between the size
of investment holdings and number of active members (the
correlation coefficient is .91, significant at the p-level of .00). There is
also moderate correlation between the number of systems and HHI
concentration index (the correlation coefficient is -.64, significant at
 CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 469

the p-level of .00). The other pair-wise correlations are relatively

weak, with coefficients between .01 and .30.
The range in the number of state-administered pension systems
is between one and fourteen (measure 1). There is a bi-modal
distribution in the number of systems in a state. The most common
number of systems is one. The second most common is six. Figure 1
shows the frequency distribution of the number of state-administered
pension systems in each U.S. state.
The total cash and investment holdings and total membership
illustrates the significant difference in the size of pensions among
states (measure 2). The total investment holdings in all U.S. states

FIGURE 1
Frequency Distribution of State-Administered Pensions Systems
in U.S. States
12
10
8
Frequency

6
4
2
0

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Number of State-Administered Pension Systems

Source: 2011 Annual Survey of Public Pensions: State & Local Data, U.S.
Bureau of Census.
470 MATKIN & CHEN

are more than $2.54 trillion, covering 12.8 million active members.
However, more than half of these assets and members are in just 10
states (California, New York, Texas, Ohio, Florida, Illinois, Wisconsin,
Pennsylvania, North Carolina, and New Jersey). And, more than 80
percent of pension assets and members are in just 24 states. As
such, much of what is reported about the aggregate size of state and
local pensions is more accurately considered the condition of the
largest half of the states and may be invalid for smaller states.
Figure 2 illustrates the variation in the concentration in pension
activity (measure 3) and the percent of funding from local
governments (measure 4). There is significant variation in both
dimensions. The variation on the x-axis indicates that most states are
either highly concentrated in a single pension system (HHI values
close to 1) or relatively diffused (HHI values less than .6). The

FIGURE 2
Scatter Plot of Concentration of Pension Activity (x-axis) and Percent
of Annual Contribution from Local Government (y-axis)

AL NV
AZ NH OR
ND WY IA
80

MN FL
IDWI
MI CO VA
SC SD
NE MS
MO AR
TN
60

MT
NY CA AK
TX
OH OK
GA
40

PA
NM NC RI
KS
IN WV
KY HI
DE
20

IL

LA MA
WA MD
CT ME
VT NJ UT
0

0 .2 .4 .6 .8 1
HHI

Source: 2011 Annual Survey of Public Pensions: State & Local Data, U.S.
Bureau of Census.
CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 471

variation in the y-axis is uniform distributed between about 0 and 85

percent funding from local governments. Some state-administered
plans are mostly local-government funded, others receive very little
local government funding, but most receive both state and local
funding.

DO LEVELS OF CONSOLIDATION MATTER?

In this section we examine whether levels of consolidation are
associated with measures of the financial health of state pensions.
To perform this analysis, we use the Pew Center on the State's
indicators of the financial health of state pensions. We selected the
Pew indicators because they are prominent in national and state
policy debates on the health of state pensions. Pew’s research has
also been used in academic studies of the financial health of state
pensions (e.g., Coggburn & Kearney, 2010; St. Clair, 2013).
The Pew grades each state on a four-point scale. States receive 2
points if their funding ratio (the ratio of actuarial assets to liabilities)
is greater than 80 percent, 1 point if their annual required
contribution is less than their active payroll, and 1 point if they pay 90
percent or more of their annual required contribution. States with 4
points are rated as “solid performers.” States with 2 or 3 points are
graded as “needs improvement.” And states with 0 or 1 point are
graded as “serious concern” (Pew, 2012).
We examine the association between the Pew's measures of
financial health and system consolidation by using logistic regression
to estimate the relationship between our four measures of system
consolidation on the likelihood that a state was judged to be a "solid
performer" and the likelihood that a state received the grade "serious
concerns." One benefit of the Pew grades is that they include
information on the stock and flow conditions of the state pensions. A
drawback of this data, however, is that information is lost when you
use indicator variables to represent continuous information.
Table 2 presents our descriptive statistics. The small sample size
(N=50) places limitations on the available degrees of freedom for
regression analysis. This means there are estimation problems
(inflated standard errors) if too many variables are included in the
model. Therefore, we limit the regressors to our four measures of
consolidation.
472 MATKIN & CHEN

TABLE 2
Summary Statistics
Variable Mean S.D. Min Max Description
1 = "Solid Performer"
Solid Performer .22 - 0 1 0 = "Needs Work" or
"Serious Concerns"
1 = "Needs Work"
Needs Work .14 - 0 1 0 = "Solid Performer" or
"Serious Concerns"
1 = "Serious Concerns"
Serious Concerns .64 - 0 1 0 = "Needs Work" or
"Solid Performer"
Natural log of total
Asset Size (ln) 17.19 1.07 15.01 19.89
pension assets in state
Asset Size (ln) Squared value of Asset
295.58 37.16 22.20 395.46
Squared Size (ln)
Natural log of total
# of Members
11.99 .98 10.1 14.12 number of system
(ln)
members in the state
Squared value of
# of Members
144.88 23.61 102 199 Numbers of Members
(ln) Squared
(ln)
(HHI based on assets +
Concentration of HHI based on number of
.58 .33 .05 1
Pension Activity members + HHI based
on benefit levels) / 3
Percent Percent of government
Government contributions to state-
Funding from 47.1 27.5 0 84.9 administered pension
Local systems from local
Government governments
Number of state-
Number of
4.44 3.14 1 14 administered pension
Systems
systems in the state
Notes: N = 50.
Data sources: Solid Performer, Needs Work, and Serious Concerns are from
the Pew Center on the States (2012). The rest of the data is from the
U.S. Census (2011)
CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 473

Because the regressants, the Pew indicators, are time dependent on

conditions in fiscal year 2010, it is not possible to use multiple-years
of U.S. Census data for time-series panel analysis. Future studies,
using the pension system as the unit of analysis can be done to
control for additional relevant conditions.
Table 3 presents the results of our logistic regression estimation.
We estimate four models. Models 1 and 2 estimate the likelihood
that states will be "solid performers.” Models 3 and 4 estimate the
likelihood that states will be graded as “serious concerns.” Models 1
and 3 use the cash and investment holdings variables as measures
of the aggregate size of state pensions (measure 2); and, Models 2
and 4 use the membership variables as measures of the aggregate
size of state pensions.

TABLE 3
Logistic Regression
DV: Serious
DV: Solid Performer
Variables Concerns
Model 1 Model 2 Model 3 Model 4
-20.47* 12.42
Asset Size (ln) - -
(11.61) (8.94)
.61* -.37
Asset Size (ln) Squared - -
(.34) (.26)
-21.30** 11.89a
Number of Members (ln) - -
(10.10) (7.51)
.91** -.50a
Number of Members (ln) Squared - -
(.42) (.31)
3.65* 3.61* -1.84 -1.66
Concentration
(2.00) (2.04) (1.43) (1.37)
Percent Government Funding from .01 .01 -.01 -.01
Local Government (.02) (.02) (.01) (.01)
.19 .17 -.07 -.06
Number of Systems
(.19) (.20) (.15) (.15)
166.75* 118.75** -102.4 -67.71a
Constant
(98.41) (58.80) (.14) (44.08)
N 50 50 50 50
Pseudo R2 0.17 0.20 .06 .07
Percent Correctly Predicted 78% 82% 70% 66%
Notes: * = p-values <.10, ** = p-values<.05, a = p-values<.15, standard
errors in parentheses.
474 MATKIN & CHEN

The results of models 1 and 2 suggest that a state with average

values on the four measures of consolidation is about 17.5 percent
likely to be graded a “solid performer” (17.9 percent for model 1 and
17.2 percent for model 2). This is only slightly less than the 22
percent of states that were actually observed to be “solid performers”
and shows that the model is a good fit (about 80 percent of the
actual observed “solid performer” grades are correctly predicted).
Models 3 and 4 produce predicted likelihoods that a state with
average values on the four measures of consolidation is 65 percent
likely to be graded a “serious concern.”
The results from models 1 and 2 indicate a curvilinear
relationship between the aggregate size of state pensions and the
probability of being graded a “solid performer.” States with smaller
aggregate systems actually stand a better likelihood of being graded
a “solid performer” than states around the 50th percentile in size. The
apparent benefits of size come in once aggregate sizes become very
larger (thus the positive coefficient on the squared measure of size).
The estimates also suggest that states with more concentrated
pension structures are more likely to be graded as “solid performers.”
Taken together, these findings support the size-related arguments for
the benefits of consolidation, but the relationship is curvilinear on
size and states with particularly small pensions systems may be
better managed than ones that are medium sized. The estimates
provide no support for assertions that the number of plans (measure
1) or the percent of funding from local governments (measure 4) is
associated with the likelihood of a “solid performer” grade.
Figure 3 illustrates interactive effect of size and concentration on
the probability that a state will be graded a “solid performer.” The
figure presents five lines that represent the change in predicted
probability that the state is a “solid performer” given different
aggregate sizes (the figure uses the predicted probabilities from
model 2). The x-axis illustrates how probabilities change as each
state pension activity goes from diffused (HHI=.10, the lowest
observed HHI score) to fully concentrated (HHI=1, the highest
observed HHI score). Figure 3 demonstrates that the largest
aggregate systems have a high likelihood of being a “solid performer”
regardless of their levels of concentration. However, for all other sized
aggregated systems, there is a distinct improvement in the likelihood
CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 475

FIGURE 3
Predicted Probabilities of “Solid Performer” by Number of System
Members and Concentration of Pension Activity

of being a “solid performer” as the state concentrates its pension

activity. The biggest benefit is in the large aggregate systems (those
at the 75th percentile of the observed data), which go from 15% likely
to be “solid performer” to 85% likely as the HHI score increases from
.1 to 1. For all sized aggregate systems, however, there is a clear
benefit in concentrating pension activity. These findings are
consistent with the economies of scale arguments for consolidation.
Figure 3 also demonstrates how the very-small-sized states (those
at the 5th percentile in size) are actually more likely to be considered
“solid performers” than the medium-sized states (those at the 25th
and 50th percentile in observed aggregate systems). This difference is
minimal when pension activity is diffused but is pronounced when the
activity is highly concentrated: the very-small-sized states are 65%
likely to be judged “solid performers,” 55% for the small-sized states,
and just 30% for the median-sized states.
Why might medium-sized states be the least likely to be “solid
performers?” It may be that smaller-sized states are more
conservative in their pension policies, more risk averse and more
476 MATKIN & CHEN

likely to ensure full funding. It may also be that medium-sized states

have many of the costs of larger states but do not yet have the
efficiencies of the larger-sized states. It may also be that a few
particularly small-sized states happen to have very healthy pensions
for reasons that have nothing to do with their size. More research is
needed into states with relatively small and medium-sized pension
systems.
As expected, the results of models 3 and 4 provide estimates that
are substantively similar, though in the opposite direction, to models
1 and 2. However, models 3 and 4 find weaker statistical support that
the coefficients are statistically different from zero. This may be
because states that “need work” (the base group in all the models)
are more similar to the “serious concerns” group than to the “solid
performers.” This suggests that the difference between grading
categories may not be linear and, therefore, that replication of our
finding using a linear continuum of outcome measures may find
different results.

CONCLUSION
The purpose of this study is to examine the structure of public
pension systems in U.S. states. This research is motivated by the
prominence of policy debates about the financial health of public
pensions and the use of state-level measures of public pensions. As
such, we examine levels of consolidation in state-administered
pension systems and test whether consolidation measures are
associated with the Pew Center on the State's grades of the financial
health of state pensions.
Our results demonstrate significant variation in the number of
pension systems, the size of state pensions, the concentration of
pension activity, and the degree to which local governments are the
primary funders. The size of public pensions and the concentration of
pension activity are found to be associated with the likelihood that a
state will receive a grade of "solid performer." The direction of those
associations is consistent with the economy of scale arguments that
are often used to endorse consolidation.
One new finding is that the concentration of pension activity
appears to be positively associated with the financial health of state
pensions, even when holding the size of the state pensions constant.
CONSOLIDATION OF STATE-ADMINISTERED PUBLIC PENSION SYSTEMS IN U.S. STATES 477

Another new finding is that states with smaller-levels of pension

activity are more likely to receive a better grade than states with
medium-levels of pension activity, suggesting that the relationship
between size and the health of state pensions is curvilinear and the
need for further study of pensions in smaller and medium-sized state
pension systems.
This study is preliminary in scope. We sought to understand
whether system structures matter. These results suggest that they
matter and may matter a lot. This study describes a number of
reasons why consolidation may matter, but those propositions need
further study. We suggest further research should focus on pension
systems as the unit of analysis. Studies of systems may focus on
some of the following questions: How large are the efficiency benefits
of consolidation on individual pension systems? Are there selection
reasons for variation in pension structures that affect the funding of
state pensions? What is the relationship between the cost and
funding ratio of individual pensions systems and the level of
consolidation? Does system structure affect benefit levels? What is
the role of state oversight? Why are some pension systems within the
same state better funded than others? We also suggest future
research should evaluate the effect of structure on the administrative
costs and investment returns.

NOTES
1. The six states with the most locally-administered pension systems
are: Pennsylvania (1,425), Illinois (457), Florida (303), Minnesota
(145), Michigan (138), and Massachusetts (100) (U.S. Census, 2012).

ACKNOWLEDGEMENTS
The authors would like to thank Carol Ebdon, Jun Peng, and Carol
Weissert for feedback and suggestions on an earlier version of this
research project.

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