Fiscal Stimulus or Debt Relief: The Effect of Federal Pandemic Aid on State and Local Pensions

Between 2020-2021, the U.S. federal government passed four major pieces of legislation that included nearly $1 trillion in aid to state and local governments. One concern with distributing federal stimulus in the form of intergovernmental transfers is that subnational governments may use the aid to pay down unfunded pension liabilities or other debt rather than preserve employment. We examine the effect of fiscal stimulus passed in response to Covid-19 on public pensions. To address concerns about endogeneity, we use a difference-in-difference design and an instrumental variable estimator that relies on variation in congressional representation. We find that “excess” pension contributions increased, primarily in governments with low funding ratios, but that these increases represented less than one percent of total federal funding. We also find that governments reacted to pandemic aid by adopting more conservative assumptions for the calculation of pension liabilities.