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 pension contributions. 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 state and local governments did increase their pension contributions relative to the actuarially recommended amounts, but that the absolute level of their contributions did not deviate from its pre-pandemic trend due to decreases in payroll and other factors that lowered the recommended contribution rates.