Governmental Accounting Standards Board (GASB) pronouncements 67 and 68, despite their limitations, are expected to bring about some improvements in the way governments report pension liabilities. As a result, public pension plans are predicted to report higher unfunded liabilities as the new standards are phased-in. A recent paper at Harvard Business School examines the relationship between states’ lobbying against the new rules and their finances, as well as how the lobbying aligns with public interest.
The paper finds that those states that oppose the liability increasing provisions of the new rules tend to have worse pension funding and assume higher discount rates. Also, those states are more likely to have higher deficits and face stricter balanced-budget restrictions. There is also evidence that opposing states are under stronger union influences. Financial statement users’ support for these GASB standards is positively correlated with the magnitude of pension underfunding and state budget deficits. This means the government lobbying is in conflict with public interest.
Not all financial statement users are the same. Internal users (public employees) “overwhelmingly oppose liability increasing proposals” relative to external users (credit analysts, rating agencies, and the broader citizenry), the study finds. The finding is consistent with the general expectation that pension accounting reform tends to motivate benefit cuts rather than tax increases.
To read the full paper, go here.