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The Impact of Governmental Accounting Standards on
Public-Sector Pension Funding
Divya Anantharaman
Associate Professor
Rutgers Business School
Department of Accounting and Information Systems
1 Washington Park Room 916
Newark, NJ 07102
Elizabeth Chuk*
Assistant Professor
University of California, Irvine
4293 Pereira Drive SB2 413
Irvine, CA 92697
First Draft: January 31, 2018
This Draft: April 30, 2018
Abstract The funding policy for defined benefit pension plans covering government employees represents an
important decision for government entities sponsoring plans. In recent years, a number of state and local
governments have experienced extreme funding shortfalls (e.g., New Jersey, Illinois, and Detroit), raising
concerns about whether government entities are contributing enough to their pensions. Governmental
Accounting Standards Board Statement Number 67/68 (hereafter, “GASB 67/68”) mandates changes to the
financial reporting of pension liabilities, but does not mandate changes to pension funding (i.e., how much
to contribute). Although GASB 67/68 specifically acknowledges that funding decisions are outside the
GASB’s regulatory scope, we find, for a sample of 170 large state and local plans, that employers and/or
sponsors increase pension contributions upon applying GASB 67/68, which mandates changes to: (1)
measurement – under GASB 67/68, government entities whose plan assets are insufficient to cover
forecasted benefit payments are required to apply a lower discount rate to compute the present value of the
pension liabilities, resulting in higher measurements of pension liabilities; and (2) recognition – under
GASB 67/68, any net funding deficit must be recognized as a liability on the financial statements of
governmental employers and sponsors for the first time (as opposed to only being disclosed in the
footnotes). The increased funding response is concentrated within plans expecting a large jump in measured
liabilities upon applying GASB 67/68, and for sponsors expecting more adverse economic or political
consequences from financial statement recognition. These responses suggest that governmental entities are
willing to take actions with cash flow consequences in order to avoid recognizing large liabilities on-balance
sheet; purely accounting changes, therefore, can have “real” effects on governmental pension policy.
Keywords: Public sector pensions, valuation of pension liabilities, Governmental Accounting Standards Board
*Corresponding author.
We thank brown bag participants at UC Irvine for feedback on a preliminary draft. All comments are welcome.
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1. Introduction
Defined-benefit pensions are a crucial pillar of retirement income security for employees
of local, state, and federal governments in the United States.1 In the public sector, retirement plans
are almost all defined-benefit (as opposed to defined-contribution) in nature, and 80% of state and
local government employees rely solely on a defined-benefit (DB) plan for retirement income
(Munnell and Soto 2007). As of September, 2016, state and local DB plans held $3.82 trillion in
assets to fund the retirement of 14 million active and 10 million retired employees of state and
local government (NASRA 2017). 2
Yet, despite the tremendous importance of public pensions, many public DB plans have
arrived at a state of near-crisis.3 While large state and local plans, on average, were funded to cover
74% of liabilities in fiscal year 2015, funding levels vary widely, with one-fifth of all plans less
1 In a defined benefit (DB) plan, the employee’s pension benefit is determined by a formula that takes into account
the years of service, salary, age at retirement, and other factors. In contrast, in a defined contribution (DC) plan,
contributions are paid into an individual account for each participant, and are invested in funds of the participant’s
choice. The employer (employee) bears the investment risk and longevity risk under a DB (DC) plan. 2 DB plans are also important in the private (corporate) sector. One out of every five private sector workers in the U.S.
relies on a DB plan for retirement income, and about forty million private sector workers participate in the 26,000 DB
plans sponsored by corporate employers and insured by the Pension Benefit Guaranty Corporation (Bureau of Labor
Statistics National Compensation Survey: http://www.bls.gov/ncs/). In the private sector, however, defined-
contribution (DC) plans are far more prevalent today, with 64% of private-sector employees relying solely on a DC
plan for retirement income. In contrast, only 14% of public-sector employees rely solely on a DC plan for retirement
income (Munnell and Soto 2007). 3 See, for example, Foltin, C., D. Flesher, G. Previts, and M. Stone. “State and Local Government Pensions at the
Crossroads”, CPA Journal (April 2017); O. Garret. “The disturbing trend that will end in a full-fledged pension crisis”,
Forbes (June 9, 2017); D. Grunfeld. “The looming pension crisis”, The Rand Blog (November 8, 2017); M.W. Walsh.
“An overhaul or a tweak for pensions”, The New York Times (August 26, 2009); E. Ring. “The coming public pension
apocalypse, and what to do about it”, California Policy Center White Paper (May 16, 2016). Grunfeld quotes the then-
treasurer of Orange County, who as far back as 2005 warned that California’s public-sector pensions were a “ticking
time-bomb”, and California’s Little Hoover Commission, which in 2011 advised the governor and State Legislature
that “Unless aggressive reforms are implemented now, the problem will get far worse, forcing counties and cities to
severely reduce services and lay off employees to meet pension obligations.” Walsh quotes actuary/pensions
commentator Jeremy Gold from 2009, describing California, Texas, and New Jersey’s retirement systems as going
“to hell in a handbasket”.
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than 60% funded (Munnell and Aubry 2016). 4 In 2015, the largest state and local pension systems
reported collective unfunded liabilities of $1.4 trillion using valuation techniques from extant
accounting standards. However, alternative valuation techniques that hew more closely to finance
theory value the deficit at closer to $4 trillion (Rauh 2017). The fiscal pressure from deteriorating
pension funding is significant enough to have led to credit rating downgrades in states with
critically underfunded pensions, such as Illinois, New Jersey, and Connecticut (S&P State Global
Market Intelligence 2017). Proposals to relieve the funding burden by cutting back on benefits,
eliminating cost-of-living-adjustments, and requiring employees to work longer or contribute more
are being debated in courts across the U.S. (Brainard and Brown 2016).
Pension commentators point to decades of overly generous benefit promises combined with
persistent underfunding as having led plans to their current depleted state. Many states have
historically contributed much less than their “Annual Required Contribution” (ARC), calculated
per extant Governmental Accounting Standards Board (GASB) rules, which represents the
employer’s cost of retirement benefits earned by employees in the current year. For example, in
fiscal year 2015, only 13 of the 50 states contributed the full ARC or more, with some states such
as New Jersey consistently contributing no more than 40% of the ARC for many years (S&P
Global Ratings 2016). With a rapidly burgeoning move across the country to curtail or restructure
benefits, the public retirement system in the U.S. has reached a crossroads. Decisions to fund (or
not, as the case may be) carry enormous implications both for the beneficiaries who depend upon
pension promises, and for the taxpayers who may be called upon to fulfill those promises, through
higher taxes or cuts to public spending.
4 For fiscal year 2015, the states of Kentucky, New Jersey, Illinois, Connecticut, and Rhode Island had the most
poorly-funded retirement systems, with assets worth only 37.4%, 37.8%, 40.2%, 49.4%, and 55.5% respectively of
the actuarial value of liabilities (S&P Global Ratings 2016).
3
Two GASB pronouncements, both issued in June 2012, dramatically alter the accounting
and reporting of pension expense and pension funding status for state and local plans, and increase
the transparency and comparability of pension commitments that governments across the U.S.
have accrued over time. GASB Statement No. 67 Financial Reporting for Pension Plans
(applicable to pension plan reporting, effective for plan years starting after June 15, 2013) and
GASB Statement No. 68 Accounting and Financial Reporting for Pensions (applicable to pension
sponsor reporting, effective for fiscal years starting after June 15, 2014), collectively introduce
changes that are twofold: (1) to measurement, and (2) to recognition.
With respect to measurement, previously, the pension obligation was valued by discounting
projected future benefits at the long-term expected rate of return (“ERR”) on pension assets. Now,
the ERR can only be used to the extent that plan assets are projected to be sufficient to meet benefit
payments, with a high-quality tax-exempt municipal bond rate required to be applied to any
balance of (unfunded) benefit payments remaining after the projected “depletion date”. This results
in a “blended” discount rate applied overall by any plan that is only partially funded. As
governmental pension plans invest extensively in equities, their ERRs are typically much higher
than high-quality municipal bond rates; the requirement to use a “blended” discount rate will
therefore lower discount rates, leading to larger estimates of pension liabilities and of the unfunded
portion as a result (Munnell, Aubry, Hurwitz, and Quinby 2011, Mortimer and Henderson 2014).
With respect to recognition, any net pension liability determined by subtracting the fair value of
pension assets from the pension obligation, as measured above, is to be recognized on the financial
statements of state and local governmental employers for the first time. Prior to these changes,
GASB standards only required disclosure of the unfunded liability, and did not mandate
recognition on the financial statements.
4
The pension liabilities of state and local governments, in sheer economic magnitude, are
so substantial that pension funding considerations shape public policy, budgets, and credit quality
for many states (Kilroy 2015). As a result, the changes introduced by GASB 67/68 have the
potential to place economically substantial liabilities on the financial statements of state and local
pension sponsors, as the new rules (1) potentially increase the measurement of the pension liability,
and (2) require recognition of the underfunded portion on employers’ balance sheets.
These changes could, in turn, invite heightened scrutiny of funding deficits from an array
of stakeholders: (i) credit rating agencies, for whom pension deficits are a first-order consideration
in the rating process; (ii) investors in the municipal bond markets, who have incentives to monitor
pension deficits particularly because pensions are typically senior to general obligation bonds
(Novy-Marx and Rauh 2012); and (iii) taxpayers, given that balanced budget requirements in most
states necessitate the raising of taxes or cutbacks to other government expenditures in order to
close pension deficits (Allen and Petacchi 2015; Costello, Petacchi, and Weber 2017). Renewed
scrutiny from these stakeholders raises the specter of increased financing costs and greater citizen
oversight of pension management. Given these eventualities, it is plausible that plan sponsors will
respond in ways that minimize the negative impact to their reported financials, which begs the
question: do sponsors respond to GASB 67/68, and if so how? To the extent to which these
pronouncements create negative economic consequences for sponsoring governments, do sponsors
attempt to contain or minimize the impact on reported numbers? Answering these questions is the
objective of our study.
We examine one outcome that is readily available for a broad sample of state and local
plans: how much cash is contributed into the plans following the onset of GASB 67/68. Increasing
contributions helps to reduce the GASB 67/68 liability that needs to be recognized, directly and
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indirectly – directly, by increasing the funded base that can be discounted at the (higher) ERR on
plan assets as opposed to the municipal bond rate; and indirectly, by helping to justify assuming a
higher stream of expected future contributions when projecting the plan’s depletion date, and so
reducing the likelihood that the plan will be projected to run out of assets in the first place.
For a sample of 170 state and local plans covered by the Public Pension Database
maintained by the Boston College Center for Retirement Research, which covers 95 percent of
public pension membership and assets nationwide, we find that contributions increase significantly
following GASB 67 implementation. After controlling for plan- and government-level
determinants of contributions, we document a 4% increase in total contributions (which translates
to approximately one-quarter of a standard deviation in total contributions), driven primarily by
an increase in employer and state contributions.
Furthermore, we find that the significant increase in contributions is concentrated within
plans (i) for which applying GASB 67 measurement is expected to result in greater increases to
the pension liability; (ii) and for which financial statement recognition of increased liabilities
carries more severe economic and political consequences. Contributions increase by 4.6% for
plans for which applying GASB 67 measurement is predicted to create a relatively large jump in
the PBO. When considering economic consequences of recognizing increased liabilities, we find
a 5.7% increase in contributions from sponsors accessing debt markets close to GASB 67
implementation, and a striking 9% increase in contributions from sponsors with a negative credit
rating outlook, who we expect would have particular incentives to minimize any sudden increases
to reported liabilities. When considering the political ramifications of recognizing increased
liabilities, we find a 7.7% increase in contributions from states with a stronger union presence,
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consistent with unions also having incentives to minimize sudden increases to reported liabilities
in addition to having the ability to pressure elected officials to increase funding.
Our study offers the following contributions. First, we provide some of the first large-scale
empirical evidence on the consequences of GASB 67/68, a pair of standards that were fiercely
debated over an exposure period of six years, and which continue to generate controversy to date.5
On one hand, recent work attempting to forecast the likely increases in liability measurements
from GASB 67/68 before the standards took effect estimates substantial increases in reported
liabilities (Munnell, Aubry, Hurwitz, and Quinby 2012; Mortimer and Henderson 2014).6 On the
other hand, some commentators opine that the measurement changes required by GASB 67/68
may not be significant for plans with established, sound funding policies that will qualify to
continue using the ERR as a discount rate (e.g., Goodhart and Neeb 2013), and indeed, early
compilations of state CAFR data indicate that discount rates have shifted for only a small minority
of plans (Moodys’ Analysis March 2015).7 By demonstrating evidence of managerial responses
5 The GASB 67 exposure draft received 61 comment letters and the GASB 68 exposure draft received 651 letters from
state and local treasurers’ (or controllers’) offices, public employees, credit rating agencies, bond investors, and
concerned citizens. Criticisms ranged along the spectrum, from critiques of the increasing liability measurements on
one end, to critiques that the GASB did not go far enough in requiring benefits to be discounted entirely at a risk-free
rate (or similar rates, which would increase liability measurements substantially more), on the other end. 6 Munnell, Aubry, Hurwitz, and Quinby (2012) forecast funded ratios for 126 plans in the Boston College Public
Pension Database as per the GASB proposals when they were still in Exposure Draft stage. They warn that “employers
and plan administrators should be prepared for funded ratios reported in their financial statements to decline sharply
under the new rules”. Using the proportion of the ARC contributed over the past ten years as a guide to determining
future contributions, and applying the then-prevailing high-quality municipal bond rate of 3.7% to discount benefits
payable beyond the projected depletion date, Munnell et al. (2012) estimate that blended discount rates for 2010 could
drop to as low as 4.1% (for the Illinois Teachers Retirement System) and 4.2% (for the New Jersey Teachers
Retirement System), with funded ratios declining sharply from 76% to 57% on average. While Munnell et al. (2012)
use highly granular plan-level parameters and assumptions to replicate the work of actuaries, Mortimer and Henderson
(2014) develop a simpler methodology using readily-available data to estimate discount rates and funding ratios under
the new standards. For a sample of one major plan from each state in 2010, they find that average funding ratios
decline from 73% to 56%, with average discount rates dropping from 7.9% to 5.1%. 7 Rauh (2017), analyzing the fiscal year 2015 numbers of large state and local pension systems, notes: “Remarkably,
many systems with very low funding ratios assert that assets, investment ratios, and future contributions will be
sufficient so that their pension funds never run out of money, allowing them to continue to use the high rates under
GASB 67.”
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that appear designed to mitigate the impact of GASB 67/68, our study provides a bridge between
the seemingly incongruous early forecasts and eventual reality.
Our second contribution lies in demonstrating that even in the governmental setting,
accounting standards that affect only the measurement and recognition of accruals-based assets,
liabilities, and income, without direct effects on cash flows, can elicit managerial responses that
affect cash flows. In other words, even in the governmental arena, accounting does have “real”
effects. In the context of publicly-traded for-profit firms, it is well understood that accounting
standards have real effects, and a rich literature documents evidence of managers altering the terms
of varied business transactions in order to achieve a certain accounting outcome or to moderate the
impact of an accounting change. 8 These actions are motivated by the desire to preserve firm
valuation or to preserve accounting-based inputs to (compensation or debt) contracts.
While the primacy of accounting numbers has been established in the corporate context,
whether governments are similarly motivated to alter real transactions to achieve accounting
outcomes is not as clear. Governments have distinct organizational objectives; they report to a
diverse array of stakeholders, some of which have no equivalent in the for-profit world (citizens
and elected representatives such as legislators) and some of which do (creditors and pension
beneficiaries); and their accounting reports are prepared by bureaucrats and overseen by elected
or appointed officials whose incentives could vary widely from the incentives of corporate
8 E.g., Horwitz and Kolodny (1980) find that firms reduce R&D spending after SFAS 2 required R&D to be expensed.
Imhoff and Thomas (1988) find a substitution from capital leases to operating leases after SFAS 13 required capital
leases to be recognized on-balance sheet. Bens and Monahan (2008) show that accounting rules requiring
consolidation of variable interest entities reduce firms’ willingness to sponsor these entities. Choudhary, Rajgopal,
and Venkatachalam (2008) find that firms accelerate the vesting of employee stock options to avoid recognizing
unvested option grants at fair value after SFAS 123R. Graham, Hanlon, and Shevlin (2011) show that the desire to
reduce accounting income tax expense (as opposed to simply reduce cash taxes paid) affects firms’ decisions on where
to locate foreign operations and whether to repatriate foreign earnings; Chen, Tan, and Wang (2013) show that fair
value measurement affects managers’ decisions on hedging risk. Graham, Harvey and Rajgopal (2005) provide
extensive survey evidence to the effect that managers take real actions to meet earnings goals.
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managers. Allen and Petacchi (2015) do find that states with weaker plans and stronger fiscal
pressures are more likely to oppose the GASB’s proposals during the exposure draft period, and
that state governments opposing the GASB’s proposals, in turn, are also more likely to initiate
benefit cuts as an early response to the exposure draft. These ex ante actions portend that state and
local controllers’ or treasurers’ offices will not be passive bystanders with respect to the expected
impact of GASB 67/68 on their financial statements; our evidence expands upon Allen and
Petacchi’s (2015) early findings and confirms that sponsoring entities are indeed willing to expend
resources to minimize that impact. To the best of our knowledge, a recent paper by Khumawala,
Ranasinghe, and Yan (2017), who document a significant reduction in U.S. municipalities’
derivatives usage after an accounting rule change requiring balance-sheet recognition of
derivatives, is the only other work demonstrating that accounting recognition spurs managerial
responses in a governmental setting.
Section 2 describes the institutional background of public pensions, the changes introduced
by GASB 67/68, and lays out hypotheses. Section 3 describes the sample. Section 4 discusses
results, and Section 5 concludes.
2. Institutional background and hypothesis development
2.1. State and local government pension plans
In contrast to the private sector, where defined-contribution (e.g., 401(k)) plans are
predominant today, governmental plans are primarily DB plans, covering the substantial majority
of government employees (Munnell and Soto 2007). The Census of Governments, undertaken
every five years, identifies 2,670 retirement systems sponsored by a government entity, either state
or local. Munnell, Haverstick, Soto, and Aubry (2008) report from the 2002 Census that state-
administered (as opposed to local-administered) retirement systems, which cover general state
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government employees and teachers, account for only 8% of all plans, but a majority of all active
participants (88%) and assets (82%). The remaining local plans, which are many in number but
small in size, are administered by municipalities, townships, counties, special districts, and school
districts, and cover general municipal employees and often policemen and firefighters as well.9
Benefits under these DB plans are determined by multiplying the employee’s final average
salary by the number of years of service and a multiplier for each year of service, which is around
2% in the public sector (Brainard 2007, US Department of Labor 2007). Moreover, governmental
plans typically provide cost-of-living adjustments (either automatically, or on a frequent but ad-
hoc basis), which are uncommon in the private sector (Munnell and Soto 2007). Again, in contrast
to private-sector plans, governmental plans usually stipulate contributions from employees in
addition to contributions from employers and from non-employer funding sources (e.g., the state),
with contributions often determined by statute.
Unlike the private sector, public plans are not subject to the Employee Retirement Income
Security Act (ERISA, 1974), and states vary widely in how plans are regulated and governed. Still,
some commonalities exist: most public plans hold assets in trust and are governed by a board of
trustees required to act solely in the interest of beneficiaries. Trustees usually come from one of
three groups: trustees who serve by virtue of their public office (e.g., a state treasurer who
automatically serves on the board), trustees who are appointed by an elected official, and
representatives chosen by plan beneficiaries (Fitzpatrick and Monahan 2012). While almost all
9 Structures vary widely from state to state – some states have a single system covering all employees (e.g., Maine
and Hawaii) while others have over a hundred systems (e.g., Illinois and Michigan). Furthermore, while the typical
local plan is small, there are prominent exceptions, such as the New York City Employees and New York City
Teachers’ Retirement Systems, which have $70 billion and $85 billion, respectively, in assets as of June 30, 2017.
10
plans have annual funding (i.e., contribution) requirements, these requirements vary in
enforceability, and so the annual “required” contribution need not always be contributed.10
2.2. The erstwhile pension accounting framework and the shift brought about by GASB 67/68
Since 1994, the accounting for public plans was governed by GASB Statement No. 25
Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined
Contribution Plans, and GASB Statement No. 27 Accounting for Pensions by State and Local
Governmental Employers. GASB 25 laid out the disclosures required in financial statements: plan
assets, plan liabilities, required contributions from employers and employees, and the ratio of
employer contributions made to required contributions, among others. GASB 27 focused on
defining the employer’s annual pension expense to be reported in the financial statement: this
pension expense was equal to a figure known as the annual required contribution (“ARC”), defined
as the sum of normal cost (i.e., service cost) for that year and any payment required to amortize
the unfunded liability over 30 years.11
GASB 67 and 68 reflected a fundamental change in the GASB’s approach towards pension
accounting, along two dimensions. First, while GASB 25/27 did not intend to provide sufficient
conditions for appropriate funding, the ARC had “become a de facto funding standard”, which was
“used to evaluate funding decisions of the employer” and had even “standardized the funding
10 E.g., the Ohio State Retirement System Board can sue employers for failure to pay contributions and collect past
due amounts, whereas the Illinois Teachers Retirement System (one of the most critically underfunded systems in the
country) “has a long history of successfully fending off participant lawsuits” to increase contributions or make the
required contributions (Fitzpatrick and Monahan 2012). Munnell, Haverstick, Aubry, and Golub-Sass (2008) examine
why some states and localities do not pay their ARCs, and report that many are legally constrained in what they can
contribute, as employer contribution rates are determined by statute and sometimes specify a rate smaller than that
recommended by the actuaries. Other drivers include state fiscal pressure and a lack of funding discipline. 11 Under GASB 25/27, the computation of pension expense depends on whether a Net Pension Obligation (NPO) was
recorded. The NPO, which was the balance sheet liability under GASB 25/27, was calculated as the cumulative
difference between the annual pension cost and the employer’s contribution to the plan. If there is no NPO, then
pension expense is equal to the ARC (i.e., normal cost). If there is an NPO, then pension expense = ARC + one year
of interest on NPO + adjustment to NPO to remove amounts in ARC already in the NPO.
11
approaches of state and local governmental employers” (GASB 68 Basis for Conclusions, para
160). GASB 67/68, in contrast, created a “new hard-line division of accounting from funding”
(Senta 2014). Second, these pronouncements shifted the primary focus of accounting from the
income statement to the balance sheet. Under GASB 27, the focus was on what employers
contributed each year relative to the ARC for that year; only if the cumulative ARCs exceed the
cumulative amount contributed to date did a liability appear on the balance sheet to that extent.12
In contrast, GASB 68 assigns a plan’s full unfunded liability (total pension liability minus fair
value of plan assets) to the balance sheet of the employer sponsoring it, with a “smoothed” annual
pension expense (calculated in a manner reminiscent of corporate pension expense under FASB
rules) appearing on the income statement.13
In addition to requiring recognition of the pension liability (to the extent to which it is
unfunded), GASB 67/68 also revise the measurement of the liability. Whereas the pension liability
was previously determined by discounting projected future benefits at a discount rate equal to the
expected rate of return (ERR) on plan assets, GASB now requires a “blended” discount rate to be
applied in cases where the plan is projected to become insolvent at some point in the future. To
make this determination, the GASB specifies a multi-step process: (1) project future benefit
12 The shift in the recognition framework from GASB 27 to GASB 68, in this respect, mirrors the shift in FASB
accounting rules for the private sector from SFAS 87 Employers’ Accounting for Pensions to SFAS 158 Employers’
Accounting for Defined Benefit Pensions and Other Postretirement Plans. SFAS 87 focused on defining a (smoothed)
net periodic pension cost to be expensed on the sponsor’s income statement, and a balance sheet liability was
recognized only to the extent to which the employer’s contributions into the plan fell short of the aforementioned
pension cost. In contrast, SFAS 158 required recognition of the full unfunded liability (any excess of the projected
benefit obligation over fair value of plan assets) on the sponsor’s balance sheet. 13 This change in approach was the culmination of refinements to the GASB’s accounting theory, embodied in many
Concepts Statements it released in the period between GASB 25/27 issuance and GASB 67/68 issuance. Specifically,
the GASB affirmed that a government employer’s net pension liability meets the definition of a liability under
Concepts Statement No 4 Elements of Financial Statements (issued 2007). GASB Statement No 34 Basic Financial
Statements (issued 1999) also paved the way for pension accounting changes, by requiring governmental financial
statements to be prepared using accrual basis and an economic resource measurement focus (BKD 2014). In the
meantime, other standard-setting organizations (FASB, IASB) had also developed a pension accounting framework
relying on mark-to-market principles, which also could have influenced the GASB’s evolution in this regard.
12
payments to current employees based on current benefit terms; (2) project plan assets forward,
taking into account expected inflows (contributions, plan asset returns) and outflows (benefit
payments, expenses) associated with current members primarily; (3) if the assets so projected are
sufficient to cover benefit payments for all periods, then plans can use the ERR to discount all
benefit payments; (4) if the assets so projected are insufficient to cover benefit payments for all
periods (i.e., if the plan is projected to run out of funds at some point), discount all benefit payments
until that “projected depletion date” or “crossover point” using the ERR, and then discount all
benefit payments after that date using a high-quality tax-exempt municipal bond rate; (5) the single
equivalent discount rate that, when applied to all cash flows, produces the same total present value
as the two-step discounting described above, is the “blended” discount rate.
The rationale for applying a muni-bond rate beyond the depletion date is that once the plan
runs out of funds, the employer’s projected sacrifice of resources takes on the nature of a
conventional governmental liability (GASB 68 Basis for Conclusions Para 230), and so the
applicable rate should be one that reflects the characteristics of the rate used to discount other
general unsecured liabilities of government (GASB 68 Basis for Conclusions Para 240).14
14 Both components of the blended rate – the ERR and the muni-bond rate, have drawn extensive criticism from
different quarters. Financial economists are almost universally opposed to the ERR as discount rate, as basing the
valuation of a liability on the assets held to fund that liability violates the law of one price. It also ignores the fact that
any asset allocation strategy generates a distribution of potential outcomes: a risky investment strategy, while allowing
pension assets to meet benefit payments on average, could leave the plan underfunded 99% of the time and heavily
overfunded 1% of the time. The benefits, however, must be paid in all scenarios. Instead, per finance theory, streams
of future cash flows should be discounted at a rate that reflects their risks, particularly their covariance with priced
risks. As public pension promises are virtually certain to be paid, this suggests discounting at the risk-free rate (Novy-
Marx and Rauh 2011). Robert Novy-Marx is quoted as calling the proposed rate “complete nonsense” when applied
to real-world situations (Mortimer and Henderson 2014), while Alicia Munnell of the Boston College Center for
Retirement Research is quoted as describing the blended approach as “fundamentally misguided” and with the
potential to do “enormous damage”. At the other conceptual extreme, commentators criticized the tax-exempt muni-
bond rate as unnecessary because funding policies would be adjusted over time to ensure that sufficient assets were
available to pay benefits; or questioned its appropriateness for employers that are legally restricted from borrowing to
fund pension plans; or argued for a taxable muni-bond rate, as pension obligation bonds are taxable borrowings (GASB
68 Basis for Conclusions, Para 233 & 240).
13
Appendix A provides more detail on this estimation procedure, while Appendix B
comprehensively lists all changes in GASB 67/68.
Discretion does exist in this estimation process, and such discretion can be used to mitigate
the impact of GASB 67/68. In the first step (projecting future benefit payments), benefits must
include all automatic cost-of-living adjustments (“COLAs”), even any ad-hoc COLAs that are
deemed “substantively automatic”; judgment has to be applied by the plan board, staff and auditors
to evaluate ad-hoc COLAs and determine whether they are substantively automatic. In the second
step (projecting plan assets), the projections can include expected future contributions associated
with current members, and if the plan has no statutory contribution basis or formal written funding
policy, then the most recent five-year average of contributions is the maximum projected future
contribution. However, if a statutory contribution basis or formal written funding policy exists,
then “professional judgment” can be applied in projecting the most recent five-year history of
contributions into the future. The GASB’s decision to allow employers to take credit for future
contributions raised numerous concerns of potential abuse, e.g., the AICPA’s comment letter on
GASB’s proposals argued that “projected contributions are not based on objective criteria…
employers could easily state that they are ‘planning’ for future contributions, even though the plan
is significantly underfunded”.15 A “formal written funding policy”, moreover, can take many
shapes, and pre-GASB 67/68, many funding policies were extremely basic, e.g., “we contribute
the ARC” (Goodhart and Reeb 2013).
2.3. Potential implications of GASB 67/68: managerial responses
15 The AICPA had proposed an alternative, “run-off” approach to determining the discount rate that assumes no future
contributions nor earned credits to the plan and bifurcates the discount rate into funded and unfunded portions. The
funded portion would consist of projected cash flows that would include asset growth (based on the ERR), and benefit
payouts. This would define the benefit payments that can be supported by the current plan’s net assets.
14
The GASB identifies three potential user groups for governmental reporting: the bond
market, citizens/voters, and regulators. Of these groups, investors in the bond market (and
information intermediaries in that market, such as credit rating agencies and bond analysts) pay
close attention to pension funding. Rating agencies themselves state that unfunded pension
liabilities are a major driver of credit quality for states (Kilroy 2015), and deteriorating funding
ratios are often quoted as the reason behind rating downgrades for states (e.g., S&P Global Market
Intelligence 2017 discussing downgrades of Connecticut, Illinois, Kansas, and New Jersey). In
academic findings, Marks and Raman (1988) find that municipal debt costs are sensitive to
unfunded accumulated liabilities; Martell, Kioko, and Moldogaziev (2013) find that state credit
ratings are sensitive to aggregate pension funding ratios, and Novy-Marx and Rauh (2012) find
that municipal bond spreads are sensitive to investment losses in state pension funds, all indicating
that funding status and plan performance affect debt investors’ perceptions of credit quality.
Additionally, many states have balanced budget restrictions, which imply that taxes will
have to be raised or public expenditures curtailed in order to close pension funding gaps (Costello,
Petacchi, and Weber 2017); as a result, citizens/voters could also be concerned about pension
deficits. While there is not a lot of direct evidence in this regard, Rich and Zhang (2015) examine
a sample of locally-administered municipal plans, and document that funding ratios are stronger
in municipalities that permit direct citizen participation in the legislative process (through petition
initiatives) or when elected officials have recently faced recall attempts. These findings imply that
the threat of citizen oversight and involvement plays a role in pension funding decisions, in turn
suggesting—at the least—that pension funding is an outcome of interest for citizens.
Due to the strong interest of the bond market and the citizenry in the funding outcomes of
public pensions, public officials in turn are also concerned about pension reporting. For instance,
15
incumbent gubernatorial candidates, who could be driven by incentives for re-election, manipulate
accounting numbers to present a healthier funding status for public pensions in election years
(Kido, Petacchi, and Weber 2012). Reported pension funding status, therefore, is a metric that
public officials appear to believe is important.
Given that key stakeholders pay close attention to pension funding, and also that GASB
67/68 is generally expected to increase pension liability estimates and lower reported funding
status, it is plausible that employers and plan sponsors have incentives to respond in various ways
that mitigate the “fallout” from GASB 67/68 to the extent possible. Many commentators admit this
possibility: Mortimer and Henderson (2014), for example, posit that governments with low funded
ratios could be “tempted to manage reported pension values”, either through economic transactions
and activities (i.e., “real” actions), or by the opportunistic use of discretion in estimating the
crossover point and the revised pension liability. Real actions to reduce reported pension liabilities
can include downsizing employee numbers, creating new classes of employees with reduced
benefits, and increasing employee contribution rates. In the liability estimation process, the fact
that projected future contributions can be included when determining the crossover point opens
the door to opportunistic use of the discretion that exists in projecting those future contributions.
Of these varied responses that plans can offer, we examine one that is readily observable
for all plans, has the potential to be implemented proactively, and could affect the GASB 67/68
liability estimate substantially: the annual contribution. Increasing current contributions can help
to reduce the estimated liability directly and indirectly: directly by increasing the funded portion
of the liability to which the ERR can be applied, and indirectly by helping to justify higher
projected future contributions in determining the crossover point. For plans with a formal funding
policy that are allowed to apply judgment in projecting historical contributions into the future,
16
higher current contributions should help to justify projections of increased future contributions;
and for plans lacking a formal funding policy, higher current contributions increase the five-year-
average of most recent contributions that serves as the maximum projected future contribution.
For these reasons, we hypothesize that contributions to public pensions increase after GASB 67/68.
Our prediction that GASB 67/68 will elicit responses to contain its impact is, however, not
straightforward; it hinges on a few key assumptions. The first and most crucial of these
assumptions is that financial statement measurement and recognition matter, in this governmental
context. Note that none of the GASB 67/68 provisions alter the underlying fundamentals of what
is actually owed to pensioners: as Munnell et al. (2012) put it, “$1,000 owed to a retired teacher in
ten years under current standards will remain $1,000 owed in ten years under the new standards”.
Estimates of the pension liability developed by discounting those benefits at the ERR were
disclosed in plan financial statements since before the advent of GASB 67/68. The new standards
only discount those benefits at a potentially lower rate, leading to a higher single number
representing what is owed in present value terms, and in addition require financial statement
recognition of that number (net of pension assets). If bond investors and voters are already
discounting pension benefits at rates lower than the ERR, and impounding the resulting higher
liabilities into their decision process, then financial statement recognition of those higher liabilities
need not bring any economic consequences, or in turn elicit any responses to minimize those
consequences.
Whether financial statement measurement and recognition indeed matter (i.e., carry
economic consequences) is not clear in the governmental setting. On one hand, Baber, Gore, Rich,
and Zhang (2013) find that municipal debt costs increase following accounting restatements,
suggesting broadly that reported numbers are important to bond valuation. In a recent study,
17
Khumawala, Ranasinghe, and Yan (2017) examine the consequences of GASB No 53 Accounting
and Financial Reporting for Derivative Instruments, which mandates the recognition in the
government-wide balance sheet of derivative instruments that were hitherto off-balance sheet.
They document a post-GASB 53 reduction in derivatives holdings by municipalities that faced
negative reporting consequences from GASB 53, indicating that financial statement measurement
and recognition affect managers’ real actions in the governmental setting. On the other hand, there
is strong evidence – anecdotal and academic – to suggest that credit rating agencies were already
discounting pension benefits at lower rates than the ERR. For example, Moodys’ already used a
high-grade corporate bond index to discount governmental pension liabilities (akin to FASB
discount rate requirements per SFAS 87); it announced not only that its methodology would remain
unchanged but also that it did not expect most ratings to change after GASB 67/68 (Moodys’
Investor Service 2014). Similarly, S&P announced that it did not expect “significant revisions to
state ratings solely on the changes to GASB reporting” (S&P Ratings Services 2013).16 Hallman
and Khurana (2015) empirically confirm the notion that rating agencies impound higher liabilities
than those previously reported, by re-estimating state pension liabilities at a high-quality municipal
bond discount rate, and find that the resulting adjustments are associated with lower credit ratings
and also with higher interest costs, over and above the unfunded accrued pension liability reported
in CAFRs under pre-GASB 67/68 rules. Thus, it is not clear ex ante whether measurement and
recognition matter for key stakeholders in the governmental setting.
The second assumption is that these economic consequences actually incentivize decision-
makers in the government setting to respond. In a corporate setting, poor reported performance
16 Gore (2004) explains why municipal bond yields could still show variation independent of credit ratings: first, many
municipal bond issues are unrated; and second, even for rated issues, the ratings alone are not sufficient for investors
to determine risk. This is because the ratings only provide a range for the probability of default, not the probability of
recovery, and ratings agencies do not assess the liquidity of underlying assets.
18
leads to questions from analysts and market intermediaries, increases scrutiny from institutional
investors and boards of directors, lowers valuations with consequent impacts on managers’
compensation packages, and ultimately can lead even to the manager being fired. In the
governmental setting, even if borrowing costs should increase, it is not clear whether the
bureaucrats, elected officials, and legislators who set pension policy face consequences. Some
indirect evidence exists in this regard: Rich and Zhang’s (2015) findings that pension funding is
stronger when elected officials have recently faced recall attempts suggests that poor pension
funding brings a greater threat of recall. Rich and Zhang (2014) also document that municipal
finance directors are more likely to experience job loss when their municipalities disclose
accounting restatements, compared to a matched control sample of municipalities that do not
disclose restatements (although restatements could indicate serious fiscal mismanagement or
malfeasance on a scale that does not generalize to our setting). A stream of work in public
administration documents that fiscal performance affects the turnover of top executives in local
government (Feiock, Clingermayer, Stream, McCabe, and Ahmed 2001; McCabe et al 2008).
Finally, indirect impacts could exist, through debt costs as a channel - if borrowing costs go up,
property taxes may go up, which could have adverse consequences for government officials’ re-
election prospects (Gore, Sachs, and Trzcinka 2004). On the other hand, public policy decisions
often do not take effect immediately -- policies enacted in one administration may only take effect
in the next. Politicians frequently shift blame by claiming to have “inherited” policy problems
from their predecessors (McGregor 2017, Washington Post). Thus, it is not clear whether the
economic consequences of GASB 67/68 will motivate decision-makers to respond.
The third assumption is that government officials actually have the discretion to take
actions – real actions or otherwise – to minimize the impact of GASB 67/68, and that those actions
19
will be observable in the limited period of time that has elapsed since the standards went into
effect. Funding increases could take time to effect as budget priorities have to be reset, particularly
in states facing balanced-budget mandates. Legislation may have to be passed or amended in states
where contributions are specified by statute. For instance, it is possible that managers are able to
exercise discretion in “accrual” estimation of the crossover point for funding levels but are unable
to undertake “real” actions, in which case we would not find support for our hypothesis. For these
reasons, it is an empirical question whether contributions increase after GASB 67/68.
2.4. Cross-sectional differences in the response to GASB 67/68
We do not expect responses to be the same for all plans, firstly because the actual financial
statement impact of GASB 67/68 varies across plans. For example, for plans that are not projected
to run out of assets, the “blended” discount rate applicable under GASB 67/68 will continue to be
the same as the ERR, which was used as the discount rate pre-GASB 67/68. The measurement of
the pension liability, therefore, may not change; the main impact will be that the liability,
previously disclosed in financial statement footnotes, will now be recognized on employers’ and
sponsors’ statement of net position (a “recognition versus disclosure” shift). For plans with a
projected depletion date, however, the discount rate will shift downwards, resulting in a larger
reported pension liability – a measurement effect in addition to a recognition effect. Moreover,
some plans will experience a greater upswing in the measured pension liability than others. To the
extent to which there is a response to mitigate the impact of GASB 67/68, this response should
intuitively be stronger for plans facing a greater financial statement impact from GASB 67/68.
Second, the financial statement recognition of one dollar of pension liabilities could
generate more adverse economic consequences for some governments (or officials) than for others.
To the extent to which credit rating agencies and bond investors’ perceptions are actually affected
20
by GASB 67/68 measurement and recognition, increased liabilities reported on balance sheets may
trigger credit rating downgrades, in turn increasing the cost of debt financing. Increased liabilities
on-balance sheet also raise the specter of covenant violation, with attendant costs of renegotiation.
We expect that these economic consequences from debt valuation and contracting will be more
severe for governments that rely more heavily on debt financing (Allen and Petacchi 2015).
Accordingly, these managers have stronger incentives to mitigate the financial statement impact
of GASB 67/68. In the same vein, governments that face the possibility of credit rating downgrades
could have particular incentives to mitigate the GASB 67/68 impact. 17
Third, the recognition and measurement impacts of GASB 67/68 could have political
ramifications for elected officials. Reporting a stark increase in pension liabilities might generate
a public outcry to cut benefits as the “true costs of pensions” are revealed (Allen and Petacchi
2015); as a result, pension beneficiaries are likely to be opposed to any accounting reform that
manifests in larger or more visible pension liabilities, as Allen and Petacchi (2015) document.
Beneficiaries, in turn, might be better able to impose their preferences onto elected officials when
organized into unions. Therefore, funding pressures to mitigate the impact of GASB 67/68 could
be higher when facing beneficiaries organized into powerful unions.
3. Sample and Research Design
3.1. Sample selection
We obtain plan-level data from the Boston College Public Plans Database (PPD) for 2001
to 2016. The PPD contains data for 170 public pension plans: 114 administered at the state level
17 There is, however, a substantial caveat to these predictions: governments that rely heavily on debt financing may
not have the ability to reduce the GASB 67/68 liability by increasing cash contributions. These governments could
attempt to reduce the GASB 67/68 liability through other actions: cutting benefits, as Allen and Petacchi (2015)
document, or applying accounting discretion to reduce the magnitude of the reported GASB 67/68 liability.
21
and 56 administered locally. This sample covers 95 percent of public pension membership and
assets nationwide. Initially, the PPD was constructed to cover the largest state-administered plans
in each state, but now also includes some large local plans such, as the New York City Employee
Retirement System and Chicago Teachers. The PPD is updated each spring from data available in
the most recent Comprehensive Annual Financial Reports (CAFRs) and Actuarial Valuations.
Table 1 describes our variables of interest, many of which are obtained directly from the PPD.
3.2. Empirical specification
We estimate the impact of GASB 67/68 on contributions with the following model:
Contributions = β0 + β1 POST-GASB67 + β2 Funding Ratio + β3 % Required Contributions Paid
+ β4 Deficit + β5 Surplus + β6 TTLBAL Ratio + β7 Debt / Gross State Product + β8 Accrued Liability
/ Tax Revenue + β9 Balanced Budget + β10 Union Membership + β11 Election + β12 Entry Age
Normal + β13 State-level Plan + β14 Plan Covers Teachers + β15 Per Capita Growth in GSP +
Year-Quarter Fixed Effects
Equation (1)
The dependent variable Contributions is cash contributions for the fiscal year, scaled by
prior-year covered payroll. We estimate the model separately for contributions from various
sources: (i) employees, (ii) employers, (iii) employers + state, (iv) total contributions from all
sources (employees + employers + state). To the extent to which contributions do increase in
response to GASB 67/68, the increase may come from any of these sources. If employee
contributions increase (most likely because higher contributions are mandated), this would be
tantamount to a benefit cut, on a net basis, from employees’ perspective.
Our independent variable of interest is the POST-GASB67 indicator, which is set to one for
all fiscal years applying GASB 67; i.e., fiscal years beginning after June 15, 2013. Our
specification essentially relies on time-series differences in contributions between the post-GASB
67 and the pre-GASB 67 periods to infer the impact of the GASB rule changes, in the absence of
22
a feasible control group of plans that remain unaffected by GASB rules.18 As a result,
contemporaneous events or macroeconomic shifts that also affect contributions for the broad cross-
section of plans have the potential to confound our results. In order to more confidently attribute
any shifts we observe to GASB 67, we make the following research design choices/observations.
First, we note that the standard goes into effect for all fiscal years starting after a fixed
point in time, but that plans’ fiscal year-ends are distributed throughout the calendar year. As a
result, the implementation of GASB 67 is staggered across a 12-month period starting with fiscal
years (“FY”s)ending on June 15, 2014, and ending with FYs ending on June 14, 2015. For plans
whose FY ends in June 30 (the most common FYE in our sample for state and local plans), GASB
67 becomes effective for the FY ending June 30, 2014; whereas for plans whose FY ends, say, on
March 31, GASB 67 becomes effective only for the FY ended March 31, 2015. For the group of
plans that first applies GASB 67 rules for the FY ending June 30, 2014, the March 31-FYE plans,
for example, implicitly serve as a control group of plans that (1) overlap substantially in calendar-
time with the “treated” plans, but (2) are not subject to the “treatment” yet. The staggered onset of
the financial reporting effect hence mitigates to some extent the concern that contributions could
18 We considered a number of potential control groups but concluded that each would not be appropriate for varying
reasons. First, we considered foreign governmental plans, similar to Andonov, Bauer, and Cremers (2017). However,
these plans are likely to be subject to an entirely different regulatory framework, political considerations, and
macroeconomic drivers of year-to-year funding decisions. Second, we considered U.S. corporate plans, which are also
subject to an entirely different regulatory framework (e.g., the Employee Retirement Income Security Act of 1974,
which imposes a system of mandatory contributions on sponsors) but concluded in our setting that it was unclear what,
if any, omitted variables concerns would be alleviated by matching to U.S. corporate plans. Third, we investigated the
possibility of matching to U.S. state and local government plans that were exempt from GASB 67/68, as these new
standards only apply to pension plans administered through trusts or equivalent arrangements. A separate standard,
GASB 73 Accounting and Financial Reporting for Pensions and Related Assets that are Not within the Scope of GASB
Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, covers these plans, and is
applicable for plan years beginning after June 15, 2016. However, plans that are so exempt from GASB 67-68 typically
lack dedicated assets (Chmielewski 2016), which makes them inappropriate as a control group for examining funding
decisions. Finally, we considered matching to U.S. state and local plans that choose not to report under GASB rules,
as some states within the U.S. have still not mandated GAAP for their state and local government reporting (GASB
2008). However, (1) this sample is likely to be strongly self-selected, as we surmise that governments that access debt
markets and desire credit ratings are highly likely to choose to report under GAAP even if not mandated to do so; (2)
at a practical level, for those entities that chose not to apply GAAP, we encountered considerable difficulty in
compiling the pension-related variables required to estimate the empirical models.
23
be affected by non-reporting factors (e.g., other changes to the state and local regulatory
framework, political factors, macroeconomic trends), which we would not necessarily expect to
take effect in a similarly staggered manner. We implement this identification strategy exploiting
staggered fiscal years following previous studies (e.g., Agrawal 2009; Gipper 2016; Ladika and
Sautner 2017).
Second, we include a number of controls – fixed-effects, plan-specific controls, and state-
specific controls – to mitigate the effects of contemporaneous events or macroeconomic factors
that can drive contribution shifts. For this purpose, we include fixed-effects for the calendar quarter
and year of the FYE (e.g., a dummy variable set equal to one for FYs ending in Q1 (Jan, Feb, or
Mar) of 2013; a dummy variable set equal to one for FYs ending in Q2 (April, May, June) of 2013;
and so on). We also control for plan-specific drivers of contribution policy: Funding Ratio
(measured as prior-year plan assets scaled by prior-year plan liabilities), as poorly-funded plans
tend to contribute less, but may face pressures to contribute more so as to close funding gaps; and
% Required Contributions Paid (measured as the five-year average of the ratio of actual
contributions to required contributions), to control for any historical funding patterns and policies.
Additional controls capture heterogeneity across plans that could affect funding decisions: Entry
Age Normal (an indicator set to one if the plan uses the Entry Age Normal or “EAN” actuarial cost
method in the pre-GASB 67 period), as GASB 67/68 disallows the other five actuarial cost
methods that were permitted previously – as the EAN method tends to accumulate a larger
obligation than the alternatives up until the point of retirement, plans switching over from the other
five methods could face a greater jump in the measured obligation; State-level Plan (an indicator
set to one if the plan is administered at the state- as opposed to local government-level), following
Munnell, Haverstick, and Aubry (2008), who posit that state-administered plans could have better
24
management and financial discipline; and Plan Covers Teachers (an indicator set to one for plans
covering teachers), to capture the more generous benefits that teachers accrue, by virtue of their
longer tenure and higher earnings (Munnell, Haverstick, and Aubry 2008).
At the state-level, we control for the state’s financial condition, following Naughton,
Petacchi, and Weber (2015), who measure state financial constraints with the per capita difference
between final expenditures and final revenues in the general fund and then add back any midyear
spending cuts or tax changes (EXP_MINUS_REV). Because incentives likely differ depending on
whether the state is running a deficit or surplus, we separate the effects in our model into Deficit
(which equals EXP_MINUS_REV if this variable is positive, and zero otherwise), and Surplus
(which equals EXP_MINUS_REV if this variable is negative, and zero otherwise). We also include
TTLBAL Ratio (measured as ratio of total balances to expenditures in the general fund, where total
balances are general fund balances plus budget stabilization or “rainy day” fund balances), as an
additional measure of financial constraints. Governments with low rainy-day fund balances have
a smaller cushion of reserves to draw upon when faced with an unexpected operating deficit. Debt
/ Gross State Product (measured as total state debt divided by gross state product) captures the
state’s reliance on the debt market.
We also control for Accrued Liability / Tax Revenue (measured as the accrued pension
liability scaled by current-year tax revenues), to capture plan size relative to the state’s ability to
generate taxes. On one hand, states might contribute more to larger plans, as they tend to be more
visible; on the other hand, state resources are likely to be constrained when servicing larger plans.
We also control for Per Capita Growth in GSP (the per capita percentage change in real gross state
product), as states tend to contribute more to pensions in times of prosperity. Balanced Budget
(measured as the value from an index produced by the Advisory Commission on
25
Intergovernmental Relations, ACIR 1987), ranges from 0 to 10, with higher values indicating more
rigorous balanced budget provisions; states with more stringent requirements on this front likely
have less discretion to mitigate GASB 67/68 effects by stepping up cash contributions.
We also incorporate controls for political pressures than affect pension funding: Union
Membership (the percentage of state public sector employees who are members of a labor union
or of a similar employee association), as more powerful unions could be more successful in
persuading states to contribute more to pension plans; and Election (an indicator set to one if the
state has a gubernatorial election in the current year), to control for elected officials’ incentives to
report a favorable picture of pension health in election years. Table 1 defines the variables.
Third, we rely on the cross-sectional partitions to provide more identification of the impact
of GASB 67/68. We are interested not only in whether contributions shift upwards on average for
the sample of plans we examine, but also in whether the upswing is stronger for, or driven by, the
plans that are most affected by GASB 67/68. As described in Section 2.4, we expect any response
to GASB 67/68 to be concentrated within (1) plans for which the financial statement impact from
GASB 67/68, in terms of increased liabilities, is larger in magnitude; and plans for which the
recognition of increased liabilities engenders (2) more adverse economic consequences; and (3)
more adverse political consequences.
4. Empirical Results
4.1. Descriptive statistics and over-time trends in key variables
Table 2 presents medians and means of several key variables for each year during the
period 2001 to 2016. All variables are winsorized at the 1st and 99th percentiles. While our
multivariate tests in Tables 4-7 focus on the years immediately surrounding GASB 67/68, we
describe univariate statistics for a longer period in order to observe time trends, if any, in our key
26
variables of interest. We define fiscal years in the sample period 2001-2016 using the cutoff for
the effective date of GASB 67, which is effective for plan-years beginning after June 15, 2013.
Hence, GASB 67 is first applicable to plan-years ending on June 15, 2014 to June 14, 2015, which
we denote as year t0 in Table 2. Next, we define fiscal year t-1 as plan-years ending on June 15,
2013 to June 14, 2014, and so on. As such, Table 2 indicates plan-years as defined in terms of
both calendar time and event time relative to the effective date of GASB 67.
The first two columns of Table 2, Panel A, present reported amounts of pension assets and
pension liabilities, respectively, in billions of dollars. Pension assets and liabilities are measured
as per GASB 25/27 rules in event years t-1 and before, and per GASB 67/68 rules in event years
t0 and after. Clearly, pension assets and liabilities are economically significant, with median
pension assets ranging from $5.128 billion to $9.833 billion and median pension liabilities ranging
from $6.112 billion to $13.158 billion during the sample period 2001 to 2016. For both pension
assets and liabilities, the means are typically more than double of the medians in any given year,
indicating the presence of some very large plans in our sample.
The third column in Table 2 Panel A presents the funding ratio, defined as pension assets
divided by contemporaneous pension liabilities. Unlike the case for raw (i.e., unscaled) pension
assets and liabilities, the mean and median funding ratio are quite close to each other . From
approximately 98% funding in the first event-year presented (spanning calendar years 2000-2002),
the ratio decreases steadily each year, falling to a mean (median) of 72.8% (74.2%) in the final
event-year presented (spanning calendar years 2014-2016).
The fourth and fifth columns in Table 2 Panel A present the ERR and the GASB 67 blended
discount rate respectively. The ERR is tightly clustered around 8% in the early years, but drops
steadily to 7.5% between calendar years 2010-2016. The blended discount rate, as described in
27
Section 2, is defined in the post-GASB 67 period only. The mean (median) blended discount rate
is 7.43% (7.50%) and 7.38% (7.50%) in the first two years post-GASB 67, predictably less than
the ERR in the post-GASB 67 period.
The sixth column of Table 2 Panel A reports the covered payroll in billions of dollars.
Median covered payroll ranges from $1.293 billion in the first year presented to $1.751 billion in
the last year. When constructing the dependent variable measures of contributions made by
employers, the sponsoring state, and/or employees, we scale by prior-year covered payroll. As we
hypothesize that contributions increase after GASB 67, it is important to rule out the alternative
explanation that the scaled contribution variables increase after GASB 67 due to reductions in the
scaler. Based on Table 2, covered payroll is not decreasing over time. In fact, the dollar amount
of covered payroll steadily increases each year in our sample period, most likely due to the effects
of inflation and salary growth over time, mitigating concerns of denominator effects. In addition,
we scale all contribution variables by lagged (i.e., prior-year) covered payroll to further mitigate
confounding effects from contemporaneous covered payroll.
Table 2, Panel B documents the time-series of contributions, starting with the actuarially-
determined “required” contributions, first in raw millions of dollars, and then as a percentage of
covered payroll. Required contributions as a percentage of covered payroll inch up steadily over
time. The actual contribution, as a percentage of required contributions, has a median of 100% in
all but two years, indicating that the majority of plans contribute the required amount, but the mean
ranges from 88.5% to 103.8%.
We then describe contributions, as a percentage of covered payroll, from the various
sources: employee, employer, and employer + state. Employee contributions remain flat around
GASB 67, suggesting that the government entities were unable to “pass the cost” of increased
28
contributions to the employee. Employer contributions appear to trend upwards slightly around
event year t0, with a more distinct upswing evident from employer + state contributions, which
shift from a median of 14.0% and 14.4% in event years t-2 and t-1 to 16.2% and 16.7% in event
years t0 and t+1. Consistently, the last column (total contributions as a percentage of covered
payroll) shows an uptick in total contributions of about 2-3% of covered payroll between the two
event years pre- and post-GASB 67, which appears largely attributable to employer and state
contributions.
4.2. Do contributions increase after GASB 67?
We turn next to multivariate tests to examine whether contributions increase around the
onset of GASB 67/68. In multivariate tests, we use the two years immediately preceding GASB
67 (i.e., event years t-2 and t-1) and the two years immediately following GASB 67 (i.e., event
years t0 and t+1), in order to mitigate potential confounding effects from unrelated events
introduced by a longer time series.
Table 3 describes all the key variables used in multivariate tests, with Panel A (B)
describing the variables for the two event years pre-GASB 67 (post-GASB 67) respectively. Mean
(median) total contributions in the pre-period are 26% (22%) of covered payroll, moving up to
30% (25%) of covered payroll in the post-period. Of these total contributions, Employer + state
contributions start at 19% (14%) of covered payroll in the pre-period and increase to 21% (16%)
of covered payroll in the post-period, driving much of the shift in total contributions. Employee
contributions, in contrast, remain at a mean (median) of 7% (7%) in both pre- and post-periods.
Plan funding ratios start out at 72.3% (72.6%) of the PBO in the pre-period, and remain fairly
steady at 71.8% (72.9%) in the post-period; possibly as a result of increased funding counteracting
the larger reported PBOs in the post-period.
29
State government total debt is 7% of gross state product across both periods; state reserves,
in the form of general fund or rainy-day balances, are 9% (6%) in the pre-period, increasing to
11% (6%) in the post-period. On average, about 12% of public sector employees are represented
by unions, and while only 10% of the pre-period observations are from a gubernatorial election
year, 40% of the post-period observations are.
Applying GASB 67 measurement yields a PBO that is 1.37 (1.43) times the reported PBO
in the pre-period for our sample. Almost 70% of the plans in the sample are sponsored by entities
that have a positive or stable credit rating outlook from Moodys’ in the pre-period; the remaining
30% have a negative outlook.
Table 4 presents results of estimating Eq. (1) with contributions from the various sources
– employee, employer, and total – as the dependent variable in Panel A, B, and C respectively.
Consistent with univariate patterns, POST-GASB67 is insignificant in Panel A (employee
contributions), but positive and strongly significant in Panel B (employer contributions) and Panel
C (total contributions, which comprise employee + employer + state contributions). The coefficient
estimates in Panel B (C) indicate a 4.5% (4%) increase in contributions from employers (all
sources) in the two years subsequent to GASB 67 implementation relative to the two years prior,
after controlling for plan- and state-level determinants of contributions.
Many of the control variables are significant in the predicted direction. Plans with lower
funding ratios in the prior year tend to receive greater contributions from all sources, indicating
stronger pressures to fund. The coefficients on employer and total contributions (-0.422 and -0.536
respectively) are an order of magnitude higher than the coefficient on employee contributions
though (-0.042), suggesting that funding deficits tend to be made up primarily by employers and
sponsoring state governments. % Required Contributions Paid is highly significant in the models
30
on employer and total contributions, indicating strongly persistent funding practices at the plan-
level, such that plans that have contributed a higher percentage of required contributions in the
past tend to contribute more in the current year.
At the state-level, states running deficits (surpluses) tend to contribute less (more),
although we observe significant coefficients only in the model on employer contributions. States
that have accumulated a larger balance of debt relative to GSP tend to contribute less, with a large
and strongly significant coefficient across models on employer and total contributions; this is
consistent with these states being constrained in their ability to contribute. More stringent
balanced-budget restrictions associate with lower contributions, consistent with these restrictions
binding, but the effect is insignificant. Union presence associates with larger employer
contributions, consistent with unions pressuring employers for greater funding security. The
coefficients on State-level Plan and Plan Covers Teachers are counter-intuitively negative.
4.3. Cross-sectional variation in the post-GASB 67 shift in contributions
4.3.1. Expected magnitude of financial statement impact
Table 5 presents Eq. (1), with total contributions as the dependent variable, estimated
separately within subsamples created by the expected magnitude of GASB 67’s impact on financial
statements. As a first-pass measure of expected GASB 67 impact, we partition by the plan’s
funding ratio at the end of year t-2 relative to GASB 67/68. The mechanics of GASB 67/68 liability
measurement are such that better-funded plans, by definition, are less likely to have a projected
depletion date beyond which they will be required to apply a muni-based discount rate. For well-
funded plans, therefore, it is likely that the discount rate will remain equal to the ERR, which
implies no GASB 67/68-induced increase in the pension liability. Panel A presents partitions by
the plan funding ratio, with Panel A1 (A2) tabulating estimations within the well-funded (poorly
31
funded) subsample. The mean (median) funding ratio within the Panel A1 is 0.84 (0.82), in contrast
to 0.58 (0.61) within Panel A2.
As a more precise measure of expected GASB 67 impact, we apply the Mortimer and
Henderson (2014) approach to estimate, at the end of year t-2 relative to GASB 67/68, the
expected pension liability under GASB 67/68 measurement. Under GASB 67/68 rules, plans
provide a number of discretionary inputs to forecast future benefit payments (e.g., future COLAs)
and future plan assets (expected future plan asset returns and contributions). We apply the five-
year average of actual contributions for the period ending in in the year prior to the first year when
we measure our dependent variable as an input for future contributions; this represents our best
“nondiscretionary” estimate of future contributions, given the constraint specified in the standard
that estimates of future contributions are capped at the five-year historical average in the absence
of a formal written funding policy. For future expected plan returns, we apply the 10-year CAGR
of actual returns earned by the plan. Appendix C describes the procedure in detail. We scale the
resulting estimate of the expected GASB 67 PBO by the actual PBO reported for the same period,
and use the ratio as our partitioning variable in Panel B. This ratio, which captures the expected
jump in the PBO from a “nondiscretionary” application of GASB 67/68, has a mean (median) of
1.23 (1.30) for Panel B1 and 1.49 (1.48) for Panel B2. Therefore, for the median firm in Panel B1
(B2), applying GASB 67/68 measurement is expected to yield a PBO that is 1.30 (1.48) times the
currently disclosed PBO.
The results are broadly consistent across the two sets of partitions. Within well-funded
plans (Panel A1), the coefficient on POST-GASB67 is positive but insignificant; within poorly-
funded plans (Panel A2), however, we observe a positive and significant coefficient on POST-
GASB67, albeit significant only at the p=0.07 level (two-tailed). The coefficient on POST-GASB67
32
(0.08), however, indicates an 8% increase in contributions for this subsample. Partitioning on the
expected jump in PBO yields a starker contrast across subsamples: within plans for which the
Mortimer and Henderson (2014) procedure estimates a relatively low jump in PBO upon applying
GASB 67/68 rules (Panel B1), POST-GASB67 is positive but insignificant; within plans for which
we estimate a relatively large jump in PBO, POST-GASB67 is positive and significant at the p<0.01
level, with the coefficient estimate indicating a 4.6% increase in total contributions.
4.3.2. Economic consequences of financial statement recognition
Table 6 presents Eq. (1) estimated separately within subsamples for which we expect the
economic consequences of financial statement recognition to vary. To the extent to which GASB
67/68 changes in liability measurement and recognition affect debt investors’ perceptions
adversely, we would expect a stronger response from governments that rely more on the debt
market. We measure debt market reliance with long-term debt issued in the year; the mean
(median) long-term debt issued by the governments in Panel A1 is $2.2m ($2.1m) per capita, and
in Panel A2 is $6.9m ($4.9m) per capita.
If responses to GASB 67/68 are motivated even in part by the desire to avoid credit rating
downgrades, then we would expect a particular response from sponsoring governments that face
the prospect of deteriorating credit ratings. The major credit rating agencies provide not only a
rating but also an opinion on how that rating is likely to evolve (credit rating “outlooks”); we
exploit these opinions for a further partition test, tabulated in Panel B. Panel B1 represents the
subsample of plans whose sponsoring entities have positive/stable credit rating outlooks from
Moodys’, whereas Panel B2 represents the subsample with negative credit rating outlooks, all
hand-collected from the Moodys’ website for the fiscal year t-2 relative to GASB 67/68. Moodys’
Investor Service (2017) describes the outlook as an opinion regarding the likely ratings directions
33
over the medium-term, with a “stable” outlook indicating a low likelihood of ratings change in the
medium-term, and a “positive” (“negative”) outlook indicating a higher likelihood of a positive
(negative) ratings change over the medium-term.19 We would expect issuers with a “negative”
outlook to be particularly sensitive to any impacts from GASB 67/68.
Consistent with expectation, we find an insignificant effect on POST-GASB67 within low-
debt-issuance governments (Panel A1), but a positive and significant effect within high-debt-
issuance governments (Panel A2), with the coefficient on POST-GASB67 in Panel A2 indicating
a 5.7% increase in contributions. In Panel B, the difference between the subsamples is even more
striking. Within the 27% of the sample whose sponsoring entity has a negative credit rating
outlook, the coefficient on POST-GASB67 is not only positive and significant, but also the largest
in magnitude we observe so far, indicating a 9% jump in contributions for those plans whose
sponsoring governments face fragile credit rating prospects.
These results in combination paint a picture of the real actions mostly coming from
sponsors who are particularly concerned with avoiding the negative debt market consequences of
liability recognition. However, the partitions in Panel A, in particular, carry an alternative
implication: that contributions are higher for Panel A2 (the high-debt-issuance group) because
their sponsors are borrowing to fund pension plans. This interpretation, while different from that
implied by our predictions, is nonetheless interesting, because it still suggests that post-GASB 67,
closing the pension funding gap is an important enough priority to merit borrowing, particularly
given that debt issuance is a difficult and politically-fraught process for U.S. state and local
governments. It also raises the question of balanced-budget restrictions, which impose limits (of
19 Moodys’ Investor Service (2017) states that following the initial assignment of a “stable” outlook, about 90% of
ratings experience no change in the subsequent year; following the assignment of a “positive” (“negative”) outlook,
approximately one-third of issuers have been upgraded (downgraded) in the subsequent 18 months.
34
varying stringency) on the extent to which governments can raise debt to, for example, plug a
pension funding deficit. Accordingly, in Panel C, we partition the sample by the stringency of
balanced-budget restrictions across states and find that the significant coefficient on POST-
GASB67 is driven by the subsample with relatively lenient balanced-budget restrictions.
4.3.3. Political consequences of financial statement recognition
As a final test, we partition on the extent to which public sector employees in each state
are represented by unions (Table 7). From the beneficiaries’ perspective, higher funding ratios
translate into greater benefit security (i.e., likelihood that benefits will eventually be paid), and
beneficiaries who are organized into strong unions could be better able to exert pressure on
governments to improve funding. Table 7, Panel A1 (A2) presents estimations of Eq. (1) within
subsamples of states with relatively low (high) union representation. The mean (median) union
representation amongst the states in Panel A1 is 6.8% (6.3%) of public sector employees; in Panel
A2 it is 16.2% (13.1%) of public sector employees.
Total contributions increase strongly and significantly in the high-union subsample: the
coefficient on POST-GASB67 is 0.077, indicating a 7.7% increase in contributions, after
controlling for determinants thereof. In the low-union subsample, in contrast, we find an
insignificant effect on POST-GASB67. 20
The many cross-sectional tests, in combination, paint the picture of total contributions
increasing sharply around GASB 67 implementation particularly for those plans for which (1) the
rule changes are expected to translate into substantial increased liabilities on plan and/or sponsors’
financial statements, and for which (2) there are economic and political consequences from that
20 Allen and Petacchi (2015) document, for a sample of 20 state governments that either cut benefits or increase
funding between 2011 and 2012, that governments facing strong unions are significantly more likely to increase
funding than to cut benefits. While we do not compare the relative likelihood of these two actions, our findings are
broadly consistent in that that union representation is associated with a stronger funding response.
35
recognition. Overall, they not only add richness to our understanding of the factors that drive the
contribution response, but also help in attributing the response to GASB 67/68 as opposed to other
macroeconomic factors or contemporaneous events in the public pension landscape.
5. Discussion and concluding remarks
Two GASB pronouncements, both issued in June 2012, dramatically alter the accounting
and reporting of pension expense and pension funding status for state and local DB pension plans,
increasing the transparency and comparability of pension commitments that governments across
the U.S. have accrued over time. GASB Statement No. 67 Financial Reporting for Pension Plans
(applicable to pension plan reporting) and GASB Statement No. 68 Accounting and Financial
Reporting for Pensions (applicable to pension sponsor reporting), collectively introduce
accounting changes that are twofold: (1) to measurement, and (2) to recognition.
Interestingly, even though the explicit goal of the GASB for these two pronouncements
was to separate pension accounting from pension funding (i.e., how much to contribute to pension
plans), we find that contributions increase significantly in the two years following initial
implementation of these rules. As higher contributions reduce (both directly and indirectly) the
pension liability that is required to be recognized on the employers’ and sponsors’ statement of net
position, this increased funding response is consistent with employers and/or sponsors acting to
mitigate the adverse financial statement impact of GASB 67/68. Furthermore, contributions
increase most substantially for those plans that expect a large financial statement impact from
GASB 67/68, and for those sponsors likely to face more adverse economic and political
consequences from the financial statement recognition of increased liabilities, allowing us to more
confidently attribute the funding shifts we observe to GASB 67/68. Therefore, we document
36
economic consequences or “real effects” of accounting standards in the governmental sector, and
are one of the first studies to do so.
Our results could also be interpreted in a different light: that the act of recognizing pension
liabilities on the face of the balance sheet (as opposed to disclosure in the footnotes) increased the
visibility of pension funding deficits, resulting in greater pressures to fund. Even under this
interpretation, though, the trigger, or impetus, for increased funding comes from changes to
financial statement measurement and recognition, which continues to imply that changes to
accounting generated “real” effects.
The explicit goal of GASB 67/68 stands in stark contrast to other pension regulatory
changes designed with the stated purpose of altering pension contributions. Two such examples
in recent U.S. history are noteworthy. First, the Pension Protection Act of 2006 tightened
minimum funding ratios for U.S. corporate plans. Corporate sponsors increased their pension
contributions in response. Second, in 2012 the U.S. Congress passed the Moving Ahead for
Progress for the 21st Century Act (“MAP-21”), which essentially reduced mandatory contributions
to corporate pensions by allowing sponsors to apply a higher discount rate to estimate their pension
liabilities. Predictably, corporate sponsors reduced contributions to their pensions after MAP-21
(e.g., Dambra 2018). The explicit goal of both of these changes was to alter (either increase or
decrease) contributions to pension plans, with resulting effects on funding status. Therefore, it is
not surprising that sponsors responded to these changes by altering funding practices.
In contrast, the GASB was notably agnostic about attempting to alter pension funding
behavior when issuing GASB 67/68. In fact, the GASB went so far as to state that its explicit goal
was to separate pension accounting from pension funding. Nonetheless, we document systematic
increases in pension contributions post-GASB 67/68, and our cross-sectional tests documenting a
37
stronger increase in contributions from sponsoring entities most affected by financial statement
recognition suggest the interpretation that the funding increase is driven by those entities’
motivations to soften the adverse consequences to financial statements. These findings point to the
importance of considering managerial incentives that may lead to unintended consequences of
accounting regulation.
In sum, government entities perceive financial reporting to be important and are willing to
undertake actions with cash flow consequences in order to report favorable accounting numbers.
Therefore, despite the substantial differences between private and public sectors in the objectives
of financial reporting and in the motivations of preparers and users, financial reporting plays an
important role in shaping incentives in the public sector.
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Appendix A – Estimation of the discount rate under GASB 67/68
Step 1: Project future benefit payments based on the benefit terms as of the fiscal year end.
o Benefits should be projected for all current plan members, whether active/inactive,
currently receiving benefits/not
o Projected benefits should include all automatic/substantively automatic COLAs, future
increases in salary, and future service
o Projection to be done on “closed group” rather than “open group” basis, i.e., benefits
expected to be paid to future employees should be excluded from the benefit projections
Step 2: Project plan assets
o Assets are to be projected by taking into account expected inflows (contributions) and
outflows (benefit payments, expenses) associated with current members
o Unlike benefit payment projections, expected contributions for future members can be
included to the extent to which these contributions exceed the expected service cost
associated with these new members
o Contributions can come from employers, employees, or non-employer funding source
o If the plan’s contribution rate is set by statute, or there is a formal written funding policy
in place (such that it is reasonable to assume that the contribution will continue to be made),
then professional judgment can be used in projecting the most recent five years of
contribution history into the future
o If no statutory contribution basis / formal written policy exists, then the average
contribution over the most recent five-year period is the maximum projected future
contribution
Step 3: Determine the single equivalent discount rate
o If Step 1 and Step 2 demonstrate that assets are projected to be sufficient to cover benefit
payments for all periods, then the long-term ERR on plan assets may be used to discount
all benefit payments
o If Step 1 and Step 2 indicate that there is a date at which plan assets are depleted (i.e., a
“projected depletion date” exists), the plan actuary must then calculate a blended discount
rate, by (i) discounting all benefit payments expected to be paid up until the projected
depletion date using the ERR on plan assets, and (ii) discounting all benefits payments after
that date using a municipal bond rate.
o Solve for the single equivalent discount rate that, when applied to all the cash flows,
produces the same total present value as the dual discount rate streams described above;
this single equivalent discount rate (also known as the “blended rate”) is used to calculate
the total liability per GASB 67/68.
Alternative evaluations of sufficiency
o Instead of the above approach, which can be complex, both GASB 67 (paragraph 43) and
GASB 68 (paragraph 29) allow for alternative evaluations of projected solvency if they can
be reliably made.
o The standards prescribe no particular alternative method; it is left to professional judgment
and so the determination of whether an alternative approach is warranted is up to actuary
and auditor.
43
o For example: “From a practical standpoint, a good candidate for an alternative approach
would be a plan that is relatively well-funded, where contributions are based on a
conservative, actuarially-based funding policy. E.g., the plan actuary may be able to
demonstrate to the auditor’s satisfaction that a plan that is 80% funded, with a solid track
record of adhering to a funding policy based on contributing the normal cost + 20-year
closed amortization of unfunded liabilities, is mathematically certain to remain solvent if
certain assumptions are met” (Winningham 2014).
44
Appendix B – Measurement and Recognition changes required by GASB 67 and GASB 68
GASB Statements No: 25 and
27
GASB Statements No: 67 and 68 Expected impact
Measurement of the Total
Pension Liability (TPL)
1. Discount rate: Projected
future benefit payments
discounted at the long-term
ERR on pension plan assets
1. Discount rate: If plan assets are
projected to be insufficient to cover
projected benefit payments for all
periods, then a “projected depletion date”
or “crossover point” exists.
(i) all benefit payments expected to be
paid up until the projected depletion date
are to be discounted using the ERR on
plan assets, and
(ii) all benefits payments after that date
are to be discounted using a high-quality
municipal bond index rate
The single equivalent discount rate that
produces the same total present value as
the two discounted streams from (i) and
(ii) is the plan’s overall, “blended”
discount rate.
Typically, ERRs are
higher than
municipal bond
index rates as public
pensions invest
extensively in
equities and
alternative assets.
Therefore,
“blended” discount
rates are expected to
be lower than the
ERR, leading to
higher estimates of
the TPL.
2. Substantively automatic
benefit changes are not
required to be included in
benefit projections.
2. When projecting future benefit
payments, any “substantively automatic”
changes in future benefit payments are
also to be included. Substantively
automatic” benefit changes are defined as
those “ad hoc” changes that the employer
determines based on its past practice and
future expectations of granting the
change that the item will be granted in
the future. A common example is ad-hoc
cost-of-living adjustments (COLAs).
Some factors to be considered in
determining whether an ad-hoc COLA
The inclusion of ad-
hoc COLAs that are
deemed
substantively
automatic will lead
to higher estimates
of the TPL.
45
should be deemed “substantively
automatic”:
(i) The plan’s historical pattern of
granting (or denying) ad-hoc COLAs
(ii) Consistency in the amount of the
COLAs, or the amounts relative to a pre-
determined inflation index
(iii) Whether there is evidence indicating
that the ad-hoc COLAs will not be
granted in future years
3. Any one of six actuarial cost
methods are permitted, of
which the most common
method is Entry Age Normal
(EAN), followed by the
Projected Unit Credit (PUC)
method.
3. Only the EAN method is permitted. Up until the point of
retirement, the EAN
method recognizes a
larger accumulated
pension obligation
for active employees
than the PUC
method.
Measurement of plan assets,
i.e., “Fiduciary Net Position”
(FNP)
Plan assets may be measured
with a market-related value,
where changes in market value
may be smoothed over a three-
to-five year period.
Plan assets must be measured at fair
value as of the measurement date.
Balance sheet recognition Only the Net Pension
Obligation (NPO) is
recognized as a liability, where
the NPO = cumulative excess
of required contributions over
actual contributions
The Net Pension Liability (NPL) must be
recognized as a liability, where the NPL
= excess of the Total Pension Liability
(TPL) over the Fiduciary Net Position
(FNP)
Additional liabilities Not applicable Deferred inflows and outflows:
(i) Liability gains/losses
(ii) Assumption changes
(iii) Asset gains/losses
46
Income statement recognition Generally, pension expense is
equal to the Annual Required
Contribution (ARC). The ARC
= normal cost + payment to
amortize the unfunded
actuarial accrued liability in 30
years
Pension expense = normal cost
+ interest on NPL
- Expected return on plan assets
+/- Liability gain/loss (amortized)
+/- Asset gain/loss (amortized over 5
yrs)
+/- Plan changes (immediate
recognition)
+/- Assumption changes (amortized)
Funding policy Many governments’ funding
policies were defined based on
the ARC, as defined by GASB
25/27.
No reference to funding policies; GASB
67/68 represent an explicit effort by the
GASB to delink accounting and funding
for governmental plans.
47
Appendix C: Procedure to estimate the increase in PBO expected on moving to GASB 67/68
We follow the procedure developed by Mortimer and Henderson (2014), with some modifications
as detailed below:
1. We start by estimating the number of periods for which the plan will pay out benefits, as n =
(Proportion of active beneficiaries*30 + Proportion of inactive beneficiaries, both vested and
nonvested*20 + Proportion of retired beneficiaries*10). We assign durations of 30, 20, and 10
years to active, inactive, and retired liabilities based on commonly-used rules of thumb.
2. Then, for each of the n periods, we estimate the ending Fiduciary Net Position of the plan, as:
Ending Fiduciary Net Position = Beginning Fiduciary Net Position + Projected Contributions into
the Plan + Projected Plan Asset Returns – Projected Benefit Payments – Projected Administrative
Expense
(i) For beginning fiduciary net position, we use the opening balance of fair value of pension plan
assets, as disclosed on the CAFR for that year.
(ii) For projected contributions into the plan, we apply the average of actual total contributions
made in the five-year period ending in the year preceding the year at which we commence the
estimation.
(iii) For projected plan asset returns, we apply the ten-year CAGR of actual plan asset returns.
When this ten-year CAGR is negative (for about 10% of our plans), we replace it with the lowest
positive CAGR of any plan in that year.
(iv) The sum of projected benefit payments and administrative expense (i.e., total payments from
the plan) is estimated as an annuity payment based on the opening PBO for each plan, with the
number of periods = n and the investment rate = expected rate of return (ERR) on plan assets. In
other words, we first assume that a certain constant benefit payment is made each year for n years,
and that it has been discounted to present value at a discount rate = ERR to yield the current
opening PBO. We invert this relationship to obtain that benefit payment, as ERR * opening
PBO/[1-(1+ERR)^-n]
With these inputs, we then estimate the beginning fiduciary net position, projected contributions,
projected asset returns, projected payments, and ending fiduciary net position each year for n years,
as in the illustration in Exhibit 1, Panel A of Mortimer and Henderson (2014).
3. For each year, we then determine whether the benefit payment for that year, as determined in
(2)(iv), is funded or unfunded, by comparing the benefit payment for that year to the (beginning
fiduciary net position for that year + projected contributions during the year + projected asset
returns during the year). To the extent to which benefit payments < (beginning fiduciary net
position + projected contributions during the year + projected asset returns during the year), we
assign those benefit payments to the “funded” stream. If at some point, benefit payments >
(beginning fiduciary net position + projected contributions during the year + projected asset returns
during the year), we assign the unfunded portion of benefit payments to the “unfunded” stream.
This implies that the plan has reached its “crossover” point or “depletion date”, and we assign all
48
benefit payments thereafter to the “unfunded” stream. This is illustrated by Exhibit 1, Panel B of
Mortimer and Henderson (2014).
4. We then discount the funded stream of benefit payments using the ERR, and the unfunded
stream of benefit payments using the 20-year high-quality municipal bond index yield provided
by Bonds Online. Alternatively, we apply high-quality municipal bond index yields from Bond
Buyer’s 20-year GO Bond Index, the S&P High-Grade Index, and the Fidelity GO 20-year Index,
with very similar results.
5. Adding up the two discounted streams gives us the estimate of the PBO under GASB 67/68
measurement rules, for the beginning of year 1 (of the n years considered in the estimation). We
scale this estimate by the PBO reported under pre-GASB 67/68 rules for the same point in time,
to obtain our estimate of the expected increase in PBO when moving from pre-GASB 67/68 rules
to GASB 67/68 measurement.
6. The “blended” discount rate is the single, equivalent discount rate that upon being applied to
discount the benefit payments stream yields the same PBO as obtained in step (5).
Table 1
Variable Measurement
Variable Definition
Pension Assets The actuarial value of pension plan assets
Pension Liabilities The actuarial accrued pension liability obligation
Funding Ratio The ratio of Pension Assets divided by Pension Liabilities, both measured in the same fiscal year
Expected Rate of Return (ERR) The managerial assumption on the rate of return based on the expected riskiness of the pension plan assets, expressed as a percentage
Blended Discount Rate The single discount rate that produces an equivalent present value of pension liabilities as the combination of using (i) the ERR as the
discount rate to compute the present value of pension liabilities for which there are enough pension assets projected to cover projected
benefit payments (i.e., up to the "projected depletion date" or the "crossover point") and (ii) a high-quality tax-exempt municipal bond
rate as the discount rate to compute the present value of liabilities for the remainder of the projected benefit payments
Covered Payroll The dollar value of the total pensionable earnings of the pension plan participants
Required Contributions The dollar amount of the employer's annual required contribution as reported in the required supplementary tables for GASB
accounting purposes, set equal to the Annual Required Contribution (ARC) prior to GASB 67/68 and set equal to the Actuarially
Determined Contribution (ADC) after GASB 67/68
Required Contributions / Payroll Required Contributions divided by prior-year Covered Payroll
% Required Contributions Paid The percent of the required contribution actually contributed into the plan by the plan sponsor. The degree to which the plan sponsor
regularly and fully pays its required contributions to the plan – is a critical factor in assessing the current and future health of a pension
plan and an indicator as to whether or not the costs of funding the pension plan creates fiscal stress for the pension plan sponsor. In the
multivariate regressions in Tables 3 and 4, we compute a five-year average of the % Required Contributions Paid for the five-year
period ending in the year prior to the current year.
Employer Contribution / Payroll The dollar amount of contributions paid into the plan by the employer, divided by prior-year covered payroll
Employer + State Contribution / Payroll The sum of (i) dollar amount of contributions paid into the plan by the employer and (ii) the dollar amount of contributions paid into
the plan by the sponsoring state, divided by prior-year covered payroll
Employee Contribution / Payroll The dollar amount of contributions paid into the plan by the employees, divided by prior-year covered payroll
Total Contribution / Payroll The dollar amount of total contributions paid into the plan (i.e., by the employer, state, and employees), divided by prior-year covered
payroll
EXP_MINUS_REV The per capita difference between final expenditures and final revenues in the general fund and then add back any midyear spending
cuts or tax changes
Deficit This variable equals EXP_MINUS_REV if the variable is positive, and zero otherwise
Surplus This variable equals EXP_MINUS_REV if the variable is negative, and zero otherwise
TTLBAL Ratio The ratio of total balance to expenditures in the general fund, where total balances are the sum of the general fund balances and the
state’s budget stabilization fund balances (i.e., rainy day fund balances)
Per Capita Growth in Gross State Product The percentage change in real gross state product, per capita
Per Capita Long-Term Debt Issued The amount of long-term debt issued during the year, per capita
Accrued Liability / Tax Revenue The accrued pension liability scaled by tax revenues
Balanced Budget The value from an index produced by the Advisory Commission on Intergovernmental Relations (ACIP 1987), where the variable
ranges from 0 to 10, with higher values indicating more rigorous balanced budget provisions
Union Membership The percentage of public sector employees who are members of a labor union or of an employee association similar to a union
Election An indicator variable set equal to one if the state has a gubernatorial election in the current year, and zero otherwise
Debt / Gross State Product Total debt scaled by gross state product
Entry Age Normal A dummy variable set equal to one if the plan uses Entry Age Normal as the actuarial valuation method, and zero otherwise
State-Level Plan A dummy variable set equal to one if the plan is a state-level plan, and zero if the plan is a locally administered plan
Plan Covers Teachers A dummy variable set equal to one if the plan covers teachers, and zero otherwise
Per Capita Long-Term Debt Issued The amount of long-term debt issued during the year, per capita
Expected GASB-67 PBO / Actual PBO The expected projected benefit obligation liability under GASB 67/68, scaled by the actual projected benefit obligation, as estimated
following Mortimer and Henderson (2014), as described in Appendix C
Positive credit rating outlook A dummy variable set equal to one if the Moody's credit rating outlook is "positive", and zero otherwise
Stable credit rating outlook A dummy variable set equal to one if the Moody's credit rating outlook is "stable", and zero otherwise
Negative credit rating outlook A dummy variable set equal to one if the Moody's credit rating outlook is "negative", and zero otherwise
49
Table 2
Panel A
Time-Series Trends in Pension Assets, Liabilities, Assumptions, and Covered Payroll
Pension Assets
($millions)
Pension Liabilities
($millions) Funding Ratio
Expected Rate of
Return Blended Discount Rate
Covered Payroll
($millions)
Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean
June 15, 2001 to June 14, 2002 t-13 5,822 13,317 6,112 13,353 98.6% 97.7% 8.00% 8.03% 1,293 2,867
June 15, 2002 to June 14, 2003 t-12 5,128 12,832 6,321 13,909 92.8% 91.5% 8.00% 8.02% 1,332 2,920
June 15, 2003 to June 14, 2004 t-11 5,240 12,998 6,622 14,777 88.5% 87.3% 8.00% 7.99% 1,369 3,003
June 15, 2004 to June 14, 2005 t-10 5,400 13,461 7,172 15,618 85.3% 84.8% 8.00% 7.96% 1,378 3,069
June 15, 2005 to June 14, 2006 t-9 5,636 13,775 7,650 16,294 84.8% 83.2% 8.00% 7.96% 1,431 3,144
June 15, 2006 to June 14, 2007 t-8 6,086 14,583 8,048 17,082 84.3% 83.2% 8.00% 7.94% 1,546 3,281
June 15, 2007 to June 14, 2008 t-7 6,493 15,717 8,457 18,197 85.9% 84.6% 8.00% 7.93% 1,589 3,427
June 15, 2008 to June 14, 2009 t-6 6,859 16,043 9,011 19,087 82.6% 82.1% 8.00% 7.91% 1,582 3,578
June 15, 2009 to June 14, 2010 t-5 6,761 15,637 9,393 19,938 77.2% 76.7% 8.00% 7.89% 1,628 3,669
June 15, 2010 to June 14, 2011 t-4 6,993 15,825 9,926 20,779 74.8% 74.6% 8.00% 7.83% 1,621 3,664
June 15, 2011 to June 14, 2012 t-3 7,209 16,095 10,303 21,494 73.2% 73.4% 7.75% 7.78% 1,621 3,655
June 15, 2012 to June 14, 2013 t-2 7,337 16,238 10,732 22,221 71.5% 71.2% 7.75% 7.71% 1,637 3,642
June 15, 2013 to June 14, 2014 t-1 7,862 16,847 11,046 22,962 72.6% 71.2% 7.75% 7.68% 1,679 3,667
June 15, 2014 to June 14, 2015 t0 8,842 18,081 11,773 25,767 73.6% 72.3% 7.60% 7.65% 7.50% 7.43% 1,709 3,728
June 15, 2015 to June 14, 2016 t+1 9,833 18,618 13,158 27,674 74.2% 72.8% 7.50% 7.62% 7.50% 7.38% 1,751 3,847
50
Table 2 (Continued)
Panel B
Time-Series Trends in Contribution Variables
Required Contribution
($millions)
% (Required
Contribution / Payroll)
% Required
Contribution Paid
Employee Contribution
/ Payroll
Employer Contribution
/ Payroll
Employer + State
Contribution / Payroll
Total Contribution /
Payroll
Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean
June 15, 2001 to June 14, 2002 t-13 78 184 6.8% 8.7% 100.0% 103.8% 3.0% 2.8% 3.3% 5.1% 3.1% 4.2% 6.1% 6.2%
June 15, 2002 to June 14, 2003 t-12 77 197 6.9% 8.7% 100.0% 101.3% 6.2% 5.7% 6.5% 8.3% 6.4% 7.8% 12.3% 14.7%
June 15, 2003 to June 14, 2004 t-11 98 240 8.6% 10.9% 100.0% 94.6% 6.3% 5.7% 7.6% 11.3% 7.7% 10.8% 14.3% 17.7%
June 15, 2004 to June 14, 2005 t-10 123 309 10.0% 13.0% 100.0% 90.3% 6.2% 5.8% 9.3% 12.6% 9.3% 12.1% 15.9% 19.4%
June 15, 2005 to June 14, 2006 t-9 183 350 11.2% 14.8% 100.0% 88.5% 6.2% 6.0% 9.8% 12.3% 10.0% 12.2% 16.9% 20.6%
June 15, 2006 to June 14, 2007 t-8 202 380 12.8% 15.7% 100.0% 91.2% 6.2% 5.9% 10.5% 13.6% 10.8% 13.6% 17.9% 20.5%
June 15, 2007 to June 14, 2008 t-7 233 422 13.5% 16.4% 100.0% 91.8% 6.6% 6.2% 10.7% 14.8% 11.1% 14.9% 18.4% 21.8%
June 15, 2008 to June 14, 2009 t-6 244 441 12.8% 16.3% 100.0% 94.3% 6.5% 6.3% 11.3% 15.3% 11.6% 16.2% 19.1% 23.2%
June 15, 2009 to June 14, 2010 t-5 252 467 13.0% 16.7% 100.0% 90.6% 6.6% 6.2% 11.1% 15.0% 11.7% 15.6% 19.0% 22.3%
June 15, 2010 to June 14, 2011 t-4 263 530 14.7% 18.6% 99.2% 85.5% 6.7% 6.4% 11.3% 14.7% 12.5% 15.6% 19.2% 22.3%
June 15, 2011 to June 14, 2012 t-3 301 574 15.6% 19.9% 98.9% 87.8% 6.7% 6.3% 12.5% 16.2% 13.0% 16.9% 20.3% 23.6%
June 15, 2012 to June 14, 2013 t-2 313 609 16.7% 20.9% 100.0% 89.0% 7.1% 6.8% 12.8% 17.7% 14.0% 18.3% 21.7% 25.4%
June 15, 2013 to June 14, 2014 t-1 342 650 18.6% 22.3% 100.0% 89.1% 7.1% 6.9% 13.6% 18.7% 14.4% 19.2% 22.5% 26.6%
June 15, 2014 to June 14, 2015 t0 359 673 19.5% 23.2% 100.0% 92.4% 7.1% 6.9% 14.7% 19.7% 16.2% 20.6% 24.6% 28.9%
June 15, 2015 to June 14, 2016 t+1 400 712 17.8% 23.0% 100.0% 96.4% 7.5% 7.1% 14.9% 20.2% 16.7% 22.1% 25.7% 30.6%
51
Table 3
Descriptive Statistics
Panel A: Pre-Period (Years t-2 and t-1)
P5 P25 P50 P75 P95 Mean Std
Employee Contributions / Payroll 0.01 0.05 0.07 0.09 0.12 0.07 0.03
Employer Contributions / Payroll 0.05 0.09 0.14 0.23 0.48 0.18 0.15
Employer + State Contributions / Payroll 0.05 0.10 0.14 0.24 0.48 0.19 0.15
Total Contributions / Payroll 0.10 0.16 0.22 0.31 0.57 0.26 0.15
% Required Contributions Paid 41.5% 80.9% 100.0% 100.0% 111.8% 89.1% 22.9%
Covered Payroll ($millions) 138 530 1,641 4,420 12,704 3,654 5,180
Pension Assets ($millions) 900 2,829 7,638 19,889 62,477 16,543 25,977
Pension Liabilities ($millions) 1,263 3,382 10,868 26,496 88,856 22,591 31,611
Funding Ratio 43.6% 61.9% 72.6% 82.6% 99.7% 72.3% 16.3%
Expected Rate of Return (ERR) 7.00% 7.50% 7.75% 8.00% 8.25% 7.70% 0.39%
EXP_MINUS_REV -158 -72 -10 60 155 -7 93
Deficit 0 0 0 60 155 32 52
Surplus -158 -72 -10 0 0 -39 59
TTLBAL Ratio -0.02 0.02 0.06 0.10 0.27 0.09 0.17
Debt / Gross State Product 0.03 0.05 0.07 0.09 0.13 0.07 0.03
Gross State Product ($millions) 52,187 181,556 299,996 659,792 2,131,199 570,448 621,782
Per Capita Growth in Gross State Product -2.30% -0.40% 0.80% 1.70% 3.50% 0.72% 1.68%
Accrued Liability / Tax Revenue 0.1 0.2 0.7 2.0 4.3 1.3 1.4
Per Capita Long-Term Debt Issued 110 312 435 572 1,250 491 292
Balanced Budget 3 6 8 10 10 7.58 2.55
Union Membership 4.4% 6.2% 11.6% 15.9% 22.5% 11.6% 5.5%
Election 0 0 0 0 1 0.10 0.31
Expected GASB-67 PBO / Actual PBO 0.99 1.31 1.43 1.49 1.57 1.37 0.19
Positive credit rating outlook 0 0 0 0 0 0.02 0.12
Stable credit rating outlook 0 0 1 1 1 0.70 0.46
Negative credit rating outlook 0 0 0 1 1 0.29 0.45
Notes: All variables are defined in Table 1.
52
Table 3 (Continued)
Descriptive Statistics
Panel B: Post-Period (Years t0 and t+1)
P5 P25 P50 P75 P95 Mean Std
Employee Contributions / Payroll 0.01 0.05 0.07 0.09 0.12 0.07 0.03
Employer Contributions / Payroll 0.05 0.10 0.15 0.25 0.54 0.20 0.16
Employer + State Contributions / Payroll 0.05 0.11 0.16 0.28 0.57 0.21 0.17
Total Contributions / Payroll 0.11 0.18 0.25 0.37 0.67 0.30 0.17
% Required Contributions Paid 50.9% 88.2% 100.0% 100.0% 113.8% 94.3% 23.7%
Covered Payroll ($millions) 146 557 1,744 4,828 13,146 3,787 5,278
Pension Assets ($millions) 1,023 2,880 9,137 20,446 71,378 18,348 27,989
Pension Liabilities ($millions) 1,581 3,716 12,318 30,348 96,167 26,718 40,300
Funding Ratio 41.9% 61.1% 72.9% 82.4% 96.9% 71.8% 15.9%
Expected Rate of Return (ERR) 7.00% 7.50% 7.50% 8.00% 8.00% 7.64% 0.36%
Blended Discount Rate 5.39% 7.25% 7.50% 7.90% 8.00% 7.40% 0.82%
EXP_MINUS_REV -288 -78 -21 25 120 -27 144
Deficit 0 0 0 25 120 31 102
Surplus -288 -78 -21 0 0 -58 82
TTLBAL Ratio 0.01 0.04 0.07 0.12 0.33 0.11 0.17
Debt / Gross State Product 0.03 0.05 0.07 0.08 0.14 0.07 0.03
Gross State Product ($millions) 53,803 193,995 325,904 708,011 2,358,811 622,691 691,630
Per Capita Growth in Gross State Product -0.10% 1.00% 1.70% 2.30% 3.60% 1.64% 1.28%
Accrued Liability / Tax Revenue 0.1 0.2 0.7 2.1 4.4 1.4 1.5
Per Capita Long-Term Debt Issued 115 299 399 570 1,161 470 305
Balanced Budget 3 6 8 10 10 7.58 2.55
Union Membership 4.1% 5.9% 11.6% 15.3% 21.9% 11.4% 5.3%
Election 0 0 0 1 1 0.40 0.49
Notes: All variables are defined in Table 1.
53
Table 4
Regressions of Contributions around GASB 67
Predicted Panel A: Panel B: Panel C:
Sign Employee Contributions Employer Contributions Total Contributions
Estimate P-Value Estimate P-Value Estimate P-Value
Intercept 0.110 <.0001 0.451 0.0003 0.571 <.0001
POST-GASB 67 + 0.005 0.152 0.045 0.050 ** 0.040 0.018 **
Funding Ratio (Prior-Year) − -0.042 0.013 ** -0.422 <.0001 *** -0.536 <.0001 ***
% Required Contributions Paid (5-Year Average) + 0.003 0.814 0.178 0.001 *** 0.208 0.0002 ***
Deficit − 0.00002 0.184 -0.0001 0.077 * 0.0002 0.302
Surplus + -0.00003 0.281 0.0003 0.018 ** 0.0001 0.264
TTLBAL Ratio − 0.011 0.210 -0.057 0.162 0.058 0.152
Debt / Gross State Product − 0.086 0.432 -0.864 0.003 *** -0.631 0.001 ***
Accrued Liability / Tax Revenue +/− 0.0010 0.675 0.006 0.360 0.008 0.236
Balanced Budget − 0.001 0.675 -0.005 0.298 -0.006 0.178
Union Membership + -0.083 0.284 0.424 0.077 * 0.409 0.077
Election + 0.001 0.713 0.007 0.215 0.002 0.792
Entry Age Normal + -0.001 0.819 -0.024 0.306 -0.043 0.033
State-Level Plan ? -0.017 0.017 ** -0.079 0.002 *** -0.082 0.003 ***
Plan Covers Teachers + -0.001 0.920 -0.102 <.0001 *** -0.088 <.0001 ***
Per Capita Growth in Gross State Product + 0.201 0.109 -0.053 0.895 0.663 0.145
N 656 641 660
R2
16.8% 43.8% 46.5%
Notes:
All variables are defined in Table 1.
All dependent variables are scaled by prior-year covered payroll.
Standard errors are clustered at the state level.
All model specifications include indicator variables for each quarter + year combination (e.g., Q1 2012, Q2 2012, Q3 2012, Q4 2012, Q1 2013, Q2 2013, etc.).
*, **, and *** indicate significance at p < 0.10, p < 0.50, and p < 0.01, respectively.
54
Table 5
Regressions of Total Contributions around GASB 67, Partitioned on the Expected Magnitude of Effect on Financial Statements
Predicted Panel A1: Panel A2:
Sign Well Funded Sample Poorly Funded Sample
Estimate P-Value Estimate P-Value
Intercept 0.442 <.0001 0.433 0.026
POST-GASB 67 + 0.012 0.526 0.080 0.071 *
Funding Ratio (Prior-Year) − -0.310 0.003 *** -0.542 0.005 ***
% Required Contributions Paid (5-Year Average) + 0.083 0.084 * 0.233 <.0001 ***
Deficit − -0.0002 0.074 * -0.00011 0.312
Surplus + 0.0001 0.465 0.00029 0.089 *
TTLBAL Ratio − -0.091 0.246 -0.078 0.137
Debt / Gross State Product − -0.050 0.856 -1.307 0.002 ***
Accrued Liability / Tax Revenue +/− 0.008 0.091 * 0.0021 0.841
Balanced Budget − -0.003 0.644 -0.008 0.231
Union Membership + -0.024 0.905 0.672 0.032
Election + 0.006 0.287 0.009 0.357
Entry Age Normal + -0.040 0.122 0.025 0.497
State-Level Plan ? -0.069 0.006 *** -0.087 0.044 **
Plan Covers Teachers + -0.077 0.002 *** -0.119 0.001 ***
Per Capita Growth in Gross State Product + 0.202 0.664 0.222 0.731
N 316 325
R2
41.5% 46.9%
Notes:
All variables are defined in Table 1.
Standard errors are clustered at the state level.
All model specifications include indicator variables for each quarter + year combination (e.g., Q1 2012, Q2 2012, Q3 2012, Q4 2012, Q1 2013, Q2 2013, etc.)
*, **, and *** indicate significance at p < 0.10, p < 0.50, and p < 0.01, respectively.
55
Table 5 (Continued)
Regressions of Total Contributions around GASB 67, Partitioned on the Expected Magnitude of Effect on Financial Statements
Panel B1: Panel B2:
Predicted Low Expected Increase in High Expected Increase in
Sign PBO on Applying GASB 67 PBO on Applying GASB 67
Estimate P-Value Estimate P-Value
Intercept 0.589 <.0001 0.557 <.0001
POST-GASB 67 + 0.036 0.267 0.046 <.0001 ***
Funding Ratio (Prior-Year) − -0.589 <.0001 *** -0.473 <.0001 ***
% Required Contributions Paid (5-Year Average) + 0.263 0.002 *** 0.157 0.009 ***
Deficit − 0.0005 0.029 ** -0.00004 0.581
Surplus + 0.0001 0.599 0.00006 0.634
TTLBAL Ratio − 0.034 0.620 -0.088 0.114
Debt / Gross State Product − -1.500 0.0003 *** -0.097 0.696
Accrued Liability / Tax Revenue +/− -0.002 0.737 -0.0016 0.844
Balanced Budget − -0.005 0.468 -0.006 0.256
Union Membership + 0.828 0.019 ** -0.145 0.634
Election + 0.010 0.270 -0.008 0.527
Entry Age Normal + -0.041 0.075 * -0.028 0.278
State-Level Plan ? -0.111 0.0002 *** -0.037 0.333
Plan Covers Teachers + -0.023 0.167 -0.072 0.001 ***
Per Capita Growth in Gross State Product + 0.185 0.731 0.857 0.184
N 322 338
R2
60.7% 38.2%
Notes:
All variables are defined in Table 1.
Standard errors are clustered at the state level.
All model specifications include indicator variables for each quarter + year combination (e.g., Q1 2012, Q2 2012, Q3 2012, Q4 2012, Q1 2013, Q2 2013, etc.)
*, **, and *** indicate significance at p < 0.10, p < 0.50, and p < 0.01, respectively.
56
Table 6
Regressions of Total Contributions around GASB 67, Partitioned on Economic Consequences of GASB 67
Predicted Panel A1: Panel A2:
Sign Low Long-Term Debt Issued High Long-Term Debt Issued
Estimate P-Value Estimate P-Value
Intercept 0.766 <.0001 0.462 <.0001
POST-GASB 67 + 0.020 0.259 0.057 0.026 **
Funding Ratio (Prior-Year) − -0.628 <.0001 *** -0.474 <.0001 ***
% Required Contributions Paid (5-Year Average) + 0.181 0.020 ** 0.222 0.004 ***
Deficit − -0.0001 0.691 0.00020 0.327
Surplus + 0.0000 0.727 0.00011 0.335
TTLBAL Ratio − 0.060 0.485 0.032 0.111
Debt / Gross State Product − -0.380 0.452 -0.568 0.016 **
Accrued Liability / Tax Revenue +/− 0.010 0.312 0.0090 0.360
Balanced Budget − -0.009 0.172 -0.008 0.161
Union Membership + 0.410 0.167 0.515 0.096 *
Election + -0.009 0.444 0.005 0.626
Entry Age Normal + -0.112 0.042 ** -0.016 0.459
State-Level Plan ? -0.096 0.037 ** -0.066 0.039 **
Plan Covers Teachers + -0.095 0.006 *** -0.084 0.0002 ***
Per Capita Growth in Gross State Product + 1.313 0.014 ** 0.313 0.630
N 318 342
R2
46.5% 50.3%
Notes:
All variables are defined in Table 1.
Standard errors are clustered at the state level.
All model specifications include indicator variables for each quarter + year combination (e.g., Q1 2012, Q2 2012, Q3 2012, Q4 2012, Q1 2013, Q2 2013, etc.)
*, **, and *** indicate significance at p < 0.10, p < 0.50, and p < 0.01, respectively.
57
Table 6 (Continued)
Regressions of Total Contributions around GASB 67, Partitioned on Economic Consequences of GASB 67
Predicted Panel B1: Panel B2:
Sign Positive or Stable Credit Outlooks Negative Credit Outlooks
Estimate P-Value Estimate P-Value
Intercept 0.687 <.0001 0.402 0.000
POST-GASB 67 + 0.013 0.460 0.090 0.023 **
Funding Ratio (Prior-Year) − -0.542 <.0001 *** -0.382 <.0001 ***
% Required Contributions Paid (5-Year Average) + 0.173 0.002 *** 0.164 0.014 **
Deficit − 0.0001 0.411 -0.00014 0.366
Surplus + 0.0000 0.613 0.00030 0.051 *
TTLBAL Ratio − 0.038 0.307 0.350 0.062 *
Debt / Gross State Product − -0.822 0.001 *** 0.256 0.395
Accrued Liability / Tax Revenue +/− 0.007 0.363 0.0148 0.252
Balanced Budget − -0.007 0.196 -0.012 0.031 **
Union Membership + 0.416 0.073 * 0.483 0.216
Election + -0.006 0.520 0.016 0.046 **
Entry Age Normal + -0.013 0.399 -0.031 0.268
State-Level Plan ? -0.099 0.001 *** -0.063 0.261
Plan Covers Teachers + -0.085 0.002 *** -0.062 0.007 ***
Per Capita Growth in Gross State Product + 0.353 0.464 0.429 0.520
N 456 172
R2
50.4% 57.3%
Notes:
All variables are defined in Table 1.
Standard errors are clustered at the state level.
All model specifications include indicator variables for each quarter + year combination (e.g., Q1 2012, Q2 2012, Q3 2012, Q4 2012, Q1 2013, Q2 2013, etc.)
*, **, and *** indicate significance at p < 0.10, p < 0.50, and p < 0.01, respectively.
58
Table 6 (Continued)
Regressions of Total Contributions around GASB 67, Partitioned on Economic Consequences of GASB 67
Predicted Panel C1: Panel C2:
Sign High Balanced Budget Restriction Low Balanced Budget Restriction
Estimate P-Value Estimate P-Value
Intercept 0.427 0.0111 0.613 0.005
POST-GASB 67 + 0.062 0.140 0.022 0.038 **
Funding Ratio (Prior-Year) − -0.516 0.001 *** -0.534 <.0001 ***
% Required Contributions Paid (5-Year Average) + 0.292 0.004 *** 0.127 0.006 ***
Deficit − 0.0006 0.004 *** 0.00001 0.823
Surplus + 0.0000 0.928 -0.00001 0.956
TTLBAL Ratio − -0.013 0.798 -0.017 0.802
Debt / Gross State Product − -0.937 0.018 ** -0.622 0.112
Accrued Liability / Tax Revenue +/− -0.018 0.181 0.0100 0.163
Balanced Budget − 0.001 0.948 0.004 0.788
Union Membership + 0.383 0.422 0.216 0.384
Election + -0.009 0.186 0.005 0.459
Entry Age Normal + -0.024 0.179 -0.058 0.137
State-Level Plan ? -0.041 0.215 -0.098 0.012 **
Plan Covers Teachers + -0.066 0.077 * -0.084 0.001 ***
Per Capita Growth in Gross State Product + 0.034 0.951 0.720 0.088 *
N 256 404
R2
51.7% 43.9%
Notes:
All variables are defined in Table 1.
Standard errors are clustered at the state level.
All model specifications include indicator variables for each quarter + year combination (e.g., Q1 2012, Q2 2012, Q3 2012, Q4 2012, Q1 2013, Q2 2013, etc.)
*, **, and *** indicate significance at p < 0.10, p < 0.50, and p < 0.01, respectively.
59
Table 7
Regressions of Total Contributions around GASB 67, Partitioned on Political Consequences of GASB 67
Predicted Panel A1: Panel A2:
Sign Low Union Membership High Union Membership
Intercept 0.618 <.0001 0.296 0.072
POST-GASB 67 + 0.008 0.626 0.077 0.036 **
Funding Ratio (Prior-Year) − -0.415 <.0001 *** -0.512 0.0002 ***
% Required Contributions Paid (5-Year Average) + 0.101 0.080 * 0.217 0.001 ***
Deficit − -0.0001 0.109 0.00042 0.019 **
Surplus + 0.0002 0.133 0.00014 0.328
TTLBAL Ratio − -0.086 0.144 -0.015 0.754
Debt / Gross State Product − -0.729 0.243 -0.835 0.009
Accrued Liability / Tax Revenue +/− 0.002 0.830 0.0048 0.644
Balanced Budget − -0.005 0.396 -0.003 0.628
Union Membership + -0.528 0.366 1.215 0.004 ***
Election + 0.009 0.085 * 0.010 0.517
Entry Age Normal + -0.056 0.092 * -0.024 0.418
State-Level Plan ? -0.064 0.063 * -0.077 0.062 *
Plan Covers Teachers + -0.072 0.002 *** -0.102 0.002 ***
Per Capita Growth in Gross State Product + 0.175 0.625 -0.276 0.750
N 330 331
R2
43.3% 51.6%
Notes:
All variables are defined in Table 1.
Standard errors are clustered at the state level.
All model specifications include indicator variables for each quarter + year combination (e.g., Q1 2012, Q2 2012, Q3 2012, Q4 2012, Q1 2013, Q2 2013, etc.)
*, **, and *** indicate significance at p < 0.10, p < 0.50, and p < 0.01, respectively.
60