Abstract

http://ssrn.com/abstract=2199067
 
 

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Economic Consequences of Public Pension Accounting Rules


James P. Naughton


Northwestern University - Kellogg School of Management

Reining Petacchi


Massachusetts Institute of Technology (MIT) - Sloan School of Management

Joseph Weber


Massachusetts Institute of Technology (MIT) - Sloan School of Management

April 28, 2014


Abstract:     
We provide evidence that the accounting rules prescribed by the Governmental Accounting Standards Board (GASB) and the choices states make when implementing these rules allow states to understate pension deficits, especially during times of fiscal stress. We also find that the understated pension deficit is negatively associated with states’ decisions to increase taxes and cut spending, and that an economic consequence of these understatements is higher future labor costs. Importantly, we find that the positive association between pension deficit understatement and future labor costs is attributable to the inherent methodology in the GASB rules, which systematically understate the pension deficits, and not to the opportunistic reporting by state governments. Therefore, it is not only the case that the current GASB regime poses distributional fairness issues (by not requiring sufficient pension contributions), but also that it is leading to policy choices (such as increased labor expenditures) that have the potential to exacerbate future fiscal problems.

Number of Pages in PDF File: 60

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Date posted: January 11, 2013 ; Last revised: April 29, 2014

Suggested Citation

Naughton, James P. and Petacchi, Reining and Weber, Joseph, Economic Consequences of Public Pension Accounting Rules (April 28, 2014). Available at SSRN: http://ssrn.com/abstract=2199067 or http://dx.doi.org/10.2139/ssrn.2199067

Contact Information

James P. Naughton
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
Reining Petacchi (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main Street
Cambridge, MA 02142
United States
Joseph Peter Weber
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)
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