Appraising Commitments, Quasi-Commitments, and Guarantees

Abstract:     
This article raises several issues regarding the valuation and disclosure of pension commitments, quasi-commitments, and guarantees. We all know that the annual process of budgetary decision-making is prone to myopia and to tunnel vision. The long-term consequences of fiscal commitments are frequently over-looked, as are off-budget items. At the state and local level, tunnel vision often manifests itself in an exclusive concern with the general fund. Unfortunately, pension commitments suffer from both of these pathologies. They involve substantial future costs, which are largely off budget. In this case, we look closely at the State of Oregon's Public Employee Retirement System (PERS) to show how the disclosure standards adopted by the Government Accounting Standards Board (GASB) can help to correct the fiscal vision of state and local governments. The case is comprised of a narrative account of the development of PERS over the last twenty-five years and a detailed assessment of one apparently casual commitment on the part of the Government of Oregon: a decision to guarantee an annual rate of return of 8 percent on the individual contribution component of PERS. We will show that the present-value of this guarantee was in fact very large and probably should have been disclosed. Unfortunately, it is not clear that current or proposed GASB standards would have required its disclosure. Consequently, we conclude that the issues raised by this guarantee ought to be addressed in GASB's comprehensive review of the effectiveness of its pension accounting and reporting standards scheduled to be carried out in 2008.

Number of Pages in PDF File: 14

Keywords: options, present-value budgeting, public employee retirement systems, Oregon, accounting standards, FASB, GASB, defined contribution plans

JEL Classification: G13, G23, H72, H74, H79, J32

working papers series