Public Pension Accounting Rules and Economic Outcomes

56 Pages Posted: 11 Jan 2013 Last revised: 24 Jan 2015

James P. Naughton

Northwestern University - Kellogg School of Management

Reining Petacchi

Georgetown University - Department of Accounting and Business Law

Joseph Weber

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

Date Written: January 1, 2015

Abstract

We find a negative association between a state’s fiscal condition and the use of discretion in applying Governmental Accounting Standards Board (GASB) rules to understate pension funding gaps. We also find that the use of discretion is negatively associated with states’ decisions to increase taxes and cut spending. In addition, we find that the funding gap understatement is positively associated with higher future labor costs. Importantly, this association is primarily attributable to the GASB methodology, which systematically understates the funding gap. This suggests that the GASB approach is associated with policy choices that have the potential to exacerbate fiscal stress.

Suggested Citation

Naughton, James P. and Petacchi, Reining and Weber, Joseph, Public Pension Accounting Rules and Economic Outcomes (January 1, 2015). Available at SSRN: https://ssrn.com/abstract=2199067 or http://dx.doi.org/10.2139/ssrn.2199067

James P. Naughton

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Reining Petacchi (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
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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