The Effect of Unfunded Accumulated and Projected Pension Obligations on Governmental Borrowing Costs
Posted: 12 Jul 2014
Date Written: 1988
Available evidence suggests that state and local government pension plans may be substantially underfunded. The capitalization of these unfunded obligations in borrowing costs is an important public policy issue, since noncapitalization may lead to the misallocation of credit and stimulate the provision of an inefficiently high level of current services. Prior research has relied largely on pension ratios as surrogates for unfunded liabilities and also appears to have made no attempt to distinguish between projected benefits and accumulated benefits. The Governmental Accounting Standards Board requires the disclosure of projected benefits and asserts that accumulated benefits severely understate the obligations of a governmental unit. The empirical evidence reported in this study suggests that, for state governments, unfunded projected liabilities provide no incremental information to the bond market over and above that already provided by unfunded accumulated liabilities.
Keywords: State and local government pensions, underfunding, projected vs. underfunded liabilities
JEL Classification: M41
Suggested Citation: Suggested Citation