Author Information : Samuel B. Bonsall IV (Penn State)
Joseph Comprix (Syracuse)
Karl A. Muller III (Penn State)
Year of Publication : Contemporary Accounting Research (2019)
Summary of Findings : The results suggest that, in states with stronger public unions, pension assumptions are made that make pension obligations look less burdensome to the public.
Research Questions : 1. Do state pension plans with stronger public unions select higher discount rates to improve reported funding levels?
2. Do stronger union plans select shorter amortization periods to fund pension deficits when underfunding is larger (to minimize underfunding)?
What we know : Public pension plans in New Jersey, Kentucky, and Illinois are less than 40% funded, for example. These liabilities will have to be paid by future generations so everyone in these states is affected.
Novel Findings : In states with stronger public unions, discount rates are higher and amortization periods are shorter for pension plans. These choices affect both apparent and actual pension plan funding.
Implications for Practice : The study shows that choices of discount rates and amortization periods are associated with outside pressures. Outsiders need to carefully examine and question the choices of these assumptions.
Implications for Policy: When discount rates are set too high, apparent pension liabilities appear to be too low. This magnifies pension funding problems, which will have to be paid by future generations.
Implications for Society: Unfunded pension liabilities for the states are estimated at $1.6 trillion by Moody's and they are significantly underfunded. Transparency around the true costs of pensions is important because states will have to make some tough policy decisions going forward.
Implications on Research: The study provides evidence on the importance of organized labor on accounting choices, particularly with respect to public pensions.
Full Citations : Forthcoming at Contemporary Accounting Research
Abstract : Concerns are commonly raised that strong public unions extract generous pension benefits from state governments and are the cause of states’ burdensome pension obligations. Prior research (Anzia and Moe 2015) finds evidence supporting such concerns. Consistent with incentives to minimize such perceptions, our findings suggest that state pension plans with stronger public unions select higher discount rates to improve reported funding levels. While riskier asset allocations are used to support the higher discount rates (which equal the expected return on the plan assets), most of the higher rates appear opportunistic. In addition, consistent with a desire to avoid drawing attention to persistent plan underfunding, our evidence indicates that stronger union plans are less likely to select longer amortization periods to recognize pension deficits when underfunding is larger. We do not, however, find evidence for asset smoothing periods being used to delay the recognition of investment losses on plan assets. Together, our findings suggest that stronger union plans take steps to make their pension obligations look less burdensome to the public.
According to this research, in states with stronger public unions, pension assumptions are made that make pension obligations look less burdensome to the public.
- State Pension Accounting Estimates and Strong Public Unions - January 23, 2019