Counties cut public welfare spending when forced to disclose pension costs, study finds

Business man and woman working at office with laptop and documents showing high costs
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When local governments were required to disclose their long-term pension liabilities, they responded by diverting funds away from public welfare, salaries, and hiring, a new study has shown.

The study, in press at the Journal of Accounting and Economics, examined the economic impacts of a 2015 rule known as GASB 68 issued by the Governmental Accounting Standards Board (GASB). While the rule did not directly affect pension plans themselves, it aimed to make governments more accountable by requiring them to disclose their full defined-benefit pension obligations, which are among the most significant liabilities for local governments.

“The disclosure requirements increased awareness and clarity about future funding requirements of pension obligations,” said co-author Omri Even-Tov, an assistant professor of accounting at the Haas School of Business, UC Berkeley. “In other words, the new requirement changed the information set of county managers who did not previously understand the future cash flow requirements of their pension plan.”

Even-Tov collaborated on the paper with Michael Dambra, an associate professor of accounting at the University at Buffalo School of Management and James Naughton, an assistant professor of accounting at the University of Virginia Darden School of Business.

Chronic pension underfunding

About 83% of full-time public sector employees—or more than 25 million people—participated in a defined benefit pension plan as of 2018, with annual payments costing governments more than $300 billion. However, long-term unfunded obligations far exceed these yearly payments: According to a recent study, the national public pension funding shortfall reached $6.5 trillion as of 2021.

Despite those obligations, municipalities tend to rely more heavily on their cash budgets in managing their annual financial cycle, the researchers wrote.

Even-Tov, an authority on the impact of accounting rule changes who has also studied how conflict minerals disclosure requirements reduced violence in Central Africa and how relaxed disclosures enacted to stimulate the IPO market harmed investors, wanted to know whether governments would change their budgeting when required to make their full pension liabilities public.

Public welfare reductions

The researchers analyzed data from census bureau reports and hand-collected GASB financial statements for 432 counties across 45 states from 2013 to 2016. About half of the counties in the sample had already been reporting their pension liabilities, but the other half had been exempt from disclosure rules because their pension liabilities were only reported as part of their states’ pension plans. GASB 68 removed this exemption, requiring them to report their share.

The analysis found that when counties disclosed underfunded pension costs for the first time, they reduced public welfare expenses by 6%, payroll by 2.5%, and employee headcounts by 2%. They generally accomplished this by freezing their budgets relative to the counties that had already been disclosing their pension obligations, rather than by raising taxes or finding other ways to increase revenues.

The findings are important because they demonstrate the real impact of financial regulation on governments.

“Despite the economic importance of the government sector, we know relatively little about how GASB financial statements influence the provision of resources,” Dambra said in a press release from the University at Buffalo. “Our study shows that mandatory disclosure in the public sector can influence local-level managerial decisions.”


Read the full study:

The economic consequences of GASB financial statement disclosure
By Michael Dambra, Omri Even-Tov, and James P. Naughton
Journal of Accounting and Economics (forthcoming)