Essays on determinants and consequences of pension funded status in local units of government

Abstract

Recognizing the magnitude of the public pension problem, the Government Accounting Standards Board (GASB) issued new standards for pension financial reporting that require recognition of the full net pension liabilities on the face of the financial statements effective with fiscal years beginning after June 15, 2014. Based on an extensive review of the literature on determinants and consequences of pension funded status (Essay 1), this dissertation examined a determinant and a consequence of pension funding at local units of government participating in an agent multi-employer defined benefit pension plan. Specifically, this dissertation focused on the association of pension funded status with: (a) employer accounting basis choice as a measure of quality in financial reporting (Essay 2) and (b) decisions made by terminating public-sector employees to take lump sum withdrawals (Essay 3). Prior studies have generally utilized aggregate data at the state systems level and have primarily focused on the magnitude and determinants of pension funding. This dissertation is differentiated by its larger sample size than most prior pension studies and the use of data at the local employer (i.e. municipality or agency) level with such participants in a single multi employer agent plan (having common investment and board governances across participants). The main findings from the pension funding determinant paper, Essay 2, suggest that conformity with Generally Accepted Accounting Principles (GAAP) is positively associated with better pension funding in the subset of municipalities that are healthy funded (funding ratios of 80% to 100%). The pension funding consequence paper, Essay 3, finds an inverse association between the employer’s pension funded ratio and the probability of its separating employees to take a lump sum withdrawal of their pension contributions. Both essays further provide for implications and considerations for policy-setters and regulators as they relate to pension funding in this setting.