How a pension disclosure regulation reduced public welfare spending

GASB 68 rule altered government spending by raising awareness of future expenses

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Release Date: February 6, 2023

“The rule better informed municipalities about the future cash flow requirements of their pension plans, which resulted in reduced spending in other areas.”
University at Buffalo School of Management

BUFFALO, N.Y. —  A 2015 rule that changed the pension reporting of state and local governments ended up diverting funds away from public welfare, salaries and hiring, according to new University at Buffalo School of Management research.

Established by the Governmental Accounting Standards Board, GASB 68 required governments that provide defined benefit pensions to both disclose and recognize the long-term obligation as a liability for the first time.

Available online ahead of publication in the Journal of Accounting and Economics, the study found that after GASB 68 went into effect, some governments reallocated funds because it made them more aware of the financial costs of future pension obligations. 

“GASB 68 showed governments that their current-year pension contribution reflects only a fraction of what is ultimately owed, because they’re responsible for funding the entire deficit,” says the study’s lead author Michael Dambra, PhD, associate professor and Kenneth W. Colwell Chair of Accounting and Law in the UB School of Management. “The rule better informed municipalities about the future cash flow requirements of their pension plans, which resulted in reduced spending in other areas.”

The researchers analyzed the data of more than 400 counties from 45 states, collected from Census Bureau reports and GASB financial statements from 2013-2016. Within this sample, half of the counties did not report their total pension liability in their financial reports before GASB 68 was implemented.

When compared to counties that were reporting pension liabilities prior to GASB 68, the counties that had not been reporting reduced their public welfare expenses by 6%, payroll expenses by 6% and employee head counts by 1.9% after the new regulations went into effect.

The authors say their findings are especially relevant for policymakers, since it shows the real impact of financial regulations on governments.

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

Dambra collaborated on the study with Omri Even-Tov, PhD, assistant professor of accounting in the Berkeley Haas School of Business and James Naughton, DBA, associate professor of business administration in the University of Virginia Darden School of Business.

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