Working Paper: NBER ID: w17613
Authors: Robert Novy-Marx
Abstract: It is well known that the funding status of state and local government defined benefit pension plans, as measured by the accounting methodology prescribed by the Governmental Accounting Standards Board (GASB), improves when the plans take on more investment risk. This paper documents several lesser known logical implications of the GASB methodology. In particular, I show that GASB accounting is susceptible to the "Yogi Berra fallacy," under which a pizza is less filling when sliced into fewer pieces: GASB gives different "valuations" for the exact same assets and liabilities when they are partitioned differently among plans. Moreover, the marginal valuation of assets can be negative under GASB. In such cases a plan can improve its GASB funding status literally by burning money. Finally, I show that GASB's methodology is exactly equivalent to fairly valuing plan liabilities, but accounting for stocks at more than twice their traded prices, and further crediting a plan an additional dollar for each dollar of stock that it intends to buy in the future.
Keywords: No keywords provided
JEL Codes: H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asset management (H82) | funding status (I22) |
| reducing assets (G32) | funding status (I22) |
| marginal value of assets can be negative (G19) | funding status (I22) |
| manipulation of asset types (G11) | perceived funding status (H55) |
| different valuations of assets based on partitioning (G32) | perceived values (D46) |
| GASB methodology (C11) | misalignment in reporting of assets and liabilities (G32) |