State Pension Accounting Estimates and Strong Public Unions

Recently, there has been an increase in concern over the substantial pension benefits that strong public unions are able to obtain from state governments and the level of reported funding.

Joe Comprix, chair of the Martin J. Whitman School of Management’s Lubin School of Accounting and associate professor of accounting, along with Samuel B. Bonsall, IV and Karl A. Muller, III (Penn State University) investigated correlations between pensions and strong public unions.

The team examined whether state pension plans with stronger public unions selected higher discount rates to improve reported funding levels. Next, they explored whether or not stronger union plans select shorter amortization periods to fund pension deficits when underfunding is larger to minimize underfunding.

Certain states such as New Jersey, Kentucky and Illinois have public pension plans that are less than 40 percent funded. Unfunded pension liabilities are estimated at $1.6 million for these states.

One novel finding in the study included the discovery that in states with stronger public unions, discount rates are higher and amortization periods are shorter for pension plans. This causes the liabilities associated with pensions to appear too low, which magnifies the funding problem, as the financial burden will fall on younger generations.

This research emphasizes the importance of organized labor on accounting choices, specifically with regards to public pensions, as well as displaying that discount rate and amortization period choices are associated with outside pressures.

“Outsiders need to carefully examine and question the choices of these assumptions,” said Comprix. “Transparency around the true costs of pensions is important because states will have to make some tough policy decisions going forward.”

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