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Logical Implications of GASB's Methodology for Valuing Pension Liabilities

  • Robert Novy-Marx
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    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.

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    File URL: http://www.nber.org/papers/w17613.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17613.

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    Date of creation: Nov 2011
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    Publication status: published as Novy-Marx, Robert, “Logical Implications of GASB’s Methodology for Valuing Pension Liabilities,” Financial Analysts Journal, 69(1), 2013, 26-32.
    Handle: RePEc:nbr:nberwo:17613
    Note: AP PE
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    1. Jeffrey R. Brown & David W. Wilcox, 2009. "Discounting State and Local Pension Liabilities," American Economic Review, American Economic Association, vol. 99(2), pages 538-42, May.
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