01 Jun 2015
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Research Brief: If State Pensions Clean Up Their Books, Who Pays?

by Erin Peterson

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When the financial crisis hit in 2008, it became apparent that many states had played fast and loose with their pension funding. Some states slashed benefits, others contemplated bankruptcy. You might think state governments, burned badly once, would be eager to clean up their books.

But according to a new working paper coauthored by Lecturer Abigail Allen, the opposite is often true. When the Governmental Accounting Standards Board (GASB) proposed stricter public pension accounting standards in 2012, many state governments balked. Even more surprising? Those state governments most resistant to the new standards often employed a heavily unionized public-sector workforce whose members would seem to benefit most from fully funded pensions.

To come to this conclusion, Allen and her coauthor studied 227 letters received by the GASB when it requested comments on the new proposals and found that states with the largest pension deficits and those with heavy unionization were most likely to want to keep the status quo—even when the public and financial experts pushed for the opposite. It makes sense: “The most likely scenario of increased transparency is not that governments will increase funding levels but that they’ll cut benefits,” Allen says. And that makes both politicians and union bosses unpopular.

It’s understandable that state governments, like corporations, lobby for their own interests—which may mean supporting looser accounting practices that push financial consequences to a later date. “What we might actually be seeing is politicians lobbying in the interest of their own reelection chances,” she says. “We might need a bit more skepticism when a state says, ‘We have things under control.’ ”

“Lobbying Behavior of Governmental Entities: Evidence from Public Pension Accounting Rules,” by Abigail M. Allen and Reining Petacchi, HBS Working Paper.

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