Appraising Commitments and Guarantees with Option Prices1

Abstract

Budgetary decision‐making is prone to myopia and to tunnel vision. Pension commitments suffer from both of these pathologies. In this case, we look closely at the State of Oregon's Public Employee Retirement System to show how the disclosure standards adopted by the Government Accounting Standards Board (GASB) help correct the fiscal vision of state and local governments and further conclude that postemployment commitments ought to be comprehensively examined in GASB's review of its accounting and reporting standards scheduled for 2008, ideally from the standpoint of present‐value budgeting.