The debt equivalence of unfunded government pension obligations

Abstract

The Governmental Accounting Standards Board (GASB, 1987, p. 12) has identified bond investors as a primary user group of government financial reports and is currently active in setting standards for pension accounting and reporting (GASB, 1986, 1988; Ives, 1988). However, relatively little is known about the information content of government pension data for bond pricing. In this study, we employ seasoned bond prices for a national sample of cities to investigate whether the market (1) is cognizant of unfunded pension obligations, (2) appears to distinguish between accumulated and projected benefits, and (3) treats pension liabilities as equivalent to general obligation debt. Our results suggest that unfunded pension obligations are only partially impounded in bond prices; a dollar of pension debt appears to have a smaller incremental effect on yield-to-maturity then a dollar of bonded debt. The implications for the GASB are discussed.