Logical Implications of Gasb&Apos;S Methodology for Valuing Pension Liabilities

14 Pages Posted: 24 Nov 2011 Last revised: 15 Feb 2021

See all articles by Robert Novy-Marx

Robert Novy-Marx

Simon Business School, University of Rochester; National Bureau of Economic Research (NBER)

Date Written: November 2011

Abstract

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.

Suggested Citation

Novy-Marx, Robert, Logical Implications of Gasb&Apos;S Methodology for Valuing Pension Liabilities (November 2011). NBER Working Paper No. w17613, Available at SSRN: https://ssrn.com/abstract=1964158

Robert Novy-Marx (Contact Author)

Simon Business School, University of Rochester ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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