Researchers for the Center for Retirement Research at Boston College conclude that new accounting standards forcing cities to recognize their share of a state’s unfunded pension plan liability may lead them to take more interest in having these liabilities paid off.

A report, “GASB 68: How Will State Unfunded Liabilities Affect Big Cities?” notes that to increase the visibility of pension commitments, GASB Statement 68 makes two changes. First, it moves pension funding information from the footnotes to the balance sheets of employers. Second, it requires employers that participate in so-called “cost-sharing” plans to provide information regarding their share of the “net pension liability” on their books. 

According to the researchers, no information currently appears for employers participating in cost-sharing plans, so the new provisions require determining each employer’s share of the net pension liability and including that amount on the balance sheet. They contend that local governments—now saddled with a portion of the state plan’s unfunded liabilities on their books—may be more interested in seeing the unfunded liability decline over time.

The researchers looked at a sample of 173 cities and towns, which includes cities that administer their own local plans, cities that participate only in state plans, and cities that have some combination of the two. The key metric was a city’s contribution to a given state plan as a percentage of the plan’s total annual required contribution (ARC). If ARC information was not available, the apportionment was based on the ratio of a city’s actual contributions to the state plan’s total actual contributions.

Ninety-two of the cities in the sample participate in cost-sharing state plans and are affected by GASB 68. The measure of the impact in the analysis is the change in the unfunded liability relative to a city’s own-source revenue (to standardize for city size). For the 92 cities affected, the unfunded liability as a percentage of revenue rises from 37% before GASB 68 to 70% after. Because GASB 68 simply shifts the recognition of these liabilities from the states to the cities, the unfunded liability for the states drops by a corresponding amount (in dollar terms).

According to the report, the aggregate numbers hide much variation. Thirty-seven percent of the 92 cities have their unfunded liability as a percentage of revenue increase by less than 20 percentage points. However, about one-third of the affected cities in the sample experience increases of more than 60 percentage points.

However, while the overall impact of GASB 68 on the 92 affected cities within the sample is large, the impact on the total 173 cities is much smaller—about 9 percentage points (a 12% increase). The reason is that the 92 cities are small; they make up only about one-quarter of the total revenue in the sample cities.