Are local governments adopting optimistic actuarial methods and assumptions for defined benefit pension plans?

Abstract

Recent news articles about pension funding issues highlight the importance of transparent financial reporting and disclosures for defined benefit pension plans. Using pension-related data for local governments in Michigan and Pennsylvania, we provide descriptive evidence regarding the actuarial methods and assumptions adopted and the factors that explain a government’s propensity to adopt optimistic actuarial methods and assumptions that reduce the annual required contribution. Our descriptive data suggests that actuaries are making aggressive assumptions for some governments' pension benefits. Our regression results also suggest there is an association between monitoring mechanisms, fiscal constraints, and socioeconomic factors and the choice of optimistic actuarial methods and assumptions that reduce the annual required contribution. The GASB should consider our findings as they determine whether existing standards should be clarified or whether allowable actuarial methods and assumptions should be restricted.

Citation

Vermeer, T.E., Styles, A.K. and Patton, T.K. (2010), "Are local governments adopting optimistic actuarial methods and assumptions for defined benefit pension plans?", Journal of Public Budgeting, Accounting & Financial Management, Vol. 22 No. 4, pp. 511-542. https://doi.org/10.1108/JPBAFM-22-04-2010-B003