GASB 68 and Its Impact on the Cost of Debt

• In Event: History and Public Interest

Abstract

In this paper, we investigate the effect of GASB 68 on the cost of debt. The recent Government Accounting Standards Board (GASB) Statements No 68, Accounting and Financial Reporting for Pensions, requires states use a high-quality municipal bond rate to discount future benefit payments that are not projected to be covered by pension assets. As a result of the new standards, the pension liability recognized on the statement of net position is expected to increase dramatically. The increased pension liabilities may negatively impact governments’ cost of debt and their ability to borrow in the market. Using bond yield-spreads as a proxy for cost of debt, we find that unfounded pension liabilities are positively associated with bond spread yield after GASB 68. Additional analyses indicate that the bond spread yield increases after GASB, and the increase is more pronounced for firms with a larger pension deficit. These findings indicate that debt market investors value the new information disclosed under GASB 68, consistent with previous research suggesting that credit market participants agree about the need for and the direction of a pension liability adjustment (Hallman and Khurana, 2015).

Author

• Fang Sun, Queens College, CUNY