We calculate the present value of state employee pension liabilities using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and ...recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion. If pensions have higher priority than state debt, the value of liabilities is much larger. Using zero-coupon Treasury yields, which are default-free but contain other priced risks, promised liabilities are $4.43 trillion. Liabilities are even larger under broader concepts that account for salary growth and future service.
As of December 2008, state governments had approximately $1.94 trillion set aside in pension funds for their employees. How does the value of these assets compare to the present value of states' ...pension liabilities? Just as future Social Security and Medicare liabilities do not appear in the headline numbers of the U.S. federal debt, the financial liability from underfunded public pensions does not appear in the headline numbers of state debt. If pensions are underfunded, then the gap between pension assets and liabilities is off-balance-sheet government debt. We show that government accounting standards require states to use procedures that severely understate their liabilities. We then discuss the true economic funding of state public pension plans. Using market-based discount rates that reflect the risk profile of the pension liabilities, we calculate that the present value of the already-promised pension liabilities of the 50 U.S. states amount to $5.17 trillion, assuming that states cannot default on pension benefits that workers have already earned. Net of the $1.94 trillion in assets, these pensions are underfunded by $3.23 trillion. This “pension debt” dwarfs the states' publicly traded debt of $0.94 trillion. And we show that even before the market collapse of 2008, the system was economically severely underfunded, though public actuarial reports presented the plans' funding status in a more favorable light.
We construct estimates of external assets and liabilities for 145 countries for 1970–2004. We describe our estimation methods and key features of the data at the country and global level. We focus on ...trends in net and gross external positions, and the composition of international portfolios. We document the increasing importance of equity financing and the improvement in the external position for emerging markets, and the differing pace of financial integration between advanced and developing economies. We also show the existence of a global discrepancy between estimated foreign assets and liabilities, and identify the asset categories accounting for this discrepancy.
This paper investigates whether gubernatorial elections affect state governments' accounting choices. We identify two accounts, the compensated absence liability account and the unfunded pension ...liability account, which provide incumbent gubernatorial candidates with flexibility for manipulation. We find that, in an election year, the liability associated with compensated absences and unfunded pension liabilities are both systematically lower. We also find that the variation in these employment-related liabilities is correlated with proxies for the incumbent's incentives and ability to manipulate their accounting reports. Jointly, these results suggest that state governments manipulate accounting numbers to present a healthier financial picture in an election year.
This paper argues that the extent of financial contagion exhibits a form of phase transition: as long as the magnitude of negative shocks offecting financial institutions are sufficiently small, a ...more densely connected financial network (corresponding to a more diversified pattern of interbank liabilities) enhances financial stability. However, beyond a certain point, dense interconnections serve as a mechanism for the propagation of shocks, leading to a more fragile financial system. Our results thus highlight that the same factors that contribute to resilience under certain conditions may function as significant sources of systemic risk under others.
The study explores the role of institutional forces in shaping corporate accounting and reporting for environmental liabilities practice within the context of South Africa. Drawing on the literature ...that conceptualizes accounting as a “social and institutional practice” and using Scott's institutional pillars approach, we qualitatively analyze data obtained through in‐depth interviews and documentary reviews and demonstrate that environmental liabilities reported on financial statements of South African companies may not reflect the full extent of environmental obligations stemming from their operations. The enabling environment for this dereliction of corporate responsibility is fostered by the following: (a) a mosaic of weakly enforced laws, acts, and regulations that constitutes the regulative pillar; (b) a cultural‐cognitive template that is still at an early stage of its development; and (c) a stronger normative pillar reinforced by relatively powerful actors who support the institutionalization of normative modes and conflicts and/or contradictions among actors who support the regulative institutions. Our findings suggest that companies in South Africa tend to adopt practices that foster production and disclosure of environmental information that comply with the normatively sanctioned scripts to maintain legitimacy with important stakeholders while decoupling these practices from the regulative prescripts that call for greater environmental accountability.
This paper builds on the liabilities of newness literature to suggest that accounting information is important for new firms. Using a sample of over 30,000 companies followed during their first ...7 years of existence, we find evidence that financial indicators mitigate the liability of newness and that this buffering effect is stronger the younger the organization. These results represent three primary contributions to the literature. First, our conceptualization of accounting measures as indicators of external (creditworthiness enhancing legitimacy) as well as internal (targets for management) buffers to the liabilities of newness provides a novel way of viewing these constructs and explains why they are important to new firms despite their uncertainty and opacity. Second, we theoretically justify and empirically validate that these constructs are more important the younger the new firm is, which runs counter to the common wisdom of these constructs in the entrepreneurship literature. Third, we identify buffers against failure for new firms that are generalizable across industries.
We develop a Bayesian methodology for systemic risk assessment in financial networks such as the interbank market. Nodes represent participants in the network, and weighted directed edges represent ...liabilities. Often, for every participant, only the total liabilities and total assets within this network are observable. However, systemic risk assessment needs the individual liabilities. We propose a model for the individual liabilities, which, following a Bayesian approach, we then condition on the observed total liabilities and assets and, potentially, on certain observed individual liabilities. We construct a Gibbs sampler to generate samples from this conditional distribution. These samples can be used in stress testing, giving probabilities for the outcomes of interest. As one application we derive default probabilities of individual banks and discuss their sensitivity with respect to prior information included to model the network. An R package implementing the methodology is provided.
This paper was accepted by Noah Gans, stochastic models and simulation
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A lending boom is reflected in the composition of bank liabilities when traditional retail deposits (core liabilities) cannot keep pace with asset growth and banks turn to other funding sources ...(noncore liabilities) to finance their lending. We formulate a model of credit supply as the flip side of a credit risk model where a large stock of noncore liabilities serves as an indicator of the erosion of risk premiums and hence of vulnerability to a crisis. We find supporting empirical evidence in a panel probit study of emerging and developing economies.
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