For several decades, nonprofit organizations have reported on their defined benefit pension plans in the footnote disclosures of their annual reports and with the Department of Labor. The Form 990, a tax informational return that is the basis of much nonprofit financial and accounting research, does not include information on these employee retirement benefits or information on how pension assets are invested. The extent to which these employee pension systems may be a potential source of fiscal stress is relatively unknown because of this segregation from the rest of the organizations’ financial reporting. Further, variation in the funded status of systems exists between organizations, suggesting that different nonprofits choose different funding strategies within existing regulations.

Two dominant frameworks exist to explain the funding and management of defined benefit pension plans for private firms: 1) the traditional view of pensions, in which they are managed without regard to the corporation or its owners; and 2) the corporate financial view, in which firm objectives and financial condition are related to funding policy.

Researchers overwhelmingly find evidence supporting the corporate financial view of pensions, in which these defined benefit pension liabilities are simply an additional liability of the firm, the assets in the fund are indistinguishable from the other assets of the firm, and any accumulated funding shortfall or excess belongs to the firm and its owners as well. In this view, pension funding and management are not concerned primarily with protecting the benefits of retirees.

No existing analysis of public charities’ pension systems exists. In this paper, I test whether public charities fund and manage their pension systems as predicted by the traditional view or the corporate finance view. Nonprofits face different incentives than for-profit firms, and these may be reflected in how they fund and manage their pension systems. Because nonprofits do not have owners and strive to meet mission-oriented goals, it is conceivable that pensions are managed in the benefit of the employees as articulated in the traditional view. On the other hand, nonprofits might use pensions to further other priorities. For example, nonprofits may face incentives to reduce contributions and seek risky investments to increase fundraising efforts to generate additional donation revenues, increase other spending on mission-relevant areas, or increase employee salaries; alternately, they might face incentives to smooth earnings to mask surpluses from donors, clients, government agencies, and (in the case of health care organizations) public and private third-party insurers.

This paper will be the first snapshot of nonprofits’ defined benefit pension plans – analyzing which sectors use them, what the trends in funded ratios are, how contributions have changed over time, etc. This will add to our understanding of the fiscal health of the sector. Further, through the analysis of these pension systems, this paper will shed light on the financial incentives and motivations that nonprofit managers face in meeting the twin goals of mission and prudent financial management.