Association for Public Policy Analysis & Management

Jinhai Yu

Abstract

In 2004, the Governmental Accounting Standards Board (GASB) statements No.43 and No. 45 established accounting and financial reporting standards for the Other Postemployment Benefits (OPEB) provided by local governments. I examine the impacts of GASB 43 and 45 on borrowing costs of county and city governments in this paper. The hypothesis is that, by disclosing new information on default risks in municipal bond market, the OPEB liabilities released under the GASB 43 and 45 may increase or decrease borrowing costs of local governments, depending on prior expectations by bond investors and funding status of OPEB plans.

The analysis consists of two parts. In the first part of analysis, I model GASB 43 and 45 as dummy variables indicating requirements of compliance for counties and cities. By combining bond data from Bloomberg and fiscal data from census surveys, I construct a panel of counties and cities and match them with all the bonds they issued between 1999 and 2012. I employ a fixed-effect model at county or city level. The results show that GASB 43 decreases coupon rates paid by counties by about one standard deviation (1.08 percentage points) and decreases coupon rates paid by cities by about one tenth standard deviation (1.12 percentage points). GASB 45 decreases coupon rate paid by cities but increases coupon rates paid by counties both by about one tenth standard deviation. The analysis in the first part will be improved by using bond yields as a better measure of borrowing costs. In the second part of analysis, I model GASB 43 and 45 by the direct consequence of compliance by counties and cities, i.e., financial disclosure on OPEB plans. I construct a panel of counties and cities based on their Comprehensive Annual Financial Report (CAFR) data and then match them with all the bonds they issued between 2008 and 2014. Again, I conduct a fixed-effect model at county or city level. I find that an increase of 10 percentage points of annual contribution as a percentage of annual OPEB costs decreases bond yields by about 0.1 percentage points for cities and 0.6 percentage points for counties.

Key Words

OPEB, GASB, Municipal Borrowing Costs