Wefindanegativeassociationbetweenastate'sfiscalconditionandtheuseofdiscretion
in applyingGovernmentalAccountingStandardsBoard(GASB)rulestounderstate
pensionfundinggaps.Wealsofindthattheuseofdiscretionisnegativelyassociated
with states’ decisionstoincreasetaxesandcutspending.Inaddition,wefindthatthe
funding gapunderstatementispositivelyassociatedwithhigherfuturelaborcosts.
Importantly,thisassociationisprimarilyattributabletotheGASBmethodology,which
systematicallyunderstatesthefundinggap.ThissuggeststhattheGASBapproachis
associatedwithpolicychoicesthathavethepotentialtoexacerbatefiscalstress.