As part of a new push to broaden the way economic growth is measured, government statisticians will soon begin using a new accounting method that’s likely to spotlight the problem of underfunded pension funds, particularly those managed by state and local governments across the nation.
Sometime in July, the Bureau of Economic Analysis will revise the way it measures the nation’s gross domestic product for only the 14th time. The GDP is the sum of all goods and services produced in the U.S. economy, and the coming changes will measure differently not just pensions but everything from R&D to R&B.
The Bureau of Economic Analysis will start counting spending on research and development as fixed investment that counts toward final spending taking place in the economy. It’ll also count as fixed investment expenditures by business on entertainment, literature, theater and other forms of original art, including Motown recordings and “I Love Lucy” reruns.
Importantly, the agency will adopt a form of accounting that’ll measure pension plans using the present-day value of future benefits promised by an employer. This change, called accrual-based accounting, likely will spotlight the unfunded promises in government pension plans.
“I think the measures we (had) developed were based on old concepts and old accounting standards that just sort of measured the cash flow,” said Brent Moulton, the Bureau of Economic Analysis’ associate director of national economic accounts. “It’s now been recognized both by economists and accountants . . . that you need to take the present value of those future obligations.”
The accounting shift won’t change the overall GDP numbers. But it should help spotlight, through reported data that breaks down to the regional level, how state and local governments have made promises without setting aside adequate funds.
Many private companies already provide present-value data on pensions to federal regulators, but state and local governments have not. During the 1980s and 1990s, strong stock market returns helped give the appearance that pensions were a source of income rather than a cost to sponsors of pensions, whether private-sector or government pension plans. Since 2000, two recessions and a deep financial crisis have hit investment plans hard, and it’s why accrual accounting is now being touted as truer measure of employer costs.
“Hopefully the data that we provide can help provide a benchmark or a set of accounts that people can reference when they’re discussing individual states,” said Moulton.
The nonpartisan Congressional Budget Office in May 2011 found that underfunding of public pensions was rampant.
“By any measure, nearly all state and local pension plans are underfunded, which means that the value of the plans’ assets is less that their accrued (promises) . . . for current workers and retirees,” the CBO said.
The Bureau of Economic Analysis’ new ways of measuring pension liabilities and other economic activity won’t result in a huge change in the headline number for economic growth in any given quarter, say 5 percent instead of 2.5 percent. But the changes, said Steve Landefeld, the bureau’s director, will shed light on “the contribution of innovative activities to growth, hopefully we’ll be getting a better handle on marquee issues.”
The changes were agreed to as part of an international agreement to modernize how GDP is measured across the globe. Australia and Canada already have adopted the new measurements. The European Union is scheduled to do so next year.
Historically, spending by U.S. companies on research and development has been treated by statisticians as an input that gets added into the final cost of producing a good or service. The new measurement views R&D spending not as a cost but rather a fixed investment that counts as a consumption of fixed capital, just as a purchase of machinery that yields more economic activity might be counted. Federal government R&D also will be counted as investment because the results further government’s role of providing services to citizens.
Total spending on R&D amounts to about 2.5 percent of the broader economy, according to Landefeld’s estimate. As of July, this will now be counted in the sum of goods and services that collectively are used to determine the rate of growth in the U.S. economy, although some economists may think the new measurement still falls short.
“Their main complaint would probably be that they wished we had been able to go further in identifying the returns (from) and the evaluation of R&D,” Landefeld said in an interview. “Despite a multi-year effort looking at these issues, we essentially had to fall back to conservative, middle-of-the-road estimates, so that some people who expect very, very large effects from R&D may well be disappointed.”
There’ll also be a new effort to measure the economic contributions from spending on films and other forms of entertainment.
“You’d think given that we’re the nation of Hollywood that it has been measured before,” said Landefeld. “I guess it just seemed kind of hard. It seemed a little bit out there in terms of measuring. But over time, you look at it in terms of how much it contributes to our exports. We have a very healthy surplus in that category.”
One important measurement change sought perennially by Landefeld won’t be included.
“Frankly, my assessment is that the data we have today on small business is still inadequate. There is some good data out there but there are a lot of conflicting results you get on the size of small business,” he said. “We can do a good job on trying to settle that . . . but unfortunately in the current budgetary environment it’s not happening anytime soon.”