Do Governments Hide Resources from Unions? The Influence of Public Sector Unions on Reported Discretionary Fund Balance Ratios

• Published date: 01 December 2023
• Author: ANGELA K. GORE,YUAN JI,SUSAN L. KULP
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/1475-679X.12497

DOI: 10.1111/1475-679X.12497

Journal of Accounting Research

Vol. 61 No. 5 December 2023

Printed in U.S.A.

Do Governments Hide Resources

from Unions? The Inf‌luence of

Public Sector Unions on Reported

Discretionary Fund Balance Ratios

ANGELA K. GORE,∗YUAN JI,†AND SUSAN L. KULP∗

Received 14 November 2019; accepted 2 May 2023

ABSTRACT

We explore whether municipalities with public sector unions exploit aspects

of governmental (or “fund”) accounting to obscure the availability of discre-

tionary resources in fund balance accounts, relative to municipalities without

public sector unions. We f‌irst investigate whether governments with unions

report higher proportions of discretionary resources outside of the general

fund, a primary measure of f‌inancial health, and instead within less promi-

nent fund types. Second, we explore whether governments with unions report

lower ratios within accessible general fund balance account categories – that

∗School of Business, The George Washington University; †University of Texasat Arlington

Accepted by Douglas Skinner. Wethank an anonymous reviewer for constructive and help-

ful comments. We are grateful to Sarah Anzia, Bill Baber, Robert Bushman, Joe Comprix,

Diane Del Guercio, Randy Elder, Xuesong Hu, Chris Jones, Ying Li, Patrick McHugh, Dean

Mead, Sunay Mutlu, Mayank Palod, Kevin Rich, Hannu Schadewitz, Brett Schonberger, Liang

Tan,Yanfeng Xue, Joe Weber, and Jenny Zha Giedt for their comments and advice. Workshop

participants at Aalto University (formerly Helsinki School of Economics), the Conference on

Financial Economics and Accounting (CFEA), Financial Accounting and Reporting Section

(FARS) midyear meeting, The George Washington University faculty lunch series, Marquette

University, MIT, Singapore SOAR conference, Syracuse University, and the Turku School of

Economics offered useful suggestions. In memory of Bruce MacKenzie, railroader. An on-

line appendix to this paper can be downloaded at https://www.chicagobooth.edu/jar-online-

supplements.

Christopher P.Kehoe provided valuable research assistance.

1735

© 2023 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business.

1736 a. k. gore, y. ji, and s. l kulp

is, report lower proportions of unreserved fund balance. Primary f‌indings are

consistent with both hypotheses. Although somewhat mixed, cross-sectional

analyses reveal that effects are magnif‌ied when unions have more bargain-

ing power, as proxied by the ability to strike or the absence of state right-to-

work laws. Further analysis corroborates cross-sectional f‌indings by examin-

ing difference-in-differences specif‌ications surrounding the quasi-exogenous

shock of Wisconsin’s 2011 weakening of state public sector union laws and

Ohio’s time-varying union contract negotiations. Overall, the evidence sug-

gests that governments with unions shelter resources to avoid the appearance

of large discretionary amounts available.

JEL codes: H83, K31, M41, M48

Keywords: union; right to work; accounting manipulation; fund balance;

local government

1. Introduction

Our study explores whether municipalities with public sector unions ex-

ploit governmental (or “fund”) accounting to obscure the amount of avail-

able resources, relative to municipalities without public sector unions.1

That is, do politicians strategically report fund balance accounts in the pres-

ence of union pressures? Credit agencies, taxpayer associations, and others

use fund balance (i.e., the difference between assets and liabilities, or pos-

itive net assets) to identify discretionary resources available to spend, re-

pay debt, reduce property taxes, and add or expand government programs

(AFSCME [2006], GASB [2009]).2As such, fund balance is considered an

important component of governmental balance sheets.

The question of whether governments with unions strategically report

fund balance is not obvious. On one hand, political economists suggest that

public sector unions are a powerful interest group that faces little competi-

tion in inf‌luencing government policy choices (Becker [1983], Matsusaka

[2009]). Public employees organize into powerful unions that can help

politicians attain reelection, and face little resistance when bargaining with

them (Moe [2005], Bainbridge [2011]). Under this scenario, public sec-

tor unions and politicians’ incentives align; hence, local government politi-

cians possess few incentives to strategically report fund balances.

On the other hand, politicians have incentives to strategically shelter

resources from unions for at least two reasons. First, sheltering resources

aligns with median voter interests. Unions tend to increase the costs

1For brevity, we interchangeably use the following terms: municipalities with unions, gov-

ernments with unions, unionized municipalities, and unionized governments to indicate mu-

nicipal governments with public sector unions. In addition, our tests predominantly compare

municipalities with unions to those without unions, although for expositional parsimony, we

may not always refer to the latter.

2Specif‌ically, fund balance represents net assets on the balance sheet within a given gov-

ernmental fund type, which broadly includes the general, special revenue, capital project, and

debt service funds (GASB [2006a]).

do governments hide resources from unions?1737

of government through higher wages and increased employment levels

(Anzia and Moe [2015]), and, other things equal, citizens prefer more

eff‌icient, lower cost services (Figlio and O’Sullivan [2001]). Competitive

political markets help align politicians’ incentives with those of citizens

(Van Lent [2012]), in which case, politicians prefer to avoid wealth trans-

fers to unions. Under this reasoning, politicians shelter resources from

unions because it ref‌lects good stewardship over f‌inancial resources and

aligns with voter preferences. Second, others argue that politicians and

bureaucrats maximize their utility as self-interested agents (Downs [1957],

Stigler [1971], Peltzman [1976], Watts and Zimmerman [1986]).3Hence,

politicians may shelter resources to use later for political patronage or

perquisite consumption and have few incentives to be transparent with

unions (Wilson [1961], Naughton and Spamann [2015], Compton et al.

[2017]). Under both scenarios, politicians can report resources as desig-

nated for various causes, rather than leaving large amounts unassigned

in the general fund. By doing so, they convey the appearance of pos-

sessing fewer fungible resources for unions to extract, possibly avoiding

public opposition to this powerful constituency. Union off‌icials, in turn,

have strong incentives to negotiate higher wages, pension benef‌its, and

other perquisites, and often utilize f‌inancial report information during

the bargaining process, including fund balance information (AFSCME

[2006]). Overall, whether governments with unions strategically report

fund balance is an open and interesting empirical question.

We investigate two means through which government off‌icials can use

fund accounting to obscure the amount of discretionary resources avail-

able. First, we analyze whether governments with unions report relatively

smaller discretionary fund balance ratios within the general fund—that is,

a relatively lower unrestricted fund balance, and relatively higher restricted

and/or designated fund balance (a form of classif‌ication shifting; McVay

[2006]). Second, we explore whether governments with unions report

relatively greater proportions of resources outside of the general fund,

within fund types that are politically protected from unions or where

f‌inancial statement users are less likely to focus (deemed “fund type shift-

ing”). Among the fund types used by governments, the general fund is

typically considered the primary measure of f‌inancial health and is closely

examined by f‌inancial statement users (Anthony [1985], Standard and

Poor’s [2012]). Although GAAP pronouncements offer guidelines over

fund balance reporting, anecdotal evidence suggests that many politicians

take advantage of the standards’ f‌lexibility (GASB [2006a]).4

3In our setting, politicians (elected mayors) and bureaucrats (appointed city managers)

are primarily responsible for f‌inancial reporting choices; we elaborate on this in section 2.2.

When we refer to governments or municipalities making decisions, we are implicitly referring

to politicians and bureaucrats.

4Hence, when we refer to “strategic reporting” or “obscure available fund balance,” we

refer to within-GAAP reporting choices, akin to those used under earnings management in