The Association Between Compensated Absences Liabilities and Interest Cost on Public School Districts' General Obligation Bonds

SYNOPSISIn this study, I examine whether compensated absences liabilities are associated with interest cost on public school districts' general obligation bonds. This research question is motivated by the lack of transparency surrounding the accounting for compensated absences and by how the potential size of the liability can affect the government debt market. Using archival data, I analyze public school districts' bond issuance reports along with corresponding financial information. Separating the liability for compensated absences into the current and non-current portions due, I find a significant positive association between the current (but not the non-current) portion and interest cost. The results suggest that the debt market may be unsure about what is being reported as non-current. The amount may be considered too noisy a measure because of uncertainty tied to the quality of the numbers and/or thoughts that longer-term management decisions related to the liability can be altered.