Do Public Pension Obligations Affect State Funding Costs?

Jean Burson, John Carlson, O. Emre Ergungor and Patricia Waiwood

Municipal Finance Journal, 2014, vol. 35, issue 2, 17 - 52

Abstract: States’ unfunded pension obligations to their current and retired employees have exploded in recent years to levels that are estimated to be between $750 billion and $4.4 trillion. In theory, this massive debt should have implications for states’ ability to meet their financial obligations and a measurable impact on funding costs. Yet we find limited evidence that municipal bond markets are pricing the risks to states’ fiscal health arising from these large obligations. Although yield spreads have become more sensitive to pension underfunding since the financial crisis, the economic effect is small.

Date: 2014
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