How have municipal bond markets reacted to pension reform?

Abstract

The brief's key findings are: (1) Bond rating agencies have begun accounting for public pension funding and have cited pensions in several downgrades. (2) As a result, state and local governments see that their pension finances could threaten their ability to borrow at affordable rates. (3) This study examines the impact of both pension finances and pension reforms on borrowing costs from 2009 to 2014. (4) The results show that a higher ratio of unfunded pension liability to government revenue is related to increased borrowing costs. (5) Pension reforms appear to reduce borrowing costs but the result is not statistically significant, perhaps because those making changes also had poor general finances.