How Have Municipal Bond Markets Reacted to Pension Reform?

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The brief’s key findings are:

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