Mounting Municipal Pension Liabilities: Do They Affect the Cost of Borrowing?
Public pension systems are integral components of state and local government finance, but the funding of these systems is emerging as a major fiscal challenge in cities across the United States. The growth rate of financial obligations across public pension systems is substantially outpacing the rate of revenue growth for many municipalities. If this trend continues there will be significant impacts to public services as budgets are increasingly overburdened. These obligations will also negatively impact the credit worthiness of municipalities resulting in higher capital and borrowing costs, further increasing financial strain on municipalities. This study analyzes whether or not unfunded pension liabilities have a significant impact on municipal costs of capital by determining whether the municipal bond market is appropriately factoring in the long term risk of unfunded pension obligations into bond prices.