DP11998 U.S. municipal yields and unfunded state pension liabilities

Author(s):	Roel Beetsma, Zina Lekniute, Eduard Ponds
Publication Date:	April 2017
Keyword(s):	actuarial values, civil servants pension funds, explicit debt, implicit debt, market values, municipal yields, underfunding, unfunded pension liabilities
JEL(s):	G12, H55, H74, H75
Programme Areas:	International Macroeconomics and Finance
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=11998

We present empirical evidence that municipal bond yields are increasing in the pension debt towards U.S. state civil servants. However, positive yield effects of both pension and explicit debt are found only for the period since the start of the crisis, suggesting that the crisis triggered awareness of budgetary sustainability. The marginal yield effect of higher pension debt is smaller than that of higher explicit debt, but still economically meaningful. The effect of higher pension debt seems stronger when using market values of pension assets than actuarial values, suggesting that investors pay more attention to market values.