Do Public Pension Obligations Affect State Funding Costs?

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.