US municipal yields and unfunded state pension liabilities

We present empirical evidence that municipal bond yields are increasing in both the explicit debt and the unfunded pension liabilities of U.S. state civil servants. However, the positive yield effects of both types of debt are found only for the period since the start of the global financial crisis. A potential explanation is that the crisis triggered awareness of budgetary sustainability. Further, the marginal yield effect of higher pension debt is significantly smaller than that of higher explicit debt.