The Information Content of Unfunded Pension Obligations for Municipal Bond Ratings

Pension data for local governments are generally unavailable. Hence, prior re­search has relied on pension ratios as proxies for underfunding. In this paper, we utilize data from Pennsylvania where local governments are required to report unfunded obligations on an actuarial basis to a state agency. The advantage of a within-state sample is that it avoids confounding state-to-state differences relating to the potential for diminution or a state bail-out of pension obligations. In contrast to prior research, we report that unfunded pension obligations do have information content for municipal rating decisions