Public Pension Reform and Credit Quality of State Governments

Abstract

The growth of unfunded pension liabilities has raised concern over states’ fiscal sustainability and threatens their ability to access the capital market. Over the past decade, many states have implemented different types of pension reforms to reduce pension costs, improve funding levels, and mitigate the risks of default on unfunded pension obligations. However, have these reforms enabled states to enhance their credit quality? This study uses state-level data from 2004 to 2018 to examine the relationship between state pension reforms and assigned credit ratings and outlooks. The findings show that the impact of pension reforms on a state's credit quality is tangible and differs by reform type and the government's financial capacity and debt level.