This paper investigates whether a municipality’s unfunded pension plan liabilities are associated with the municipality’s credit rating. We answer this question by examining Moody’s credit ratings for municipalities located within the state of Massachusetts. Focusing on a specific state helps us to avoid heterogeneity problems that have plagued prior studies employing multi-state data. Using panel data, and the ordered probit and ordered logit methodologies, our results demonstrate a significant negative relationship between unfunded liabilities and Moody’s credit ratings. Furthermore, the standardized coefficients in both models are close in magnitude indicating robustness of the relationship. These results have public policy implications for municipalities.
Available for download here.