This paper utilizes a sample of 6,185 locally-issued, general obligation municipal bonds to examine the relationship between a city’s cumulative pension contributions and its cost of borrowing. Following the Great Recession unfunded public pension liabilities have soared to record highs, which, in theory, represent additional credit risks and may hinder local governments’ ability to service their outstanding debt. After controlling for bond characteristics, bond ratings, and issuer characteristics, the empirical analysis finds a statistically significant correlation between pension costs and borrowing costs, defined as the spread between the effective offering yield on municipal debt and the yield on a maturity-matched treasury on the municipal bond’s date of issuance. The results suggest that a 1% increase in cumulative city pension costs as a percent of city revenue is associated with an increase in yield spreads ranging from 1.2 to 3.5 basis points. These findings indicate that municipal bond investors do in fact consider pension expenses when pricing municipal bonds and suggest that addressing unfunded pension liabilities by mandating higher annual contributions will lead to higher borrowing costs for local governments.

In this master thesis, we compare three different types of funding alternatives from a Swedish municipality's point of view, with the main focus on analysing a Nikkei-linked loan. We do this by analysing the resulting interest rate and the expected exposures, taking collateral into consideration. We conclude, with certainty, that there are many alternatives for funding and that they each need to be analysed and compared on many levels to be able to make a correct decision as to which ones to choose. An important part of this is to consider the implications of the newest regulations and risk exposure, as it might greatly influence the final price for contracts. Between the cases that we considered, the SEK bond was the one with the lowest resulting spread, and the one which is the simplest considering the collateral involved. While other alternatives might be better depending on how profitable it is for the municipality to receive collateral, the SEK bond is the most transparent one and with least risk involved.