IMPLICIT DEBT CAPITALIZATION IN LOCAL HOUSING PRICES: AN EXAMPLE OF UNFUNDED PENSION LIABILITIES

I analyze the response of individual housing sales prices to negative information or "news" about local public debt levels and their underlying impact on the provision of public goods and services. In February 2004, it was announced that rising levels of unfunded liabilities for the San Diego City Employees' Retirement System (SDCERS) were higher than previously perceived. Comparing the sales of homes on both sides of the city boundary before and after the shock occurred, I find the "news" led to a 2.5–3.7 percent decrease in housing sales prices in San Diego City over the four years following the announcement. This result implies overcapitalization of the unfunded pension liabilities, where the impact on home values is greater than the residents' financial burden from the unfunded liabilities.