Oliver Giesecke



Research Fellow,

Hoover Institution, Stanford University

ogiesecke [@] stanford.edu

RECENT UPDATES

12/21: New working paper: “State Government Debt Structure”

12/20: New working paper: State and Local Pension Funds 2022" (with Joshua Rauh)

12/06: New working paper: Where Did Pandemic-Era Fiscal Aid to States Land?" (with Jeffrey Clemens, Joshua Rauh, Stan Veuger)  - available upon request

10/04: Major revision: “Local Government Valuation” (with Haaris Mateen and Marcelo Sena)

10/02: Major data update: Public Pension Dashboard

09/07: New working paper: State and Local Government Financial Fundamentals (with Seamus Duffy)

07/31: New working paper: “Deep Learning for Corporate Bonds” (with Jetlir Duraj)

06/26: Major revision: “How Much Do Public Employees Value Defined Benefit versus Defined Contribution Retirement Benefits?” (with Joshua Rauh)

06/12: The municipal finance dashboard is online:  https://municipalfinance.stanford.edu


MUNICIPAL FINANCE DASHBOARD

The dashboard displays credit spreads for a large sample of state and local governments in the municipal bond market. It is available at https://municipalfinance.stanford.edu. I use a state-of-the-art pricing model to accurately price the universe of municipal debt instruments, including those that contain a rich set of embedded options. The dashboard is updated on a daily basis. Thus, it provides quasi real time information about the conditions in the municipal bond market for a broad sample of issuers.

Furthermore, the dashboard provides financial fundamentals for all state governments and the 500 largest local governments in the United States. The documentation for the financial fundamentals is available here.

I highly value any feedback regarding the sample universe, functionality and potential issues via feedback form.

Coverage: The Bond Buyer: Stanford research fellow dives into muni data with interactive dashboard

PUBLICATIONS 

“Trends in State and Local Pension Funds” (with Joshua Rauh) - Annual Review of Financial Economics 15, forthcoming (Available on SSRN)


Unfunded public pension obligations represent the largest liability for state and local governments in the United States. As of fiscal year 2021, the total reported unfunded liabilities of these plans is $1.076. In contrast, the market value of the unfunded liability is approximately $6.501 trillion. As a result, the reported funding ratio of 82.5% falls to 43.8% under a market-based valuation. The market values reflect the fact that accrued pension promises are a form of government debt with strong statutory and contractual rights. The assumed discount rates are based on expected returns and remain elevated relative to risk-free rates, despite a decline since 2014. As a result, not only is the unfunded pension liability understated, but also the yearly pension cost for newly accruing liabilities. In order to achieve high returns, pension funds have accumulated large exposure to risky assets, in particular alternative investments, which results in highly uncertain investment returns.

More metrics and recent updates are available at: Public Pension Dashboard 

Coverage: MarketWatch: Here's is why you should be worried about state and local pension

RECENT COMMENTARY AND POLICY WRITING

“Pension Reform: Conceptual Foundations and Practical Challenges” (with Seamus H. Duffy) - Hoover Institution Press

Underfunded pension are the largest liability for state and local governments across the United States. As a result of increasing recognition of the associated risks, recent statutory funding mandates led to a sharp increases in required contributions, threatening city services and employee bases. As funding pressure mounts, pension reforms offer a viable tool for prudent economic policy. We propose five general principles that guide pension reform considerations and discuss how these principle stand in contrast to current policy and actuarial practices. Current actuarial valuation practices of pension liabilities often dissuade cities from adopting pension reforms and can lead to sub-optimal policy outcomes. We illustrate the application of the general principles in the context of several local governments in the U.S., which have recently executed or are actively deliberating a pension reform.

Financial Challenges Facing US Cities: Milwaukee, Wisconsin” (with Dean Ball, Seamus H. Duffy, and Jillian Ludwig) - Hoover Institution Press

The City of Milwaukee, like many cities around the United States, has faced financial challenges in recent years. Budgetary constraints have put pressure on the city’s ability to promote economic growth, fund its pension obligations, and maintain basic infrastructure. Addressing these challenges requires research-based solutions and an innovative approach to governance that places data and evidence at the forefront of policymaking.

WORKING PAPERS

AI at the Frontier of Economic Research - (Available on SSRN)

The use of AI gets increasingly incorporated into economic research. Some of the applications include sentiment analysis, classification, clustering, or function approximation for the development of flexible models. Another promising development is the use of AI for the selective extraction of data that is subsequently analyzed by the conventional economic toolkit. Latter is enabled by the recent advances in image and language transformer models. This approach has the potential to significantly expand the possibilities for economic research as demonstrated by an example that extracts debt maturity data from thousands of PDF documents (Giesecke, 2023).

“State Government Debt Structure” - (Available on SSRN)

This paper documents the debt structure of state governments in the United States. Despite its economic significance for the U.S. economy, little is know about the debt structure of state governments due to severe data limitations. I develop an original machine learning approach to obtain detailed debt structure information for all state governments between 2006 and 2021. The paper shows that revenue bonds constitute the majority of all issued debt. The average duration (maturity) for outstanding debt liabilities is about 8.6 years and shows a declining trajectory over the sample period. Revenue bonds tend to be of longer duration than general obligation debt, and leases are of the shortest maturity among all debt categories. The paper tests the leading hypotheses for determinants of the debt structure in the data. I find that tight market conditions in the municipal bond market shorten the overall debt maturity structure of state issuers. Furthermore, financial strength of the issuer is robustly negatively related to the duration of the debt portfolio, regardless whether measured by fiscal fundamentals or credit spreads. The case study of the territory of Puerto Rico, which underwent a debt restructuring, shows that duration of the debt portfolio shortened substantially in the years preceding the bankruptcy announcement; thus, highlighting the interaction between fiscal fundamentals and debt maturity. The quasi-exogenous variation in credit rating that originates from Moody's recalibration of credit ratings in 2010 has little effect on duration of the debt portfolio. Further, I do not find an effect for neither the changes in the federal debt structure, nor for the SALT deduction cap on state governments’ debt maturity structure.

“State and Local Pension Funds 2022" (with Joshua Rauh)  - (Available on SSRN)

This paper updates the status of state and local pension funds as of the end of fiscal year 2022. Total reported unfunded liabilities increased to $1.572 trillion from $1.076 trillion in the prior year, due to weak investment returns and actuarial factors. In contrast, the market value of the unfunded liability fell to $5.120 trillion from $6.501 trillion due to substantial increases in risk-free discount rates that are appropriate for measuring the value of a form of government debt with strong statutory and contractual rights. Both the unfunded liability and the annual pension costs for new benefit accrual remain substantially understated. Investment returns were negative 3.2% in fiscal year 2022, underperforming assumed discount rates by approximately 10%. Employer contributions increased substantially, with the contribution rate as of payroll rising from 26.9% in 2021 to 28.3% in 2022. The increase in employer contributions is partly driven by supplemental contributions that state and local government made at a time when they experienced budgetary surpluses inclusive of pandemic-related relief.

Coverage: The Bond Buyer: States, cities tapped surpluses to fund pension contributions in 2022, Stanford GSB Insights: Public Pensions Are Mixing Risky Investments with Unrealistic Predictions

“Where Did Pandemic-Era Fiscal Aid to States Land?” (with Jeffrey Clemens, Joshua Rauh, Stan Veuger) - available upon request 

Using variation in pandemic-era fiscal aid to states driven by the strength of political representation, we find that incremental pandemic-era fiscal aid to states was most likely to end up in the category of general administrative service spending and employee benefit funding. Spending on categories that motivated the aid in the first place, such as healthcare, education, and infrastructure, may also have increased but does not show robust patterns. Total state government revenues and expenditures had increased by around 70 cents per dollar of committed federal funds by 2022. Of this, the statistically significant categorical spending effects are 38 cents to general government expenditures (the residual that excludes healthcare, education, infrastructure, and other functional categories) and 7 cents to pension funding, even though the fiscal legislation that sent money to states in 2021 specified that those funds were not to be used for pension funding. States with tighter fiscal rules such as total expenditure limits were somewhat more likely to adhere to the intended use of funds.

“Deep Learning for Corporate Bonds" (with Jetlir Duraj) - (Available on SSRN)

We estimate an asset pricing model for the U.S. corporate bonds market using bond portfolios, as well as a large longitudinal dataset of individual bonds that we augment with fundamental characteristics of the issuer. We further enrich the information set with a large set of macroeconomic time series.  We estimate diverse model architectures with two approaches: (1) minimizing the mispricing loss, and (2) maximizing the Sharpe ratio. We find that, contrary to the equivalence of these two approaches in the sense of financial theory, maximizing the Sharpe ratio performs better for individual bonds, whereas the difference is smaller for bond portfolios. The out-of-sample annual SDF portfolio Sharpe ratios are in the range of .59 to 1.00, and show statistically significant excess returns (alphas) relative to conventional risk factors. Our results are robust to the exclusion of financials and REITs. 

How Much Do Public Employees Value Defined Benefit versus Defined Contribution Retirement Benefits?” (with Joshua Rauh) - (Available on SSRN)

We survey public employees across the United States about their preferences regarding retirement plan options, and in particular at what employer contribution rate public employees would agree to switch to a defined contribution (DC) plan on a forward-looking basis. Overall, 89.2% of respondents are willing to accept a hard freeze of their defined benefit (DB) plan and the introduction of a DC plan at some contribution level. Conditional on acceptance, the median minimum contribution rate that respondents would require---if no additional retirement benefits would accumulate under their existing plan---is 10% of payroll, while the mean is 18.2% of payroll. The perceived and actual financial generosity of the pension plan relates negatively to the acceptance rate and positively to the minimum required contribution. More senior employees are somewhat less likely to accept the DC option, but there is over 80% acceptance even among long-tenured employees. Consistent with typical DB accrual patterns in the presence of early retirement options, employees with around 20 years of service require the largest DC contributions to switch. Employees who perceive the financial stability of their current plan as weaker are, on average, more likely to accept a DC plan and at lower contribution levels. We find no statistically significant heterogeneity with respect to educational attainment or financial literacy, making an explanation of the results based on cognitive ability less likely. In comparison to the economic cost of prevailing DB plans, introducing DC options that are acceptable to employees could potentially improve the sustainability of pension systems across the United States without compromising employees' satisfaction with their pension plan options.

Presented at: Stanford GSB, University of Amsterdam.

Local Government Valuation” (with Haaris Mateen and Marcelo Sena) - (Available on SSRN) 


We construct a novel data set on the fiscal position of municipalities in the United States and document a secular decline in their financial health. Our data combines financial data from the Annual Comprehensive Financial Reports (ACFRs) of municipalities along with Census data of their revenue and expenditure cash flows. We find that a large share of municipalities operate with a negative net position-akin to a negative book equity position in the corporate context. We find that most of the decline originates from the accumulation of legacy obligations, i.e., pensions and other post-employment benefits (OPEBs); this is recognized by municipal bond markets through higher credit spreads. While accounting values from the ACFRs are informative, they are based on book valuations which potentially convey limited information about the economic value of assets and liabilities. Thus, we turn to the market valuation of local governments' equity by estimating an SDF that matches the valuation of a wide range of assets in the economy to prices future tax and expenditure claims. Using market prices for tax and expenditure claims, and market valuations of liability positions we find that the market values of equity are highly correlated with the book values. The negative equity position-in terms of book and market values-for some local governments suggests the presence of implicit insurance by the state and federal governments.

NASDAQ Best Paper Award in Asset Pricing

Presented at: UEA 11th European Meeting, Brookings Institution 2022 Municipal Finance Conference, UEA 16th North America Meeting, Midwest Finance Association 2023 Annual Meeting, Western Finance Association 2023 Annual Meeting, AREUEA National Conference 2023, Stanford GSB Finance.

Local Governments' Response to Fiscal Shocks: Evidence from Connecticut” (with Haaris Mateen) - (Available on SSRN)

The deteriorating fiscal position of municipalities across the United States raises the question which adjustment mechanisms municipalities have at their disposal and what their effects are. We utilize quasi-experimental variation in the year of property tax assessments in the state of Connecticut to provide causal evidence of the fiscal adjustment following a large decline in property values after the Great Financial Crisis. We find that local governments adjust tax rates to maintain stable tax revenues; there is no change in public employment levels and limited adjustments of public services. Our micro data on people's location further allows us to causally estimate the migration elasticity to a change in property tax rates. We find evidence of inter-state migration in response to an increase in property tax rates; and no statistically significant response of intra-state migration. Detailed property and location choice data reveal the elasticity of migration with regard to the property tax bill. An increase in the property tax bill by ten percent leads to an average increase in the migration propensity by about 1.5%.

UEA North America Meeting 2021 Honorable Mention

Presented at: Columbia University, Columbia Business School, AREUEA National Conference 2021, UEA North America Meeting 2021, EEA-ESEM 2022.

Local Fiscal Constraints and Amplification of Regional Shocks (Available on SSRN)

How do municipal finances interact with local labor market shocks? I show that the observed general equilibrium response to local labor market shocks contains an economically important amplification effect through local financial constraints. At the center of the local financial amplification channel is the housing market. Local governments in the United States receive a median share of  63.1% of own source revenues from property taxes. I show that exogenous shocks to local labor markets affect the housing market and exerts fiscal pressure on local government finances. Local governments-on average-increase property taxes and cut amenities. Both policy responses affect the relative attractiveness of a location which amplifies the initial shock. I estimate a multiplier of 1.7x through this local financial constraint channel.


Economic Impact of Water Scarcity” (with Jessica Goldenring and Dhruv Singal) - (Available on SSRN)


What is the economic impact of water scarcity? The World Resource Institute projects that 44 countries experience high or extremely high water distress in 2040. We assess the economic impact of water scarcity on land valuations. This Ricardian  approach is commonly used in the literature to assess the impact of climate change. Specifically, we focus on farmland valuations in California—one of the most productive farmlands in the world. The semi-arid climate makes its valuation particularly sensitive to the amount of surface and groundwater water available for irrigation. The detailed administrative transaction data from the counties’ assessor offices allows us to estimate repeat sales indices as opposed to a hedonic model which make our results less likely to be affected by unobserved confounders. We find that parcels with better access to freshwater see a 24.9%-25.9% larger appreciation in land values per acre over the time period from 2011 to 2020 depending on the exact specification; we find no statistical significant differential price change between 2000-2011. The differential change in land values points towards large economic effects of water scarcity with beliefs about future climatic conditions being updated due to two severe episodes of drought and signals of legislative willingness to curb groundwater overdraft.

Presented at: Public Policy Institute of California (PPIC), Columbia University, Hoover Institution.

“The Bond Lending Channel of Monetary Policy” (with Olivier Darmouni and Alexander Rodnyansky) - (Available on SSRN)

Corporate bond markets are a growing source of funding for companies throughout the world. How does a firm's debt structure affect the transmission of monetary policy? This paper sheds light on a new corporate finance mechanism in which monetary policy disproportionately impacts market-financed firms as bonds have higher downside risks relative to bank loans. We present high-frequency evidence consistent with this channel in the euro area: firms with more bonds are more affected by surprise monetary actions than their counterparts. This finding stands in contrast to a standard bank lending channel and suggests a key role for bond markets in monetary transmission.

Finalist European Central Bank Young Economist Competition 2021

Presented at: EPR ESSIM 2021, CEPR and Bank of Finland Joint Conference on Monetary Policy Tools and Their Impact on the Macroeconomy, SED 2021, EFA 2020, 9th MoFiR Workshop on Banking, SFS Cavalcade 2020, CFM London Macro Workshop, Bocconi, University of Cambridge, Columbia Business School, LMU Munich, and NYU Stern, Georgetown University. 

RESEARCH PAPERS IN PROGRESS

“Urban Doom Loop” with Arpit Gupta, Pierre Mabille, Stijn Van Nieuwerburgh

“Capital Structure Arbitrage” with Jetlir Duraj