Aging and public financing costs: Evidence from U.S. municipal bond markets

• We examine the causal impact of population aging on municipal access to credit. • A one standard deviation increase in a state’s population age leads to a 23 basis point increase in municipal bond issue spread. • Three mechanisms drive this effect: income tax revenue, healthcare spending, and pension liabilities. • Constitutional pension protections and securities with lower credit quality or longer maturity exacerbate the effect. • Our findings highlight the challenges municipalities face to cope with systemic demographic transition. We examine the impact of population aging on municipal access to credit. A one standard deviation increase in a state’s population age leads to a 23 basis point increase in municipal bond issue spread. Three mechanisms drive this effect: income tax revenue, healthcare spending, and pension liabilities. Constitutional pension protections and securities with lower credit quality or longer maturity exacerbate the effect. To control for endogenous migration and mortality patterns, we exploit variation from historical state fertility trends. Our findings highlight the challenges municipalities face to cope with systemic demographic transition.