Fiscal Institutions,Credit Ratings,and Borrowing Costs

This paper investigates the impact of fiscal institutions on state government borrowing costs. We find that institutions have both a direct and indirect effect on interest costs paid by state governments. Revenue limits are associated directly with higher interest costs; expenditure limits, stricter balanced budget rules, and restrictions on state debt issuance are indirectly associated with lower interest costs because they lead to higher credit ratings. It appears that investors and bond raters incorporate information on fiscal institutions into their assessment of state government credit quality.     

Budget Slack,Institutions, and Transparency

Economic theory suggests that it is optimal for governments to use precautionary saving as a countercyclical tool. However, the availability of surplus funds often triggers political pressure for tax cuts and spending increases. Mechanisms for alleviating that pressure include limiting the transparency of slack resources and limiting politicians’ discretion to use slack resources for purposes other than stabilization. This article investigates the extent to which these two mechanisms are substitutes. In particular, the authors examine whether the widespread adoption of budget stabilization funds (BSFs) in the U.S. states over the past several decades has been accompanied by a decline in conservative revenue forecast bias. Using panel data from 47 states over a 22‐year period, they find that the adoption of a BSF reduces revenue underestimation by approximately two‐thirds; however, the size of the effect depends in part on how much a state saves in the BSF and the rules governing BSF deposits and withdrawals. The results suggest that BSFs have the unintended effect of increasing fiscal transparency.     

What Stabilizes State General Fund Expenditures in Downturn Years—Budget Stabilization Fund or General Fund Unreserved Undesignated Balance?

This article strictly defines the budget stabilization fund (BSF) as a counter-cyclical reserve, and with a panel data set examines the effects of BSF and general fund unreserved undesignated balances (UUB) on stabilizing state general fund expenditure during downturns. The article finds that BSFs bolster spending in lean years: each percentage point increase of BSF balance as a percent of general fund expenditure can minimize negative expenditure gap by a quarter percentage point. But the article does not find evidence that UUB is a counter-cyclical fiscal tool, indicating that wide adoption of BSF may have changed the nature and use of UUB.     

Management Practices and State Bond Ratings

One of the central claims of public administration is that management matters for the performance of public entities. Quantifying the impact of organizational management is thus central to the empirical evaluation of this claim. Utilizing novel features of the Government Performance Project (GPP), we assess the impact of state‐level management practices on the credit quality of US states. The central challenge—that both the GPP data and bond ratings take the form of ordinal grades—suggests a common solution utilizing multiple indicators of a latent construct (management capacity and credit quality) with appropriate measurement models. After describing the characteristics of the measurement approach, we derive management capacity scores from the GPP data and credit quality scores using bond ratings from the three rating agencies. These derived scores then allow us to test linkages between credit quality of the US states and broad aspects of their relative management capacity. On the whole, we show that financial management capacity influences credit quality, while the evidence is less clear that other forms of management capacity matter.     

Now You See It, Now You Don't: The Mysterious Case of the Vanishing Split Bond Rating in States

Bond ratings on state-issued debt provide a signal to credit markets that help them charge an appropriate interest rate, based on the risk of payment default. Though actual default may occur only in extreme circumstances, observed differences in ratings and interest costs across states and time demonstrate that a sound economy, strong financials, and stable policies matter. When data on the factors that presumably affect ratings is public and easily accessible, making sense of differences of opinion between bond rating agencies is difficult. We suggest that such differences—observed as so-called split bond ratings—are often ephemeral. Utilizing a simulation method to uncover the latent credit risk presented by each state, we show that split ratings on state bonds are often due to the fact that presumed category overlap between rating agencies is absent when evaluated on a common latent scale. Most observed state bond rating splits from 1997 through 2006 can be explained by this category mismatch. Our approach has broad implications for pricing state debt, as well as pricing rated debt in other capital market sectors.     

Municipal Bond Insurance Premium,Credit Rating,and Underlying Credit Risk

This article explores the question of whether bond insurers are able to sufficiently evaluate the credit risk of insured bonds, the answer to which would determine the future of municipal bond insurance. A sample of insured municipal bonds is investigated to determine whether bond insurance premia can predict the future credit rating transition, the proxy for bond credit risk. The results show that municipal bond insurance premia, conditional on bond credit ratings and other explanatory variables, have explanatory power over credit rating downgrades but not over upgrades. As such, bond insurance premia convey extra information about the underlying credit risk of a bond issue than the original credit rating reveals. This research also provides evidence that the rating agencies might not be doing as a good job as they could potentially do.     

Capital Financing of Schools: A Comparison of Lease Purchase Revenue Bonds and General Obligation Bonds

School building construction is on the rise nationwide and Texas has led the nation in outlays on school construction. We consider key factors that distinguish lease purchase revenue (LPR) bonds and general obligation (GO) bonds as debt instruments for financing school facilities in Texas. Our research shows that LPR bonds typically have a higher interest cost than GO bonds and they do not have any advantages over GO bonds in circumventing state restrictions on school district tax and debt authority. Voter approval requirements implicit in the state aid formulae supporting school bond repayments and the bond election requirements are however both less stringent in the case of LPR bonds than GO bonds.     

State Mandated Accounting, Auditing and Finance Practices and Municipal Bond Ratings

The accounting, auditing, and finance practices of municipal governments often are legally constrained by regulations imposed by state governments under whose jurisdiction cities are created. These practices may impact on municipal security risks and returns, either directly in the bond market or indirectly through such market intermediaries as bond rating agencies. The purpose of this article is to assess the impact of state mandates on municipal bond ratings.     

Is Management Performance a Factor in Municipal Bond Credit Ratings? The Case of Texas School Districts

Municipal bond ratings are an important determinant of interest costs that a bond issuer must pay. The three major bond rating firms profess that economic and management factors are considered in assigning a bond rating. The management component is of particular interest to public administrators because they can exert more direct control over management factors. Management factors have not been studied empirically in the literature because management performance is generally difficult to quantify. However, the public education sector has seen advances in performance measures and at the same time has increasingly relied on municipal bonds to finance construction. The ordered probit estimation provides support that management performance, as measured in the districts performance on standardized test scores and success in student college admission rates, does influence Texas school district bond credit ratings.     

Public utility regulation and bond ratings

This paper investigates the extent to which political factors, which vary across state Public Utility Commissions, affect electric utility bond ratings. The paper focuses on the effects of the commissioner selection method (election or appointment) and other politically determined variables on bond ratings of privately owned and regulated electric utilities. The paper develops a generalization of ordered logit that allows the latent risk measure to have a skewed and thicktailed distribution. The distributional assumption underlying the standard logit model is strongly rejected. Empirically, both political variables and financial variables are determinants of electric utility bond ratings, and election of the PUC has a strong negative effect on bond ratings.     

Using Fuzzy Rule–Based Systems to Evaluate Overall Financial Performance of Governments: An Enhancement to the Bond Rating Process

Credit ratings remain a key feature of municipal debt management. The primary objective of this article is to develop a new methodology for evaluating the financial performance and creditworthiness of governments and to illustrate this approach for a sample of large American cities. Specifically, we develop a fuzzy rule–based system (FRBS) that uses economic, debt, and other financial information as well as a measure of financial management to produce rankings of city financial performance. The FRBS credit ratings are highly correlated with actual Moody's ratings for these cities. FRBS have the potential of enhancing the rating process by standardizing the information used and encouraging consistent rules about what combinations of inputs result in good, fair, or poor performance.     

Determinants of Municipal Bond Ratings for General‐Purpose Governments: An Empirical Analysis

In the wake of the destabilization of the tax‐exempt bond insurance industry, this paper presents an ordered probit model of the determinants of the credit ratings of 965 county and city governments from throughout the nation. The underlying Moody's rating of these governments is posited as a function of a vector of publicly available economic, demographic, governmental, fiscal, and financial variables. The empirical results demonstrate the relative importance of economic base diversity, the growth rates of earnings, and population as well as existing full faith and credit debt on credit ratings. Additionally, our findings support the proposition that the existence of tax limits reduce the perception of credit quality, while expenditure limits raise credit ratings.     

State Saving Behavior: Effects of Two Fiscal and Budgetary Institutions

This paper explores how state saving behavior is affected by two fiscal/budgetary institutions—budget stabilization funds (BSF) and balanced budget requirements (BBR). While adopted for different reasons, BSF and BBR could have significant effects on state savings behavior depending on their design features. We empirically examine the effects of BSF and BBR using a panel data set that covers three business cycles, controlling for budgetary institutions, state economy, social services, politics, and business cycles. The paper finds that adopting BSF and BBR can raise savings by 2 and 3 percentage points, respectively; however, the effects depend crucially on the devices' design.     

Structural Deficits and State Borrowing Costs

This study examines the factors that affect the borrowing costs of state governments with specific attention being paid to the impact of state structural deficits (or fiscal imbalances) on borrowing costs. The findings for 1999–2000 suggest that interest costs for state competitively sold municipal securities reflect estimates of state structural deficits. States with a higher structural deficit were found to pay significantly higher interest costs. The evidence implies that bond ratings do not fully reflect the fiscal problems faced by state governments.     

Fiscal consequences of public corruption: Empirical evidence from state bond ratings

Empirical analyses of public corruption focus predominantly on international differences; regional differences in public corruption within a single country receive little attention. We empirically investigate the effect of public corruption in the United States on state bond ratings, which previous research shows are inversely related to net interest costs on public debt. After controlling for various economic influences on bond ratings, we find that more corrupt states have lower bond ratings, which implies that taxpayers in more corrupt states face a negative pecuniary externality by paying a premium for debt.     

Budget Stabilization Fund: Structural Features of the Enabling Legislation and Balance Levels

This article examines what leads to high balances of the budget stabilization fund (BSF) to make it a countercyclical fiscal tool. Checking state BSF laws, this article classifies BSF structural features into purposes, funding sources, balance caps, and use approval procedures. Using panel data (1979–1999) and controlling for related variables, this article tests the features' effects on BSF levels over the sample period and different phases of the economy to identify specific effects of the features in boom and lean years. The article also forwards policy recommendations for state governments to consider in designing or revising their BSF legislation.     

Promoting Participation? An Examination of Rulemaking Notification and Access Procedures

This study documents state implementation of mechanisms designed to promote public participation in agency rulemaking. Many scholars have questioned the effectiveness of such mechanisms, arguing that they fail to encourage greater participation or that increased participation does not affect the substance of administrative rules. Using data from a unique survey of state administrators, the author employs multivariate analyses to assess the relationship between these measures and the perceived influence of external actors. The results suggest that critics may understate the importance of public notification and access procedures. These devices are associated with increases in the impact that a wide variety of actors are perceived to have on the content of agency rules.     

No Guaranties: The Decline of Municipal Bond Insurance

The credit crisis that roiled the financial and housing markets in late 2007 and early 2008 resulted in well‐publicized budget challenges for state and local governments. Less visible has been a dramatic change in the bond insurance market, which alters how governments issue long‐term debt. Debt issuance data from Texas are used to model bond insurance premiums and examine utilization following the crisis. The results provide evidence that insurance premiums rose dramatically following the fiscal crisis, even when controlling for widening credit spreads and changes in the underlying credit quality of issuers.     

“Robin Hood” and Texas School District Borrowing Costs

The “Robin Hood” system of school financing in Texas takes property tax funds from wealthy school districts and gives them to poorer districts. This paper examines Permanent School Fund‐insured, school district debt and discovers that under the “Robin Hood” system, Texas school districts with either Aa or A1 underlying credit ratings have higher borrowing costs than districts with lower ratings. Also, the borrowing costs of Texas school districts with underlying credit ratings of Aa and A1 are higher than those for non‐Texas, privately insured school districts with the same ratings, while the borrowing costs of A and Baa‐rated Texas school districts are lower.     

An Empirical Examination of the Determinants of Insured Municipal Bond Issues

Research demonstrates that there are interest cost savings associated with municipal bond insurance, and yet only half of the bonds are issued with insurance. The theoretical determinants of bond insurance are discussed and evaluated empirically through logistic regression. Statistically significant bond attributes are the underlying credit risk, maturity, par value, and a call option. In addition, regional market characteristics at the time of issue and market segmentations are determinants of bond insurance. These findings strengthen the hypotheses that insurance mitigates market segmentation and that insurers function as delegated monitors of bond quality.