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.