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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.

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Creditworthiness, as reflected in bond ratings, is of great interest to municipalities since it directly BOND RATING METHODOLOGYne of the major bond rating agencies is Moody's Investor Services. The basics of their bond rating methodology have been clearly presented in several papers (Moody's Investors Service 2002a, 2002b, 2002c, 2003, and in one comprehensive text 1 (Smith, 1979). These sources identify a number of factors that determine the underlying creditworthiness of governments that issue long-term municipal debt. These factors can be summarized under the following general headings: Economic and demographic characteristics of the local area.  Fiscal condition of the municipality.  Constraints imposed by or dependence on other governmental units.  Debt levels and other financial factors.

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