Now that state governments issue comprehensive annual financial reports in accordance with Statement No. 34 of the Governmental Accounting Standards Board, it is possible to generate a consistent and comprehensive set of government-wide financial information. We use the information to develop financial ratios to benchmark government financial performance from information beyond the traditional general fund, and test the hypothesis that such information is incorporated into the assessment of credit risk. We provide an empirical analysis of the incorporation of government-wide financial information into state government credit ratings, which provides a positive empirical test of the theory of certification and demonstrates how information from the government-wide financial statements is infused into financial markets.

This study reviews the funding status of state-administered pension plans and their impact on state credit quality. As the fund ratio (actuarial assets/actuarial accrued liability) of state-administered pension plans decreases, states are more likely assigned a lower rating. Moreover, rating outlooks are sensitive to the fund ratio, especially for migration between stable and negative outlooks for states with lower fund ratios. These results are a timely pretest to the 2013/2014 implementation of GASB Statements No. 67 and 68, serving as a benchmark to assess whether new reporting requirements will yield information to alter the market's response to unfunded pension liabilities.

While much consideration has been given to the approval process, base classification, and codification of tax and expenditure limits (or TELs), these factors tell us nothing about how they actually work. This study focuses exclusively on the technical elements of these limits and finds how states estimate their limits have over time eroded their potency. More specifically, if a state resets or rebases its limit annually by using actual revenues or expenditures for the preceding year, the limit will trend closely with actual revenues or expenditures, effectively restricting growth in spending as prescribed by law. However, if the law requires a state to estimate its limit using the appropriation limit for the preceding year instead of actual revenues or expenditures, that is, without rebasing, the limit will reflect cumulative changes to the base when it was first approved. Over time, the TEL cap is significantly above the states revenues or expenditures as it remains unaffected by the state's underlying fiscal and economic environment.

This article investigates the impact of state-level tax and expenditure limits (TELs) on state government revenues and aid to local governments. Using an instrumental variable approach to control for endogeneity, the authors find that the general fund TELs (i.e., revenue and expenditure limits) have led to substantial increases in tax and nontax revenues. States with procedural limits (i.e., those with voter approval and/or legislative supermajority requirements votes) have significantly lower tax revenues. For states with these procedural limits, their ability to impose new or higher taxes is limited by the rules for passing such legislation. This study also finds that states with general fund TELs have higher levels of aid to local governments, while Downloaded from those with procedural TELs have lower levels of aid. Local government property tax limits do not have any impact on taxing authority of states and have only marginal impacts on the state-aid programs.Keywords tax and expenditure limits (TELs), state government revenues, intergovernmental relations, instrumental variablesThe effect of tax and expenditure limitations (TELs) on government spending has been theoretically debated and empirically tested since the early adoption of TELs. This study contributes to this literature by making three contributions. First, whereas prior studies have focused on the TEL's base (revenue limit or expenditure limit), method of approval (voter initiative, referendum, or a legislative vote), institutional codification (constitutional or statutory), or the fiscal growth factor (personal income or population growth plus inflation), or some combination of the above, this study highlights the importance of understanding how these limits are executed. The relevant construct, and the one we advance in this article, distinguishes between limits on the general fund (i.e., revenue or expenditure limits) and procedural limits on taxing authority (i.e., legislative supermajority or voter approval requirements for new or higher taxes; Kioko 2011; Stark 2001). We find tax and nontax revenues are higher in states with general fund limits, while tax revenues are significantly lower in states with procedural limits. This suggests that imposing new or higher taxes is more difficult in states with procedural limits. We also find aggregating general fund and procedural limits into a single measure, or excluding either of these institutions, could lead to omitted variable bias.Second, we find that the question of endogeneity of these institutions has been largely overlooked. In this study, we attempt to improve upon prior estimates through an instrumental variable approach. A crucial instrument and a critical component of the tax revolt movement are the voter initiative provisions. Robustness tests reveal these to be weak and our examination of the literature suggests these instruments would be relevant explanatory variables. In our alternative instrumental variable specification, we consider the structure of the voter initiative provision...

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While bankruptcy protection remains an instrument of last resort, a recent wave of petitions has aroused the interest of key participants in the municipal bond market. To date, 12 states unconditionally authorize municipalities to file for bankruptcy protection, 15 states require that municipalities satisfy certain threshold requirements, while the remaining 23 states either explicitly prohibit or have not specifically provided this authority to municipal governments. As bankruptcy protection rules influence bondholder risk exposures, we empirically test the significance of the state‐specific bankruptcy eligibility requirements on borrowing costs. In a representative sample of general obligation bonds, empirical results suggest that municipalities eligible to file for bankruptcy protection pay a premium. The premium is higher if issuers are unconditionally authorized to file for bankruptcy protection, especially for debt with longer maturities. Findings also show that there are benefits associated with statutory liens; however, these benefits diminish with maturity.

This paper analyzes local government use of short-term debt. Though long-term debt, largely used for capital projects, is relatively well-researched, predictors for the use of short-term debt need to be further developed. We hypothesize that governments with limited cash reserves and expenditure flexibility are more likely to use short-term debt. Further, we expect that governments use short-term debt as an instrument to manage market timing for longterm debt. Using a heterogeneous sample of New York local governments, our analysis finds more illiquidity, declining prior year surplus, more salary expenditures, larger capital spending, and the timing of long-term debt increase the likelihood of using short-term debt. Applications For Practice• Evidence supports that local governments use shortterm debt in conjunction with increases in long-term debt, revealing an additional cost of issuing longterm debt. • Policies established to manage the issuance of shortterm debt can acknowledge that lack of illiquidity, higher capital project costs, increasing long-term debt, and more frequent short-term debt issuance are more likely to increase short-term debt burdens. • Long-term debt management policies can include provisions for more short-term debt issuance.