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.
Much has happened in the municipal bond market during the past 25 years. This article provides a retrospective of some of the significant developments in the market during that period of time. These developments include passage of the Tax Reform Act of 1986, innovations in the market in response to changing economic and social conditions, and the regulation, increase in disclosure requirements, and proliferatioin of credit enhancements that renewed the efficacy of municipal securities for American state and local governments.
Debt creation imposes an obligation to repay borrowed funds from a wealth base that for most local governments is capitalized in property values. Therefore, the ability to afford debt is tied to the local economy, a factor often overlooked by localities in the analyses of their own position. However, debt levels are also relative, as the many debt affordability studies among governments and by bond rating agencies suggest. We argue here that economic concentration and interjurisdictional coordination fundamentally provide a broader analytical approach to the question a locality asks: can we afford more debt?
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