The GASB No. 34 Impact of Budget-to-Actual Variances on Bond Ratings: Evidence from U.S. Cities

Abstract

We investigate the managerial incentives and debt cost effects associated with budget-to-actual variance disclosures required by the GASB No. 34 reporting model. Empirically, we document associations between variances and municipal bond ratings in a sample of large U.S. cities over the period 2003–2006. We find a disproportionate share of favorable variances for revenues, expenditures, and the net (i.e., surplus/deficit). Further, we show that revenue variances in either direction are associated with lower bond ratings, i.e., precision is important in predicting revenues. In contrast, favorable expenditure variances are associated with higher bond ratings, i.e., imprecision may be tolerated if the variance is favorable. These associations exist despite indirect evidence of managerial incentives to create budgetary slack for both revenues and expenditures. The findings suggest that these disclosures required in the GASB No. 34 financial reporting model indicate factors that influence municipal debt costs.

Linguistic tone of management discussion and analysis disclosures and the municipal debt market

“…While we realize that our sample size is small, it is consistent with the current literature (e.g. Reck and Wilson, 2014; Callahan and Waymire, 2015).…”

“…Lastly, we include year-fixed effects and cluster by municipality (e.g. Baber et al , 2013; Callahan and Waymire, 2015; Beck et al , 2019) to control for other regulatory differences that could impact disclosure decisions. Values for independent continuous variables are winsorized at the one percent (99 %) tails of the distribution to minimize the effect of influential observations (e.g.…”

“…Research points to information from the government-wide financial statements and GASB 34-based financial ratios being relevant to bond ratings, interest costs, bond insurance premiums and secondary market pricing and efficiency (Plummer et al , 2007; Marlowe, 2010; Kioko et al , 2013; Benson and Marks, 2014; Reck and Wilson, 2014). Additionally, governments having general fund revenues approximately equal to general fund expenditures (Apostolou et al , 2014), maintaining favorable budget-to-actual expenditure variances (Callahan and Waymire, 2015) and holding budgetary slack (Marlowe, 2011) are shown to be associated with favorable bond outcomes (e.g. higher ratings, lower interest costs).…”

Government Reporting Timeliness and Municipal Credit Market Implications

“…We propose that governments that report financial information in a timely manner are likely to have more accurate and efficient accounting systems in 11 See Reck, Wilson, Gotlob, and Lawrence (2004) for a review of early literature, including Stover (1991). More recent literature includes Plummer, Hutchison, and Patton (2007), Baber and Gore (2008), and Callahan and Waymire (2015). 12 For example, see DeFond and Zhang (2014b) ;Mansi, Maxwell, and Miller (2011);Kecske´s, Mansi, and Zhang (2012).…”

Linguistic Tone and Internal Control Reporting: Evidence from Municipal Management Discussion and Analysis Disclosures

“…Although current research shows that GASB No. 34 has information content in the debt market (Callahan and Waymire 2015;Reck and Wilson 2014;Pridgen and Wilder 2013;Plummer, Hutchison, and Patton 2007), research also finds variation and lack of detail in disclosure under GASB 34 for some local governments (Vermeer, Patton, and Styles 2011). Based on GASB 34 (GASB 1999, Cod.…”