The Influence of Jurisdiction Size and Sale Type on Municipal Bond Interest Rates: An Empirical Analysis

Abstract

The authors use data on municipal bond sales in Oregon from 1994 to 1997 to explore whether population (as a proxy for financial-management capacity) and sale type (competitive or negotiated sale) influence interest rates. They find that smaller jurisdictions pay an interest cost penalty in the municipal bond market, and that competitive sales result in significantly lower interest rates compared to negotiated sales. The authors suggest that measures to enhance the financial-management capacity of small governments are warranted and that state laws requiring justification for negotiated sales are appropriate.

The Government Finance Database: A Common Resource for Quantitative Research in Public Financial Analysis

“…Breaking the data out and studying one particular government is also an interesting exercise. For instance, Fig 10 shows The visual impact of this loss on the graph is small compared to the actual impact losses like this had on public retirement systems across the nation and the world [32], but it drives home an important point about the flexibility of the government finance database. Isolating more stable government revenues through the use of general revenue, rather than total revenue, is likely to be advisable in many situations, and further isolating your data from the impact of intergovernmental revenue by using the "own source" versions of either revenue number is also possible.…”

Management Capacity and State Municipal Bond Ratings

“…To establish the theoretical link, we start from the premise that financial management, such as debt policy or accounting practices, affects municipal bond ratings. Simonsen et al (2001) found that financial management matters for bond interest rates after controlling for credit quality (bond ratings) and other variables. Nevertheless, financial management practices also affect municipal bond ratings, as has been claimed by credit rating agencies (Moody's, 2004) and argued by scholars (Crowley & Loviscek, 1996).…”

“…Previous studies showed that population size and growth rate are positively associated with credit ratings (Cluff & Farnham, 1985;Raman, 1981;Rubinfeld, 1973;Simonsen et al, 2001).…”

“…Instead of discriminant analysis, most of the latter studies use regressions to estimate causal models of municipal bond rating. These studies typically go beyond accounting variables and include additional quantitative variables reflecting economic base and expansion (Loviscek & Crowley, 1990), population and race composition (Simonsen, Robbins, & Helgerson, 2001), and budgetary institutional constraints (Johnson & Kriz, 2005;Poterba & Rueben, 1999;Wagner, 2004).…”

“…Using data in Oregon from 1994 to 1997, they found that smaller jurisdictions indeed pay higher interest costs as a penalty in the municipal bond market. In discussion, Simonsen et al (2001) called for "a logical extension" of the study "to incorporate additional measures of management capacity into the model" (Simonsen et al, 2001, p. 715). More recently, Denison et al (2007) looked at the effects of management performance on municipal bond ratings of school districts.…”