Local Government Risk Assessment: The Effect of Government Type on Credit Rating Decisions in Texas

Abstract

In consideration of increased levels of debt issued by special purpose local governments, this study explores the relationship between local government type and credit rating decisions. Investors use credit ratings as a signal for default risk, and risk level is a function of local economic base including service responsibilities and revenue sources. Governmental functions and economic bases vary across local government types which affect credit rating decisions. Specifically, special purpose governments have more limited responsibilities and revenue sources compared to general purpose governments. To model the decision of agency selection a multivariate probit model is estimated using bond deals from six different types of local governments in Texas. Findings suggest differences among general purpose and special purpose local governments. This supports the hypothesis that economic base affects credit rating decisions. Results indicate that credit rating agencies evaluate and weight information differently, and that local governments chose rating agencies in response.

A review of public water infrastructure financing in the United States

“…In this case, if the utility defaulted on its bond payments, then investors would have a legal claim to the water utility fees rather than all revenues and assets. Special districts, such as dedicated water districts, may have different risk profiles and a more narrow fiscal base relative to general-purpose governments, which affects the types of bonds they are able to issue and the interest rates they have to pay on those bonds (Greer, 2016). It is commonly assumed that GO bonds will have lower interest rates because they represent safer investments (Peng & Brucato, 2004), but work by Kriz (2003), Moldogaziev, Greer, & Lee (2019), and others suggest that this might not always be the case.…”

“…One unique feature of drinking water delivery in the United States is the hyperlocalized water districts that are created to serve specific geographic areas and neighborhoods (Conca & Weinthal, 2018;Mullin, 2009;Scott et al, 2018). Given the capital-intensive nature of water provision, special water districts organized as independent political jurisdictions are common and they often are given the authority to issue tax-exempt municipal bonds (Greer, 2016;Moldogaziev, Scott, & Greer 2019). In many cases, these independent water districts overlap with other local governments resulting in a complex system of local debt that may result in higher borrowing prices and high overall levels of debt (Greer, 2015;.…”

Polycentric governance and the impact of special districts on fiscal common pools

“…This is particularly true when considering debt limitations. Special districts are often exempt from fiscal constraints that apply to other local governments, such as restrictions on the amount and type of debt that can be issued or held by general purpose governments (Greer 2016). By using special districts to issue debt and pursue infrastructure projects, general government policymakers at the local level are able to maintain growth strategies while technically complying with state regulations.…”

Negative Externality of Fiscal Problems: Dissecting the Contagion Effect of Municipal Bankruptcy

“…In the case of general contagion based on geographic proximity, for example, localities in a state share the same legal and institutional environment and may pursue the same remedy for adjusting their liabilities. Further, localities close to each other rely on the same regional economic base to finance debt repayment, and thus the diversity of and shocks to the economic base affect the creditworthiness of all localities in the area (Capeci ; Ciccarone ; Greer ). Therefore, the filing of one locality may prompt investors to adjust their perceived probability of being paid back by all nearby borrowers.…”