Municipal Net Revenue, Economic Activity, and the Cost of Borrowing

Abstract

We investigate the effects of state economic activity on the association of changes in the general fund (i.e., net revenue) and borrowing cost. Extant literature has established that net revenue is associated with municipal bond market metrics (e.g., true interest cost, bond yield spreads). Little is known, however, regarding the relationship between net revenue and borrowing cost when state economic activity is considered. Based on a sample of 1,970 general obligations bonds issued across 20 years by U.S. counties, we test whether the association between net revenue and borrowing cost is conditioned on state economic activity. We provide evidence that a state’s economic activity moderates the association between net revenue and borrowing cost among county governments.