The Influence of Accounting Information Disclosed under GASB Statement No. 34 on Municipal Bond Insurance Premiums and Credit Ratings

Abstract

This paper examines the impact of accounting information on first the cost of municipal bond insurance and secondly on the credit rating awarded on municipal debt, using data disclosed under Statement No. 34 of the Governmental Accounting Standards Board (GASB 34) for insured general obligation debt issued by Texas cities. It finds that both governmental fund and government‐wide financial information is related to the cost of municipal bond insurance and the credit rating on municipal debt. The paper also shows that the utilization of accounting information by bond insurers is not identical to its use by a bond rating agency.

Infrastructure Reporting and State Bond Ratings

“…The state bond rating model is based on the city bond rating model of Benson and Marks (, ) for Moody's bond ratings; however, modifications are necessary based on certain state‐level characteristics. First, real‐estate property taxes are not a primary source of funds for most states.…”

“…This variable measures the potential diversification and stability of the state which should lead to a higher bond rating. In Benson and Marks (, ), the variable that represents the wealth of the city was the value of taxable real‐estate property per capita. Since most states do not collect real‐estate property taxes, this variable is not included in the model.…”

“…Following this approach, we define Percentage of Revenues from Own Sources in a similar manner to Pridgen and Wilder () who used general revenue plus charges for services divided by total revenues from governmental activities. As in Benson and Marks (), total revenue from governmental activities is defined as general revenues before transfers, special and extraordinary items, and the sale of capital assets plus charges for services plus restricted operating grants and contributions plus restricted capital grants and contributions. Own revenue from governmental activities is defined as general revenues before transfers, special and extraordinary items, sale of capital assets, and unrestricted grants and contributions plus charges for services.…”

“…In the past 10 years several studies, Benson and Marks (, ), Johnson et al (), Martell et al (), Plummer et al (), and Pridgen and Wilder () have examined whether GASB Statement No. 34 and pension information has had its intended impact on municipal financial reporting and the users of the reported statements.…”

“…Previous studies of the bond ratings of state and local governments (Benson and Marks , ; Johnson et al ; Martell et al ; Plummer et al ; Pridgen and Wilder ) do not investigate whether bond rating agencies evaluate adopters of the modified approach differently than non‐adopters of the modified approach. We investigate this issue for state bond ratings.…”