State Bond Ratings Research Articles

The impact of public pension board of trustee composition on state bond ratings

The declining financial health of public pension systems is increasingly becoming a budgetary concern for many state and local governments. While the academic literature has identified several factors behind the growth in unfunded state and local public pension liabilities, there is mixed evidence on how the composition of a pension system’s board of trustees affects a pension’s financial health. This article contributes to this literature by measuring how public pension board composition affects fund financial health as measured by state bond ratings. With a panel dataset of state pensions between 2001 and 2014 our results indicate that elected board members are consistently associated with lower bond ratings (and thus higher borrowing costs) while appointed and ex-officio board members are associated with higher bond ratings. These results are robust to a number of specifications.

Growth-enhancing economic freedom

PurposeWe explore how economic freedom measurements can be used to guide policy.Design/methodology/approachWe propose a method for creating a growth-enhancing economic freedom index, which allows for nonlinearities and interaction effects between the components to economic freedom. We use this method to illustrate that US states differ in which policy area generates the greatest gains.FindingsTo validate the method presented, we apply our index to state bond markets. Financial market participants have the incentive to properly evaluate states’ policies. If our measurement is useful, then it should correlate with bond ratings. Consistent with this hypothesis, we present evidence that state bond ratings are strongly correlated with our growth-enhancing economic freedom index.Originality/valueIt has been well-established that economic freedom is associated with good economic outcomes. Economic freedom is comprised of numerous dimensions. Thus, the marginal benefit of improving policy in one area can be expected to depend on the amount of freedom in the other dimensions. Which policy improvement is most impactful depends on the entire menu of current policies and, therefore, differs between states. Our new method can then be used as a guide to determining for a particular state which policies can be expected to impact economic well-being the most.

Infrastructure Reporting and State Bond Ratings

Municipal governments are given the choice of two methods for reporting infrastructure assets, the depreciation approach and the modified approach. Using a model that simultaneously estimates a state's bond rating and a state's choice of the modified approach to reporting infrastructure, empirical tests suggest that bond rating agencies evaluate the government‐wide accounting information differently for states that adopt the modified approach compared to states that use depreciation accounting. The use of the modified approach may lead to either a higher or lower bond rating, depending on the level of other accounting measures.

Judicial Independence and US State Bond Ratings: An Empirical Investigation

Significant research has assessed how judicial independence influences a number of economic outcomes, however, less has been done to evaluate how financial institutions perceive an independent judiciary. Therefore, this paper considers how greater judicial independence across US states may affect state bond ratings. Overall, the results suggest that states with relatively more independent judiciaries do in fact have higher bond ratings, which translates into lower borrowing costs. The results are robust to a number of specifications and suggest the role that an independent judiciary plays in contract enforcement along with several other important implications for future research.

The Impact of Public Pension Board of Trustee Composition on State Bond Ratings

The declining financial health of public pension systems is increasingly becoming a budget concern for many state and local governments. While the academic literature has identified several factors behind the growth in unfunded state and local public pension liabilities, there is mixed evidence on how the composition of a pension system’s board of trustees affects a pension’s financial health. This article contributes to this literature by evaluating how differences in state public pension board composition affect state bond ratings. We argue that this provides an appropriate measure of the impact that boards of trustees have on the financial health of public pensions. With a panel dataset of state pensions between 2001 and 2014 our results indicate that outside (or elected) board members are consistently associated with lower bond ratings (and thus higher borrowing costs) while inside (or appointed and ex-officio) members are associated with higher bond ratings. These results are robust to a number of specifications.

Judicial Independence and US State Bond Ratings: An Empirical Investigation

Significant research has assessed how judicial independence influences a number of economic outcomes, however less has been done to evaluate how financial institutions perceive an independent judiciary. Therefore, this paper considers how greater judicial independence across US states may affect government bond ratings. Overall, the results would suggest that states with relatively more independent judiciaries do in fact have higher bond ratings, which translates into lower borrowing costs. The results are robust to a number of specifications and suggest the role that an independent judiciary plays in contract enforcement along with several other important implications for future research.

ECONOMIC FREEDOM AND STATE BOND RATINGS

Are state bond ratings, ceteris paribus, related to economic freedom? We test for the relationship between economic freedom and an aggregate index comprised of ratings by Standard & Poor, Moody's, and Fitch. We also test for a relationship between economic freedom and the ratings by these three agencies individually. With a sample covering all 50 states for the period 1995–2008, the evidence strongly indicates that state bond ratings are positively and significantly related to overall economic freedom as well as three sub‐categories of economic freedom. Our results show that the quantitative impact of economic freedom on bond ratings is comparable to the effect of state real income and the unemployment rate. (JEL E43, H71)

Economic freedom, the cost of public borrowing, and state bond ratings

PurposeThe purpose of this paper is to show that state economic policies, in addition to state economic performance, impact state bond ratings.Design/methodology/approachUsing a sample of 39 states over the period 1998‐2008, regression analysis is employed to determine whether various measures of economic freedom contribute to state bond ratings.FindingsAfter controlling for common factors such as state per‐capita income, unemployment, the ratio of tax revenue to income, state debt as a percentage of government revenue, and public corruption, results suggest that greater economic freedom is associated with higher bond ratings. For example, a one standard deviation increase in Area 2 of the Economic Freedom of North America index (Takings and Taxation) would be associated with a 0.36 increase in Moody's bond rating for that state, which translates to approximately a $247 lower cost per million dollars of debt.Originality/valueThis study contributes to the empirical state bond rating literature by highlighting that states with greater economic freedom have higher bond ratings and, therefore, pay lower borrowing costs than their counterparts with lower economic freedom index scores.

Economic Freedom and State Bond Ratings

We investigate the relationship between economic freedom and bond ratings at the state level by asking: Are state bond ratings, ceteris paribus, positively related to economic freedom? Using bounded Tobit we test for the relationship between economic freedom and an aggregate index comprised of ratings by SP tax burden; and labor market freedom). Our results show that the impact of economic freedom on bond ratings is comparable to the effect of state real income and the unemployment rate.

Legislative Term Limits and Fiscal Policy Performance

Do term limits impede the ability of legislators to effectively set fiscal policy? To address this question, I examine state bond ratings from 1996 to 2009. Bond ratings serve as a valuable indicator of a state's fiscal performance, gauging the risk and uncertainty that investors face when buying these bonds. In addition, bond ratings are important policy ends in themselves. High bond ratings make it easier for states to borrow and raise revenue, while lowering interest rates. Results from analyses of “Term‐Limitedness” and legislator experience suggest that term limits negatively impact a state's fiscal performance, leading to lower bond ratings.

Management Quality and State Bond Ratings: Exploring the Links between Public Management and Fiscal Outcomes

How and when does management matter for government performance? Focusing on the quality of core management systems, this study proposes that one way management contributes to government effectiveness is by facilitating access to low-cost credit. However, whether well-managed systems have greater access to low-cost debt compared to poorly managed organizations depends in part on prevailing conditions in the external environment. The study tests these propositions in the context of state governments' general obligation bond ratings. Results from the pooled Tobit models show that states with higher-quality management systems are rewarded with higher bond ratings. However, the positive effects of management on bond ratings are attenuated when the economy deteriorates or political uncertainties increase.

Management Practices and State Bond Ratings

One of the central claims of public administration is that management matters for the performance of public entities. Quantifying the impact of organizational management is thus central to the empirical evaluation of this claim. Utilizing novel features of the Government Performance Project (GPP), we assess the impact of state-level management practices on the credit quality of US states. The central challenge—that both the GPP data and bond ratings take the form of ordinal grades—suggests a common solution utilizing multiple indicators of a latent construct (management capacity and credit quality) with appropriate measurement models. After describing the characteristics of the measurement approach, we derive management capacity scores from the GPP data and credit quality scores using bond ratings from the three rating agencies. These derived scores then allow us to test linkages between credit quality of the US states and broad aspects of their relative management capacity. On the whole, we show that financial management capacity influences credit quality, while the evidence is less clear that other forms of management capacity matter.

Management Capacity and State Municipal Bond Ratings

Most state governments issue general obligation (GO) bonds in the financial market to borrow money. Assigned by credit agencies, state GO bond ratings reflect states’ perceived credit quality and affect their borrowing costs. Despite many studies on the determinants of municipal bond ratings, little has been known about the association between state management capacity and bond ratings because management capacity is generally difficult to quantify. However, state governments’ performance grades assigned by the Government Performance Project (GPP) provide a great opportunity to study how people perceive and respond to state governments’ management capacity. This study finds that states with higher GPP grades tend to have higher state GO bond ratings, but the relationship may be nonlinear as people are more sensitive to the extremes of perceived performance. In particular, we observe a “performance premium” scenario in which S&P bond ratings grow at an increasing rate as state GPP grades improve.

Divided Government, Political Turnover, and State Bond Ratings

Credit markets face an inherent risk that derives from future policy changes when considering the purchase of debt issued by state governments. An enacting government coalition issuing long-term debt cannot make a credible commitment to maintain the existing debt repayment policy into the future. In the face of this commitment problem, investors (and the rating agencies that serve those investors) look to recent political turnover and the existence of divided government to estimate the possibility that some future government coalition will remain substantially similar to the enacting coalition. Political turnover and divided government suggest to the credit markets that future coalitions may act opportunistically regarding debt repayment. This risk of opportunistic behavior, we argue, manifests in lower ratings of state debt. We empirically examine this claim in a model of state bond ratings from 1995 through 2000.

Fiscal consequences of public corruption: Empirical evidence from state bond ratings

Empirical analyses of public corruption focus predominantly on international differences; regional differences in public corruption within a single country receive little attention. We empirically investigate the effect of public corruption in the United States on state bond ratings, which previous research shows are inversely related to net interest costs on public debt. After controlling for various economic influences on bond ratings, we find that more corrupt states have lower bond ratings, which implies that taxpayers in more corrupt states face a negative pecuniary externality by paying a premium for debt.

Rank order analysis of state general obligation bond ratings

This study extends research which suggests the possibility that different economic variables might have been emphasized by Moody’s in establishing state bond ratings. The objectives and the scope of the earlier study preclude formal testing, and the Scheffe test is not the proper statistical tool to investigate the issue. This study uses rank order analysis to conduct a formal test. It confirms the existence of regionalization in state bond ratings. It finds statistical evidence that beginning in the early 1970s different economic variables were emphasized in establishing the ratings. The change in economic variables coincides with the administrative change in Moody’s in 1972.