Factors Affecting A Municipalitys Bond Rating: An Empirical Study

Abstract

Creditworthiness, as reflected in bond ratings, is of great interest to municipalities since it directly affects the cost and ability to borrow money.  Municipalities experiencing a decline in their economic health will be especially concerned about how these developments will impact their future bond ratings.  It is well known that municipal analysts closely monitor a community’s economic health since this has an important impact on creditworthiness.  What is less well known however, are the economic variables that influence bond ratings.  The purpose of this paper is to identify these economic variables and estimate to what extent they influence the probability of a municipality’s default.  We do so by developing an econometric model of the rating process.  The model will allow municipal governments to gauge the impact of economic developments on their credit ratings.