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Assessing Municipal Bond Default Probabilities

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  • Holian, Matthew
  • Joffe, Marc

Abstract

In response to a request from the California Debt and Investment Advisory Commission, we propose a model to estimate default probabilities for bonds issued by cities. The model can be used with financial data available in Comprehensive Annual Financial Reports that cities are required to publish. The study includes modeled default probability estimates for 261 California cities with population over 25,000. Our model relies on case study evidence, logistic regression analysis of major city financial statistics from the Great Depression – the last time a large number of cities defaulted – as well as logistic regression analysis of more recent city financial statistics. Independent variables in our model include (1) the ratio of interest and pension expenses to total revenue, (2) the annual change in total revenue, (3) the ratio of general fund surplus (or deficit) to general fund revenues and (4) the ratio of general fund balance to general fund expenditures.

Suggested Citation

  • Holian, Matthew & Joffe, Marc, 2013. "Assessing Municipal Bond Default Probabilities," MPRA Paper 46728, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:46728
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    File URL: https://mpra.ub.uni-muenchen.de/46728/1/MPRA_paper_46728.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jerch, Rhiannon & Kahn, Matthew E. & Lin, Gary C., 2023. "Local public finance dynamics and hurricane shocks," Journal of Urban Economics, Elsevier, vol. 134(C).
    2. Eymen Errais, 2019. "What Drives Municipalities Default Risk?," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(3), pages 49-57, March.
    3. Janda, Karel & Moreira, David, 2016. "Credit risk modelling: default probabilities for Portuguese municipalities," MPRA Paper 74561, University Library of Munich, Germany.
    4. Gorina, Evgenia & Joffe, Marc & Maher, Craig, 2018. "Using Fiscal Ratios to Predict Local Fiscal Distress," Working Papers 07776, George Mason University, Mercatus Center.
    5. Elena GORI & Silvia FISSI, 2014. "Scoring The Default Risk Of Local Authority," Journal of Public Administration, Finance and Law, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 5(5), pages 7-25, June.
    6. Siodla, James, 2020. "Debt and taxes: Fiscal strain and US city budgets during the Great Depression," Explorations in Economic History, Elsevier, vol. 76(C).

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    More about this item

    Keywords

    municipal bonds; municipal bankruptcy; default probability model;
    All these keywords.

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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