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

• In Event: Government Financial Reporting Issues

Abstract

We investigate the effects of economic activity on the association of changes in the general fund (i.e., net revenue) and municipal borrowing cost. Extant literature has established that net revenue is associated with municipal bond market metrics (e.g., true interest cost, net interest cost, bond yield spreads). Little is known, however, regarding the association with net revenue and borrowing cost when local economic activity is considered. Based on a sample of 1,970 general obligations bonds that were issued by U. S. counties before, during, and after the 2008 financial crisis, we test whether the association between net revenue and borrowing cost is conditioned on local economic activity. Overall, our findings provide evidence that managerial competence, as measured by net revenue, is evaluated more severely (i.e., high borrowing cost) when economic conditions are strong, and less severely when economic conditions are weak.

Authors

• Anna Hickey, U.S. Coast Guard Academy

• Jack W Dorminey, West Virginia University