Determinants of Municipal Bond Ratings for General-Purpose Governments: An Empirical Analysis

In the wake of the destabilization of the tax-exempt bond insurance industry, this paper presents an ordered probit model of the determinants of the credit ratings of 965 county and city governments from throughout the nation. The underlying Moody's rating of these governments is posited as a function of a vector of publicly available economic, demographic, governmental, fiscal, and financial variables. The empirical results demonstrate the relative importance of economic base diversity, the growth rates of earnings, and population as well as existing full faith and credit debt on credit ratings. Additionally, our findings support the proposition that the existence of tax limits reduce the perception of credit quality, while expenditure limits raise credit ratings.