Legislative Capacity and Credit Risk

Legislatures differ in their institutional capacity to draft and enact policy. While strong legislatures can increase the congruence of policy outcomes to the electorate's preferences, they can also inject uncertainty into markets with their ability to alter the political economic landscape. We argue that this uncertainty will manifest in a state's ability to borrow and hypothesize a negative relationship between legislative capacity and credit-worthiness. Using ratings of general obligation bonds issued by the American states over nearly two decades and data on the institutional capacity of state legislative assemblies, we find support for the claim that having a legislature that is better equipped to affect policy change increases credit risk evaluations. The results we present broaden our understanding of the importance of legislative institutions, the determinants of credit risk, and the economic implications of democratic responsiveness.

The Association between Compensated Absences Liabilities and Interest Cost on Public School Districts' General Obligation Bonds

SYNOPSIS In this study, I examine whether compensated absences liabilities are associated with interest cost on public school districts' general obligation bonds. This research question is motivated by the lack of transparency surrounding the accounting for compensated absences and by how the potential size of the liability can affect the government debt market. Using archival data, I analyze public school districts' bond issuance reports along with corresponding financial information. Separating the liability for compensated absences into the current and non-current portions due, I find a significant positive association between the current (but not the non-current) portion and interest cost. The results suggest that the debt market may be unsure about what is being reported as non-current. The amount may be considered too noisy a measure because of uncertainty tied to the quality of the numbers and/or thoughts that longer-term management decisions related to the liability can be altered.

Puerto Rican shutdown would increase default fears

Significance Puerto Rico is facing a severe fiscal crunch; its general obligation bonds are rated junk status and the government has said that a 2.9 billion dollar bond issuance -- at risk because of the congressional vote -- is required to prevent a shutdown in the next three months. Impacts There is little-to-no prospect of Puerto Rican statehood while Republicans control the US Congress. Puerto Rico would gain five representatives and two senators, likely to vote Democratic. However, this may encourage some Republicans to back federal intervention on debt, to ward off calls for statehood.