© 2014 Public Financial Publications, Inc.

The Influence of Accounting Information

Disclosed under GASB Statement No. 34 on
Municipal Bond Insurance Premiums and
Credit Ratings
EARL D. BENSON AND BARRY R. MARKS

This paper examines the impact of accounting information on first the cost of
municipal bond insurance and secondly on the credit rating awarded on municipal
debt, using data disclosed under Statement No. 34 of the Governmental
Accounting Standards Board (GASB 34) for insured general obligation debt
issued by Texas cities. It finds that both governmental fund and government-wide
financial information is related to the cost of municipal bond insurance and the
credit rating on municipal debt. The paper also shows that the utilization of
accounting information by bond insurers is not identical to its use by a bond rating
agency.

INTRODUCTION

The implementation of Statement No. 34 of the Governmental Accounting Standards Board

(GASB 34), Basic Financial Statements—and Management’s Discussion and Analysis—for
State and Local Government (GASB 1999) changed the financial landscape for municipalities by
requiring the preparation of two new government-wide statements, Statement of Net Assets and
Statement of Activities. Also, governments were required to disclose for the first time

Earl D. Benson is Professor of Finance, Western Washington University, 516 High Street, Bellingham, WA
98225-9073. He can be reached at earl.benson@wwu.edu.
Barry R. Marks is Professor of Accounting, University of Houston-Clear Lake, 2700 Bay Area Blvd., Houston, TX
77058. He can be reached at marks@uhcl.edu.

Benson and Marks / The Influence of Accounting Information Disclosed 63

information about the cost of infrastructure assets, such as roads and bridges.1 One motivation
behind the implementation of GASB 34 was that it would provide valuable information about
interperiod equity to the users of financial information—including investors and creditors. The
purpose of this paper is to examine whether this newly provided accounting information (in the
presence of the old information) is impacting the decisions made by bond insurers and bond
rating agencies who are both part of the investors and creditors group in Concept Statement No. 1
of the Governmental Accounting Standards Board (GASB 1987). The direct question under
examination is whether the new financial information reported under the new GASB 34
standards is related to bond insurance premiums (to date this has not been investigated) and
credit ratings, thus supporting the original claims of the GASB.
Another purpose of this paper is to investigate whether bond insurers utilize the same
accounting information as a bond rating agency. Unlike ultimate investors who have access only
to public information, bond insurers and bond rating agencies have access to private information
about the bond issuer and both are paid by the bond issuer for their services. However, the impact
of an error in judgment regarding credit quality is different for each. If a bond rating agency
makes an incorrect rating decision, then the bond rating agency’s reputation is diminished by this
error, but there is no direct financial consequence. However, if a bond insurer makes a bad
decision about a bond issue, the bond insurer may be required to pay bond investors the unpaid
debt service payments. Hence, bond insurers may utilize accounting information differently than
bond rating agencies.
The findings of this study are that two accounting variables derived from new accounting
information provided in the Statement of Net Assets are significant in determining insurance
premiums charged for municipal bond insurance and bond ratings, even in the presence of old
accounting information from the governmental funds statements. However, a financial
performance measure derived from the Statement of Activities is not significant in explaining
either municipal bond insurance premiums or credit ratings. Further, the utilization of
accounting information by bond insurers is not identical to its use by rating agencies.
Municipalities who are impacted by Statement No. 70 of the Governmental Accounting
Standards Board (GASB 70), Accounting and Financial Reporting for Nonexchange Financial
Guarantees (GASB 2013)—should, therefore, look beyond bond ratings in determining the
value of their guarantees to component units, other governments, not-for-profits, and individuals.

1. GASB 34 required state and local governments to prepare, for the first time, government-wide statements on an
accrual basis with an economic resources measurement focus. Previously, municipalities were only required to
present information about governmental activities on the modified accrual basis with a current financial resources
measurement focus. Under GASB 34, state and local governments are now required to prepare two additional
financial statements, a Statement of Net Assets and a Statement of Activities. The Statement of Net Assets includes all
assets including all long-term assets and long-term liabilities. The Statement of Activities contains revenue and
expenses based upon the accrual basis, while for governmental funds the Statement of Revenues, Expenditures, and
Changes in Fund Balances contains revenues and expenditures based upon the modified accrual basis. For instance
under the modified accrual basis, revenues must be both measurable and available for recognition, while under the
accrual basis revenues do not need to be available for recognition. Opponents contended that the additional
statements would be too costly to prepare relative to the limited usefulness of the additional information.

64 Public Budgeting & Finance / Summer 2014

 Immediately following this paragraph is a review of recent literature that looks at the
determinants of insurance premiums and municipal credit ratings. The next section of the paper
describes the methodology, variables, and data used in the paper. The subsequent section
presents the empirical findings of the study. The paper concludes with a summary and discussion
of the implications of the findings.

LITERATURE REVIEW

Insurance Premiums
Only recently have studies examined the determinants of the size of municipal debt insurance
premiums.2 In a comprehensive study of municipal insurance premiums of Texas city GO bonds
(issued from September 2004 to August 2008), Benson and Marks (2011) state that the insurance
premiums paid by municipalities to insure their new debt issues may be viewed as a function of
the expected claim cost, risk to the insuring company, insurance company administrative
expenses, and profit. The study’s empirical findings suggest that factors that lower risk (such as a
higher population) lead to lower insurance premiums, and factors that increase risk (such as
longer maturity, higher municipal market risk spreads, and lower credit ratings) lead to higher
insurance premiums. Also, larger bond issues had lower premiums, while higher premiums are
associated with the established insurers, compared to the newer ones.
In a study of California municipal bond insurance premiums (for bonds issued from 2001
through 2005), Liu (2012) finds the size of premiums helps explain future rating downgrades (but
not upgrades). He says that bond insurers provide a valuable service to financial markets because
they are more knowledgeable about bonds’ credit risk than are the rating agencies. For lower
quality issues they have more incentive to dig deeper to collect information and bargain for
higher premiums. The same incentive is not there for higher quality issues.
Using non-school Texas issues from 2000 to 2009, Ely (2012) examines the impact of the
financial crisis that began in late 2007 on debt insurance premiums. He finds that issue purpose
affects the size of the bond insurance premium, and that post-crisis premiums were 80 percent
higher than pre-crisis premiums due to the increase in credit risk and reduction in competition
among insurers (with one insurer, Assured Guaranty Ltd., dominating the market).

2. Many studies of municipal bond insurance do not look at insurance premiums. They focus on either public
insurance offered by individual states or private municipal insurance, offered by companies such as AMBAC or
MBIA. Studies by Bland and Yu (1988), Hsueh and Kidwell (1988), and Clarke and Bland (2003) suggest that public
bond issue “guarantee” programs significantly lower interest costs for issuers. The studies that examine the
theoretical justification for private municipal bond insurance (which was introduced in the 1970s) include Joehnk
and Kidwell (1978), Quigley and Rubinfeld (1991), and Justice and Simon (2002). Several studies that look at effects
on interest cost, including Cole and Officer (1981), Kidwell, Sorensen, and Wachowicz (1987), and Bland and Yu
(1987), suggest that lower-rated bond issues may realize a significant benefit from insurance. Additional studies,
including Bland and Yu (1987), Fairchild and Koch (1998), and Benson (1999), have found that insured issues
(which have traditionally been given a Aaa rating by the rating agencies) sell at substantially higher interest costs
(yields) than “natural” Aaa issues.

Benson and Marks / The Influence of Accounting Information Disclosed 65

The Impact of Accounting Information on Municipal Credit Ratings
Studies that investigate the influence of accounting information on municipal ratings go back
more than 30 years. These studies typically use a set of demographic (or socioeconomic)
variables along with finance- and accounting-related variables to examine the impact on ratings.
The demographic variables such as population, per capita income, and geographic location are
used as control variables in the models. The finance-related variables include measures like
total debt, short-term debt, long-term debt, interest, or debt-service payments, assessed
valuation of taxable properties, uncollected taxes, revenue from own sources, and pension
obligations. The accounting-related variables include measures of revenue (such as total
revenue, tax collections, federal/state aid, and revenue mix), expenditures (such as general
expenditures, payroll, welfare payments, and vital expenditures), revenue surplus (deficit),
conformance to accounting standards, recipient of a certificate of accounting compliance,
measures of audit quality, and changes in any of these variables. The finance and accounting
variables are usually divided by population or total revenues to make them comparable across
the municipalities being studied.
Beginning in the 1980s, researchers used either ordered logit or ordered probit to test for the
impact of specific accounting variables on bond ratings. This research includes Wallace (1981),
Wilson and Howard (1984), Plummer, Hutchison, and Patton (2007), and Johnson, Kioko, and
Hildreth (2012).3
In the first study of accounting variables since implementation of GASB 34, Plummer,
Hutchison, and Patton (2007) examine 512 Texas school districts using data for fiscal year 2002.
(The Texas Education Agency ordered all school districts in Texas to implement GASB 34 in
fiscal year 2002 regardless of size.) They use several demographic and finance control variables
(including debt to assessed value and percentage of self-generated revenues). They find that an
accounting variable calculated from the new, accrual-based, government-wide Statement of Net
Assets (the municipality’s financial position calculated as total net assets to total revenues) leads
to a higher bond rating. However, current liabilities do not impact credit ratings. They find that a
financial performance variable derived from the Statement of Activities (total revenues less total
expenses divided by total revenue) does not affect credit ratings. Looking at the components of
net assets (in place of total net assets) from the Statement of Net Assets, they discover that three
categories are significant determinants of bond rating: First, invested in capital assets, net of
related debt; secondly net assets restricted for other purposes than debt service; and thirdly
unrestricted net assets (all three divided by total revenues). Higher values of each lead to a higher
bond rating.

3. Looking at 106 Florida GO and revenue bonds issued from 1974 to 1976, Wallace (1981) found that two
auditing variables, use of a Big 15 CPA firm and receipt of an unqualified statement opinion, lead to significantly
higher bond ratings. In a more extensive study, Wilson and Howard (1984) examine the determinants of Moody’s
bond ratings for a sample limited to GO bonds of 350 U.S. cities and counties issued from 1978 to 1981. For their
accounting variables, they find that a larger general fund balance leads to a higher rating and the existence of a
general fund deficit leads to a lower rating. For the auditing variables the use of a national auditor or government
auditor, the timeliness of reporting, and the absence of a significant qualification all lead to higher debt ratings.

66 Public Budgeting & Finance / Summer 2014

 Finally, they test variables from modified-accrual fund statements corresponding to the
financial position, financial performance, and current liabilities variables mentioned above. The
results turn out opposite of what is reported for the government-wide statements. The financial
position variable (calculated as total fund balance to total fund revenues) is not a very significant
factor in determining bond rating. But, a financial performance variable (total fund revenues less
expenditures, divided by total fund revenues) and a governmental funds balance sheet variable
(current liabilities defined as total fund liabilities divided by total fund revenues) do significantly
impact credit ratings. In sum, the financial position variable (total assets and sub-categories of
assets) from the Statement of Net Assets provides significant, additional information, compared
to the similar variable from the modified-accrual fund statements. However, the financial
performance and current liabilities variables from the government-wide statements do not.
Johnson, Kioko, and Hildreth (2012) examine the relationship between government-wide
statement information and bond ratings for state GO debt without controlling for the impact of
information from the governmental fund statements. Their sample consists of states that
prepared their statements under GASB 34 for fiscal years 2002 through 2005. They discover that
bond ratings are related to the following accounting-related variables: First, own source general
revenue per capita, secondly total primary government unrestricted net assets divided by total
primary government expenses, thirdly total primary government general revenue divided by
total primary government operating revenue, and fourthly program revenue from business-type
activities divided by total primary government expenses. One issue that arises when
investigating the bond ratings for GO debt of general purpose governments is that the GO
debt may be directly related to and expected to be repaid from business-type activities, instead of
governmental activities. Since Johnson, Kioko, and Hildreth (2012) use total long-term full faith
and credit debt outstanding per capita, they examine accounting variables that include
information from both governmental activities and business-type activities. However, they do
not find any relationship between total long-term full faith and credit debt outstanding per capita
and bond rating.

METHODOLOGY, VARIABLES, AND DATA

This paper examines insured bonds that are new issues of Texas cities rather than bonds from
Texas school districts as used by Plummer, Hutchison, and Patton (2007). The first reason for the
focus on cities, is that one of the improvements in financial reporting under GASB 34 was the
required disclosure of information about infrastructure assets.4 Since school districts own few, if
any, roads and bridges, the reporting of infrastructure assets should have minimal impact on their
change in assets, especially when compared to cities. Second, the “Robin Hood” state aid system
existed during the period of the study by Plummer, Hutchison, and Patton (2007). This system
used property wealth to determine the amount of state aid and in some cases required the

4. Prior to GASB 34, the cost of other long-lived assets and long-term liabilities was disclosed in the notes to the
financial statements.

Benson and Marks / The Influence of Accounting Information Disclosed 67

wealthiest school districts to help finance the less wealthy school districts in the state. This
unique financing system for school districts in Texas may yield a different (and biased)
relationship between underlying bond ratings and accounting information for school districts
compared to Texas cities.

Methodology: Insurance Premium Model

The landscape for municipal debt insurance changed dramatically during the financial crisis, due
primarily to the aggressive moves by municipal debt insurers into the insurance market for real
estate-based collateralized debt obligations. Companies like AMBAC and MBIA exited the
municipal debt insurance market after incurring sizeable losses, leaving Assured Guaranty LTD
as the only private bond insurer.5 Recently a new insurer, Build America Mutual Insurance
Company, has entered the insurance market (in the first quarter of 2013 they insured 188 new
issues), bringing back some level of competition to the market for private municipal debt
insurance. Thus, our understanding of the factors that lead to lower bond insurance premiums is
very relevant as the market for this insurance is rebuilt.
Based on the work of Benson and Marks (2011) and Ely (2012), this paper develops a model
to explain insurance premiums using a set of explanatory variables that are surrogates for the risk
faced by an insurance company that they will have to pay some portion of the debt service of a
bond issue. Bond insurers have the same access to private information from bond issuers as bond
rating agencies. Therefore, bond insurers do not have to rely on bond ratings to assess default
risk. In fact, Assured Guaranty Ltd. stated (in its 2012 Securities and Exchange Commission
Form 10-K) that its underwriting process starts with the analysis of the municipality’s financial
statements. We use the set of explanatory variables used by Benson and Marks (2011), except we
substitute some other variables, including accounting variables, for the underlying bond rating.
Since one of our objectives is to compare our results with the findings from Plummer, Hutchison,
and Patton (2007), we chose our accounting variables in a similar manner, rather than following
the approach of Johnson, Kioko, and Hildreth (2012). The intention here is to test whether the
accounting variables from the government-wide statements for city governments contribute to
the explanation of insurance premiums, even in the presence of governmental funds information.
The basic linear regression model used to examine the impact of these variables on municipal
insurance premiums is:

LnPremi ¼ b0 þ b1 LnAmtInsi þ b2 LnMati þ b3 TypeSalei þ b4 MultIssuei þ b5 Callablei

þ b6 LnPopi þ b7 AsesdValPCi þ b8 BondInsureri þ b9 Downgradei
þ b10 LnBaa-AaaYldi þ b11 DebtToAVi þ b12 GFOACertif i þ b13 FundLiabToAVi
þ b14 FundBalPCi þ b15 Rev-ExpendPCi þ ei :
ð1Þ

5. The Assured Guaranty Ltd. Form 10-K for fiscal year ending December 31, 2012, states that Assured Guaranty
Ltd., insured new municipal bonds with a total par value of $13.2 billion in 2012.

68 Public Budgeting & Finance / Summer 2014

 The variables used are defined in Table 1. An expanded model is then used to examine the
influence of government-wide statement accounting variables and is added as:

þ b16 UnrestrNetAsPCi þ b17 NAInvInCapPCi þ b18 NARestrDebtPCi þ b19 NARestrOtherPCi

þ b20 Rev-ExpensPCi

TABLE 1
Variable Definitions
Variable name Definition of variable
Premium Bond insurance premium in dollars per thousand dollars of bond issue
LnPrem Natural logarithm of Premium
AmtInsured Dollar amount of bonds insured (in millions)
LnAmtIns Natural logarithm of AmtInsured
Maturity Longest maturity of a bond in the bond issue (in years)
LnMat Natural logarithm of Maturity
TypeSale Binary variable, 1 if competitive sale and 0 if negotiated sale
MultIssue Binary variable, 1 if official statement contained multiple bond issues, otherwise 0
Callable Binary variable, 1 if the bond is callable, otherwise 0
Population Population of the city (in thousands)
LnPop Natural logarithm of the Population
AsesdValPC Assessed value of taxable property per capita
BondInsurer Binary variable, 1 if bond insurer is AMBAC, MBIA, or FSA, otherwise 0
Downgrade Binary variable, 1 if the official statement date was after the first bond insurer was
downgraded by a bond rating agency on January 24, 2008, otherwise 0
Baa-AaaYld Yield on a Baa rated bond minus the yield on a Aaa (pure) rated bond using 30-yr
GO bonds from the Bond Buyer on the official statement date (in basis points)
LnBaa-AaaYld Natural logarithm of Baa-AaaYld
DebtToAV Net GO debt divided by assessed value of taxable property (in thousands)
GFOACertif Binary variable, 1 if the city has a Government Finance Officers Association
(GFOA) Certificate of Achievement for Excellence in Financial Reporting,
otherwise 0
FundLiabToAV Total governmental fund liabilities divided by assessed value of taxable property (in
thousands)
FundBalPC Total governmental fund balance per capita
Rev-ExpendPC Revenues minus expenditures per capita
UnrestrNetAsPC Unrestricted net assets per capita
NAInvInCapPC Net assets invested in capital assets less related debt per capita
NARestrDebtPC Net assets restricted for debt service per capita
NARestrOtherPC Net assets restricted for purposes other than debt service per capita
Rev-ExpensPC Revenues minus expenses per capita
Moody Moody’s bond rating, ordinal, values from 1 to 10 for Aaa through Baa3

Benson and Marks / The Influence of Accounting Information Disclosed 69

 The dependent variable, LnPrem, is the natural log of the actual bond insurance premium
divided by the amount of bonds insured. The premium must be scaled by using the amount of
bonds insured so that premiums are comparable across all issues. Municipal bond insurers do not
disclose the premiums charged to municipalities to insure their bonds. Plus, these premiums are
not disclosed in the official statement available to potential investors at the time of sale.
However, the State of Texas has now created a unique municipal bond database that includes the
insurance premium paid by Texas issuers of municipal debt.

Independent Variables: Non-Accounting

Several variables reflect attributes of the bond issue. LnAmtIns is the natural log of the dollar
amount of bonds insured. It is expected that the dollar amount insured may reflect scale
economies for the insurance companies and also reflects some of the risk of insuring the issue
since large issues tend to come from larger, more diversified municipalities. Thus, the premium
should fall as LnAmtIns rises. LnMat is defined as the natural log of the longest maturity of any
bond in the bond issue in years. This variable reflects part of the risk to the insurance company of
insuring the bond issue, where the longer the maturity the more time there is for trouble to occur,
implying greater risk. TypeSale is a binary variable reflecting bonds that were sold via a
competitive sale “1” versus a negotiated sale “0.” Competitive sales are expected to have lower
insurance premiums because competitive bond issuers normally have more experience in issuing
municipal bonds than negotiated bond issuers. MultIssue is another binary variable defined as
“1” if the official statement contained multiple bond issues. Frequently, the official statement
will contain both GO bonds and revenue bonds. The presence of multiple bond issues may reduce
the cost to the insurer (assuming the same company insures both issues) because it can spread
some of its underwriting costs over the two issues. Also, even if the same bond insurer does not
insure all bonds listed in the official statement, the competition between insurers may lower the
cost. If the bond issue contains callable bonds, then Callable is equal to “1,” otherwise it is “0.”
The callable bonds have the longest maturities so being callable reduces the expected life (or
maturity) of the bond issue, thus, reducing the potential risk to the insurer.
The demographic variable, LnPop, is the natural log of the population of the bond issuer. This
variable reflects the potential diversification and stability of the municipality and a larger
resource base available to make a bond issue’s debt service payments. A more pure measure of
debt capacity is the finance variable, AsesdValPC, the assessed value of taxable property per
capita. The Property Tax Division of the Office of the Comptroller of the State of Texas monitors
the assessment of the value of real estate throughout the State of Texas to ensure that the
assessment process is the same throughout the State.
The binary variable BondInsurer is coded as “1” if the bond insurer is one of the top three
firms, measured by the dollar value of insured debt. These are the older, established firms that
have been in business for more than 20 years, including Financial Security Assurance Inc. (FSA),
Municipal Bond Investors Assurance Insurance Corporation (MBIA), and American Municipal
Bond Assurance Corporation (AMBAC), with a 75 percent market share between them.
BondInsurer is “0” if the bond insurer is Financial Guarantee Insurance Company (FGIC), XL

70 Public Budgeting & Finance / Summer 2014

Capital Insurance Assurance/XL Financial Assurance (XLCA) (now Syncora Guarantee Inc.),
CDC IXIS Financial Guaranty (CIFG), or Assured Guaranty Corporation (AGC). FGIC is
included in the latter group because it had a smaller market share and was becoming active in
new market segments in the mid-2000s. Smith et al. (2006) referred to these four firms as new
serious competitors in the municipal bond insurance market. BondInsurer is included to reflect
potential competitive factors among bond insurers, where the expectation is that insurance
premiums may be higher for the more established insurers that have a larger share of the market.
The expectation is that insurance premiums are lower for the newcomers and firms with much
lower market share because they will be trying to become established and/or gain market share.
During most of the sample period the private municipal bond insurance market was quite
competitive; however, the last few months of the period saw rapid downgrades in the credit
rating of the insurers due to the financial crisis. The variable Downgrade is a binary variable
coded as “1” if the official statement was issued after January 24, 2008, the date of the first
downgrade of a bond insurer by a bond rating agency. Brune and Liu (2011) chose this as the first
major event date in their study of the impact of the downgrading of bond insurers on municipal
yields during the financial crisis. When a bond rating for a major bond insurer drops below the
highest rating category, most bond issuers selected as their bond insurer one of the other bond
insurers with the highest rating. The expectation is that this reduces competition in the bond
insurance market, leading to higher bond insurance premiums. During the period of this study,
two bond insurers, FSA and AGC, maintained the highest rating by Moody’s. The insurer for
each bond in our study was rated Aaa by Moody’s on the official statement date.
LnBaa-AaaYld is the natural log of the risk premium differential between Baa-rated and Aaa-
rated bond issues at the time of sale. More precisely, it is the 30-year GO bond yield on Baa-rated
bonds minus the yield on natural Aaa-rated bonds (natural meaning not insured) from the Bond
Buyer on the official statement date. This variable reflects the potential benefit to the
municipality of having their bonds insured, where the potential benefit is greater the larger is the
risk premium. If the risk premium was zero, bond issuers would receive no benefit from buying
insurance. It reflects risk as implied by bond investors, where a high risk premium says that
investors see a lot more risk (primarily default risk) in investing in lower-rated bond issues than
is inherent in highly rated issues, and measures the level of risk aversion that is inherent in the
market at the time of sale. In terms of the insurer, they will charge higher insurance premiums
when the risk premium in the market is higher because of the higher implied risk of default of the
issuers and the higher demand for insurance from the bond issuers.
The finance variable, DebtToAV, is a measure of GO debt outstanding and is measured as net
GO debt to the assessed value of taxable property. Net GO debt outstanding is taken from the
official statement. Net GO debt outstanding is total GO debt outstanding minus any self-
supporting GO debt. According to GASB Codification paragraph 1500.102 (GASB 2011), the
pledging of the full faith and credit of the government is just a further assurance to the bond
investors that they will be paid the principal and interest on self-supporting bonds when due. For
this reason, we only take our accounting information from the governmental activities column of
the government-wide statements rather from the total primary government column. A
municipality’s bond insurance premium should increase as DebtToAV increases.

Benson and Marks / The Influence of Accounting Information Disclosed 71

Independent Variables: Accounting
The accounting variables in the insurance premium model are those that have been shown to be
important determinants of bond ratings in previous studies. We divide them into basic model
accounting variables, those that are well tested—giving researchers a high level of confidence,
and expanded model accounting variables, those that we would like to test further and come from
the new government-wide statements.
The basic model variables are GFOACertif, FundLiabToAV, FundBalPC, and Rev-
ExpendPC. GFOACertif is binary variable indicating whether a city holds a GFOA Certificate of
Achievement for Excellence in Financial Reporting. The expectation is that holder of the
certificate would have lower insurance premiums because the obtaining of the certificate signals
high-quality management (Evans and Patton 1983). The remaining basic model variables are
taken from the total governmental fund column of the city’s governmental funds statements that
are prepared on a modified accrual basis. (Plummer, Hutchison, and Patton (2007) also selected
information from the total governmental fund column.) A measure of the city’s current liabilities
is FundLiabToAV, or total governmental fund liabilities to the assessed value of taxable
property. As this measure increases, so should the bond insurance premium. FundBalPC is the
total governmental fund balance per capita. Since a higher fund balance indicates a better
financial position, a higher FundBalPC should be associated with a lower insurance premium.
The final basic model accounting variable is Rev-ExpendPC. This financial performance
variable is total revenues minus total expenditures per capita from the modified accrual financial
statements. Like Plummer, Hutchison, and Patton (2007), we exclude other financing sources
and uses of funds which includes transfers, special items, and extraordinary items. We normally
would expect that the higher this variable, the lower the bond insurance premium. However,
Plummer, Hutchison, and Patton (2007) suggest that this variable may be a measure of budget
imbalance. The findings of Plummer, Hutchison, and Patton (2007) may be the result of the
Robin Hood system of financing for Texas school districts. Under the Robin Hood system, the
wealthier the school district, the lower the amount of funding received from the state. For
the extremely wealthy school districts, they actually have to provide financial assistance to the
state to fund other school districts. Benson and Marks (2005) showed that the borrowing costs for
insured Texas school district GO bonds differed from the borrowing costs for insured non-Texas
school district GO bonds after controlling for the underlying credit rating of the issuer. Since
Texas cities do not receive direct funding from the State of Texas based upon their wealth and
wealthy cities are not required to send funds directly to the state, we anticipate that our findings
will differ from Plummer, Hutchison, and Patton (2007).
The expanded model accounting variables are UnrestrNetAsPC, NAInvInCapPC, NAR-
estrDebtPC, NARestrOtherPC, and Rev-ExpensPC. These variables are taken from the
governmental activities column of the government-wide financial statements. The first four
categories of variables look at the subcategories of net assets that are in the Statement of Net
Assets. The larger are unrestricted net assets (UnrestrNetAsPC) and invested in capital
(NAInvInCapPC) per capita, the lower would be the expected insurance premium because these
items suggest a better financial position for the city. However, the impact of restricted net assets

72 Public Budgeting & Finance / Summer 2014

for debt (NARestrDebtPC) and for other purposes than debt service (NARestrOtherPC) per
capita is not clear (Plummer, Hutchison, and Patton 2007). A higher level of restricted net assets
for debt (NARestrDebtPC) indicates that more funds are set aside to repay the city’s debt;
however, the higher level may also be due to restrictions placed by bondholders on the city due to
its current fiscal condition. Frequently, the largest portion of restricted net assets for other
purposes (NARestrOtherPC) comes from funds restricted for capital projects, and in some cases,
it consists entirely of funds restricted for capital projects. Capital projects sometimes are
implemented to increase services to residents of the city rather than increase revenue or decrease
expenses; hence, the completion of these capital projects may raise a city’s expenses in the future
and, therefore, not help it repay its debt. Finally, the financial performance variable defined as
revenues minus expenses per capita (Rev-ExpensPC) from the government-wide Statement of
Activities is tested to see if it adds to the model over and above revenues minus expenditures per
capita from the modified accrual financial statements that is in the basic model. This added
variable excludes transfers, special items, and extraordinary items.
Some of the variables in this study are measured using population or assessed value of taxable
property in the denominator, rather than using total revenue as the divisor as in Plummer, Hutchison,
and Patton (2007). The accounting variables from the governmental funds statements follow the
modified accrual basis of accounting, and the accounting variables from the government-wide
statements follow the accrual basis of accounting. If we chose to scale by revenue, we would have
one measure for revenue from the governmental funds and another measure of revenue from the
government-wide statements. Population or assessed value of taxable property provides us with the
same denominator regardless of the source of the variables used in the numerator.

Bond Rating Model: Methodology

The bond ratings model is developed from all the previous research on the determinants of
municipal bond ratings but is primarily based on the specific research of Wallace (1981), Wilson
and Howard (1984), and Plummer, Hutchison, and Patton (2007), all of whom used similar
models. We estimate the bond rating model using ordered logit as did Plummer, Hutchison, and
Patton (2007). We use the following model as the base model of the determinants of bond ratings:

Moodyi ¼ f ðb1 LnPopi þ b2 AsesdValPCi þ b3 DebtToAVi þ b4 GFOACertif i

þ b5 FundLiabToAVi þ b6 FundBalPCi þ b7 Rev-ExpendPCi Þ; ð2Þ

where the dependent variable, Moodyi, is an ordinal variable as defined in Panel C of Table 2.
This model includes the demographic and finance variables from the insurance premium model
and the four accounting variables that are in the basic model. Similar to what was done for the
insurance premium model, we next create an expanded model in order to examine the influence
of five added government-wide statement accounting variables:

þ b8 UnrestrNetAsPCi þ b9 NAInvInCapPCi þ b10 NARestrDebtPCi þ b11 NARestrOtherPCi

þ b12 Rev-ExpensPCi

Benson and Marks / The Influence of Accounting Information Disclosed 73

 TABLE 2
Summary Statistics (274 Observations)
Mean Median SD Minimum Maximum

Panel A: Continuous variables

Premium 3.695 3.174 1.981 1.094 15.426
LnPrem 1.191 1.155 0.469 0.090 2.736
AmtInsured 14.361 8.640 18.138 0.695 152.190
LnAmtIns 2.200 2.156 0.942 0.3638 5.0251
Maturity 17.902 19.583 4.285 4.792 30
LnMat 2.845 2.975 0.312 1.567 3.401
Population 84.647 57.878 107.499 1.885 720.522
LnPop 3.955 4.058 1.015 0.634 6.580
AsesdValPC 56991 50990 28707 17203 225656
Baa-AaaYld 48.215 49.000 12.955 31.000 93.000
LnBaa-AaaYld 3.845 3.892 0.241 3.434 4.533
DebtToAV 20.782 18.791 10.392 2.932 55.733
FundLiabToAV 2.675 1.922 2.103 0.150 15.470
FundBalPC 620.05 498.17 414.31 47.690 2763.02
Rev-ExpendPC 137.84 101.57 183.42 1145.71 490.05
UnrestrNetAsPC 253.69 208.02 233.05 1033.58 1352.40
NAInvInCapPC 1262.36 944.21 1292.84 1289.54 7941.36
NARestrDebtPC 39.31 19.23 69.20 5.24 555.31
NARestrOtherPC 109.11 46.62 220.42 0 2730.10
Rev-ExpensPC 105.17 73.90 171.47 453.31 965.07

Number of nonzero observations % of Total sample

Panel B: Binary variables

TypeSale 81 29.56
MultIssue 128 46.72
Callable 255 93.07
BondInsurer 197 71.90
Downgrade 15 5.47
GFOACertif 235 85.77
Moody’s rating Value Number of observations % of Total sample

Panel C: Ordinal variable

Aaa 1 0 0.00
Aa1 2 3 1.09
Aa2 3 19 6.93
Aa3 4 96 35.04
A1 5 60 21.90
A2 6 54 19.71
A3 7 23 8.39
Baa1 8 9 3.28
Baa2 9 10 3.65
Baa3 10 0 0.00

74 Public Budgeting & Finance / Summer 2014

Data
The data for this study come from several sources. Bond issue, demographic, and financial
information for LnMat, MultIssue, Callable, Moody, LnPop, AsesdValPC, DebtToAV, and all
the accounting information came from the official statements of the bond issuers, except for
GFOACertif. The official statements contain only excerpts from the comprehensive annual
financial reports of the bond issuer. In some cases, the introductory section of the comprehensive
annual financial report is not included in the official statement. In these cases, the GFOA
provided us with the missing information. LnPrem, LnAmtIns, BondInsurer, and Typesale were
calculated from data provided by the Texas Bond Review Board. Information from the Bond
Buyer was used to determine Downgrade and LnBaa-AaaYld.
One of the responsibilities of the Texas Bond Review Board (2003) is to report the issuance of
public debt by local governments in Texas. Their reports are based on the fiscal year of the State
of Texas. The fiscal year of the State of Texas starts on September 1 and ends on August 31 of the
following year. The fiscal year ending on August 31, 2005 is referred to as the 2005 fiscal year.
We collected their reports on city government debt issuance for fiscal years, 2005 through 2008
(Texas Bond Review Board 2006, 2007, 2008, and 2009).
The sample is restricted to insured, nontaxable GO bonds that are backed primarily by the full
taxing authority of the city. Bond issues were excluded if the report did not include the amount of
the bond insurance premium. The bonds were sold through competitive sales, negotiated sales, or
privately placed. This study focuses on competitive and negotiated sales because only one
insured GO bond issue was privately placed during this period. The percentage of city GO debt
issues that were insured (for competitive sales and negotiated sales) was 91, 91, 88, and 84
percent in fiscal years 2005, 2006, 2007, and 2008, respectively.
Official statements for each of the bonds were found on the Municipal Security Rulemaking
Board’s Electronic Municipal Market Access (EMMA) database. If no official statement could
be found for a bond issue, the bond issue was deleted from our sample. The bond issue was also
excluded if the official statement did not include the start date for computing interest on the bond
because this start date is used to calculate the maturity of the debt issue. The final sample consists
of 274 bond issues from 114 different cities.6

6. The sample is limited to those bonds rated by Moody’s. We wanted to analyze the same sample for our bond
insurance premium model and bond rating model. Furthermore, Feldstein and Fabozzi (1987) point out that bond
rating agencies more closely examine bond ratings around the time of a new bond issue. A study of all Texas cities
rated by Moody’s would include some infrequent bond issuers, which might have stale bond ratings. Furthermore,
the annual financial statements for the cities that did not issue any bonds would not be available in EMMA. A bond
issue was dropped from the sample if the official statement did not contain the underlying Moody’s credit rating. We
also excluded partially insured bond issues. Next, we deleted those bond issues insured by Radian Asset Assurance
Inc. because its Moody’s rating was below Aaa during the period of our study. For this reason, we dropped two bond
issues. The GASB phased in the implementation of GASB 34 over a three years period depending upon the size of the
government for fiscal years beginning after December 15, 2001. We eliminated observations where the financial
statements on the official statement were not prepared according to GASB 34. Also, one official statement did not
include the excerpts from the city’s comprehensive annual financial report.

Benson and Marks / The Influence of Accounting Information Disclosed 75

 Table 2 provides summary statistics for the variables used in the study. Panel A shows
descriptive statistics for each of the continuous variables, both in their original value form and in
their natural log form. Panel B provides information on the relative occurrence of the binary
variables, and Panel C gives details about the distribution of the ordinal credit rating variable.

EMPIRICAL FINDINGS

Insurance Premium Model

Model 1 of Table 3 shows the results of ordinary least-squares estimation for equation (1), the
basic insurance premium estimation model. The insurance premium dependent variable is
specified in natural logarithms. Several of the continuous variables—the amount insured, longest
maturity, population, and the risk spread yield differential—were transformed to natural
logarithms prior to entry into the model, so the coefficients on these variables are estimated
elasticities, measuring the percentage change in the insurance premium per thousand dollars of
amount insured that is associated with a one percent change in the explanatory variable. The
coefficients on all of the other variables are estimates of the impact of the associated variable on
LnPrem.7 The R2 for the regression is 0.6269.8
All of the continuous non-accounting explanatory variables are highly significant with the
expected sign. A one percent increase in the amount insured and population is associated with an
average reduction in the insurance premium of 0.10 and 0.19 percent, respectively; while a one
percent increase in the longest bond maturity and the Baa-Aaa 30-year risk premium is
associated with an increase in the insurance premium of 0.26 and 0.59 percent, respectively.
Both finance variables, assessed value of taxable property per capita and net GO debt divided by
assessed value of taxable property are statistically significant at the one percent level.
The non-accounting binary variables are all significantly related to changes in insurance
premiums with the anticipated sign, except for the callability variable that has the correct sign but
is not significant at the 10 percent level. Competitive sales and multiple bonds issue sales are
both related to lower insurance premiums. On the other hand, bond issues that are insured by the
three bond insurers dominant during the sample period and bond issues that were sold after the
2008 ratings downgrades of some insurers by the ratings agencies are both related to higher
insurance premiums. Thus, factors that reduce costs to the insurers and the level of competition
and reputation of the insurer do seem to have an impact on the level of insurance premiums.

7. The elasticity for a binary variable, measuring the percentage change in the insurance premium per thousand
dollars of amount insured that is associated with the change in the binary variable from zero to one, can be calculated
from the coefficient of the binary variable, b. The elasticity is equal to 100  e(b1) (Halvorsen and Palmquist 1980).
8. The Variance Inflation Factor (VIF) for the variables in Table 3 is a measure of multicollinearity. The largest
VIF for the variables in Model 1 is 2.95. Multicollinearity is generally not a problem when VIFs are below 10.0
(Gunst and Mason 1980). The results presented in Table 3 follow White’s procedure for adjusting for
heteroscedasticity (White 1980), which is frequently referred to as a sandwich estimator. The Kolmogorov–Smirnov
test does not reject the null hypothesis at the ten percent level that the residuals are normally distributed; hence, the
residuals appear to be well-behaved.

76 Public Budgeting & Finance / Summer 2014

 TABLE 3
Insurance Premium Empirical Tests: Regression Model of the Determinants of the Cost
of Bond Insurance
Dependent Variable ¼ LnPrem

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient
Variables Sign (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic)

Intercept ? 0.758 0.675 0.765 0.746 0.780 0.746 0.665

(1.53) (1.39) (1.54) (1.50) (1.56) (1.49) (1.32)
LnAmtIns  0.099 0.100 0.099 0.099 0.099 0.099 0.102
(4.04) (4.09) (4.04) (4.10) (4.06) (4.03) (4.14)
LnMat þ 0.255 0.254 0.256 0.253 0.257 0.257 0.251
(2.33) (2.33) (2.32) (2.30) (2.32) (2.34) (2.25)
TypeSale  0.087 0.079 0.087 0.085 0.085 0.086 0.077
(1.78) (1.59) (1.79) (1.72) (1.73) (1.76) (1.53)
MultIssue  0.086 0.095 0.085 0.087 0.089 0.086 0.095
(2.14) (2.37) (2.12) (2.17) (2.18) (2.13) (2.33)
Callable  0.129 0.115 0.121 0.128 0.130 0.133 0.105
(1.08) (0.96) (1.01) (1.07) (1.08) (1.11) (0.87)
LnPop  0.189 0.195 0.185 0.189 0.187 0.188 0.192
(7.13) (7.37) (6.86) (7.13) (6.78) (7.03) (6.72)
AsesdValPC  0.252e5 0.259e5 0.214e5 0.246e5 0.253e5 0.247e5 0.211e5
(2.90) (3.03) (2.41) (2.80) (2.92) (2.85) (2.41)
BondInsurer þ 0.285 0.288 0.284 0.284 0.287 0.285 0.286
(5.96) (6.00) (5.96) (5.95) (5.98) (5.96) (5.94)
Downgrade þ 0.326 0.329 0.337 0.326 0.328 0.329 0.339
(3.36) (3.35) (3.51) (3.36) (3.38) (3.35) (3.46)
LnBaa-AaaYld þ 0.589 0.577 0.583 0.586 0.5902 0.583 0.566
(5.49) (5.46) (5.46) (5.43) (5.52) (5.32) (5.21)
DebtToAV þ 0.583e2 0.520e2 0.569e2 0.596e2 0.582e2 0.608e2 0.528e2
(2.71) (2.45) (2.71) (2.77) (2.70) (2.76) (2.46)
GFOACertif  0.138 0.123 0.134 0.138 0.141 0.140 0.120
(2.24) (2.00) (2.17) (2.25) (2.27) (2.28) (1.93)
FundLiabToAV þ 0.022 0.022 0.023 0.023 0.020 0.022 0.025
(2.30) (2.29) (2.46) (2.26) (1.87) (2.36) (2.10)
FundBalPC  0.110e3 0.596e4 0.836e4 0.107e3 0.114e3 0.984e4 0.301e4
(2.37) (1.18) (1.72) (2.25) (2.48) (1.96) (0.54)
Rev-ExpendPC  0.264e3 0.241e3 0.296e3 0.270e3 0.279e3 0.261e3 0.282e3
(2.43) (2.28) (2.61) (2.43) (2.47) (2.38) (2.33)
UnrestrNetAsPC  0.169e3 0.162e3
(2.40) (2.19)
NAInvInCapPC  0.286e4 0.289e4
(1.82) (1.87)
NARestrDebtPC ? 0.131e5 0.212e3
(0.42) (0.61)
(continued)

Benson and Marks / The Influence of Accounting Information Disclosed 77

 TABLE 3 (Continued)
Dependent Variable ¼ LnPrem

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient
Variables Sign (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic)
NARestrOtherPC ? 0.499e4 0.572e5
(0.69) (0.07)
Rev-ExpensPC  0.633e4 0.228e5
(0.48) (0.02)
R-squared 0.6269 0.6318 0.6306 0.6272 0.6273 0.6272 0.6357
D Statistic 0.0432 0.0528 0.0402 0.0426 0.0450 0.0455 0.0538
Largest VIF 2.95 2.95 2.95 2.96 2.96 2.96 2.98

Note: 1. N ¼ 274 for all estimates.

2. The t-statistics are adjusted for heteroscedasticity (White 1980).
3.  ,  , and  indicate significantly different from zero at the 0.10, 0.05, and 0.01 level, respectively. Two-sided tests are
used when the anticipated sign of the coefficient is unknown, otherwise one-sided tests are reported.
4. The variables are defined in Table 1.
5. The Kolmogorov–Smirnov test for the normality of the residuals has a D statistic.
6. VIF is variance inflation factor.
7. The symbol “e” stands for 10; therefore, e3 ¼ 0.001.

The four accounting-related explanatory variables in Model 1 of Table 3 are all highly
significant with the expected sign. The possession of the GFOA Certificate of Achievement is
associated with lower insurance premiums. Higher levels of fund liabilities are associated with
higher insurance premiums. Higher total fund balance and higher revenue to expenditures are
associated, on average, with a lower insurance premium. Note that FundLiabToAV, FundBalPC,
and Rev-ExpendPC are all taken from the governmental funds statements.
Five additional accounting-related explanatory variables are added in the expanded models
shown as Models 2–7 in Table 3. All five variables are taken from the government-wide financial
statements. The first four variables from the Statement of Net Assets are individually added in
Models 2–5. These results show that higher levels of net assets, either unrestricted
(UnrestrNetAsPC) or invested in capital assets (NAInvInCapPC), are associated with
significantly lower insurance premiums. The restricted net asset categories for debt and “other
assets” are not. Further, the financial performance measure of revenue minus expenses (Rev-
ExpensPC) from the Statement of Activities is added in Model 6 of Table 3 and does not
significantly contribute to the explanation of insurance premiums in the presence of the variable
Rev-ExpendPC, which remains highly significant as an explanatory variable.
Model 7 of Table 3 includes all five accounting variables in an expanded model. This model
shows that two variables from the Statement of Net Assets (unrestricted net assets per capita and net
assets invested in capital assets) are still significant in this expanded model. But, the governmental
fund balance variable from the governmental funds statements is no longer significant. In looking at
Model 2 the added “unrestricted net asset” variable takes away some of the impact of the
governmental fund balance variable and when added in combination with “net assets invested in
capital assets” in Model 7, they overwhelm the influence of the governmental fund balance variable.

78 Public Budgeting & Finance / Summer 2014

In Model 7 other variables also are reduced in significance, but not to the point of becoming
insignificant. These results differ from Plummer, Hutchison, and Patton (2007) because they report
that net assets restricted for purposes other than debt service is statistically significant. A test was
also made to see if the coefficients for UnrestrNetAsPC and NAInvInCapPC are the same (using a
Wald test). The F statistic of 1.94 with one and 253 degrees of freedom cannot be rejected at the 10
percent level. Thus, it appears that bond insurers do not differentiate between these two net asset
components in estimating bond insurance premiums.

Bond Rating Model

Model 1 of Table 4 shows the results of ordered logit estimation for equation (2), the basic bond
rating model. We used the maximum likelihood estimation procedure available in Stata to
calculate the parameters in this model. The asymptotic distribution for the parameters is,
therefore, normally distributed. As in the bond insurance model, we calculated the sandwich
estimator for the variance in our model (Long and Freese 2006). While most of the variables in
the model are significant in explaining the bond ratings, surprisingly the revenue minus
expenditures per capita variable is not. The demographic and finance variables and the three
other fund statement accounting variables are significant determinants of bond ratings.
The results from the expanded models are nearly identical to the results shown in Table 3 for
insurance premiums. Unrestricted net assets per capita and net assets invested in capital assets
are significant determinants of bond ratings both when added individually (in Models 2 and 3,
respectively) and when added in the full model (Model 7). The other added accounting variables
are not significant predictors of bond ratings. Also, the governmental fund balance variable
disappears as a significant predictor in the presence of the accounting variables in the expanded
model, equations (2)–(7). Thus, the estimates show that two accounting variables from the
Statement of Net Assets are significant in this expanded model, while only one governmental
funds statement variable, FundLiabToAV, is significant, except for Model 3 where Rev-
ExpendPC is significant at the ten percent level. We also tested in Model 7 whether the
coefficients for UnrestrNetAsPC and NAInvInCapPC are the same with a Wald test for ordered
logit models. The Chi-squared statistic is 4.40 with one degree of freedom, which can be rejected
at the five percent level. This finding differs from our earlier conclusion for the bond insurance
model. In the bond insurance model, we could not reject this hypothesis at the ten percent level.
In contrast to bond insurers, Moody’s does differentiate between these two components of net
assets in determining bond ratings.9

9. We next examine if our definition for our financial performance measures have influenced our results. An
alternate measure for financial performance from the Statement of Activities is the change in net assets per capita
from governmental activities. The change in net assets per capita differs from revenue minus expenses per capita
(Rev-ExpensPC) because revenue minus expenses excludes special items, extraordinary items, and transfers. The
transfers are either inflows from business-type activities or outflows to business-type activities. We replaced the
revenue minus expenses per capita variable with this new variable in both Model 6 for the bond insurance model and
Model 6 for the bond rating model. The untabulated results indicate that this new variable is not significant in either
model at the ten percent level.

Benson and Marks / The Influence of Accounting Information Disclosed 79

 TABLE 4
Bond Rating Empirical Tests: Ordinal Logit Model of the Determinants of Bond Ratings
Dependent Variable ¼ Moody

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient
Variables Sign (Z-statistic) (Z-statistic) (Z-statistic) (Z-statistic) (Z-statistic) (Z-statistic) (Z-statistic)

LnPop  2.416 2.541 2.412 2.405 2.417 2.427 2.563

(12.26) (12.37) (12.23) (12.30) (12.44) (12.19) (11.79)
AsesdValPC  0.488e4 0.482e4 0.456e4 0.501e4 0.488e4 0.493e4 0.475e4
(5.79) (6.37) (5.05) (6.23) (5.73) (5.77) (5.72)
DebtToAV þ 0.034 0.029 0.033 0.031 0.034 0.032 0.023
(2.96) (2.45) (2.85) (2.69) (2.96) (2.80) (1.92)
GFOACertif  2.060 1.974 2.020 2.027 2.060 2.042 1.865
(6.35) (5.83) (6.19) (6.33) (6.13) (6.37) (5.41)
FundLiabToAV þ 0.220 0.230 0.233 0.193 0.220 0.216 0.233
(4.22) (4.471) (4.35) (3.62) (3.33) (4.15) (3.23)
FundBalPC  0.680e3 0.210e3 0.472e3 0.789e3 0.680e3 0.783e3 0.171e3
(1.55) (0.52) (1.04) (1.63) (1.57) (1.56) (0.29)
Rev-ExpendPC  0.104e2 0.685e3 0.139e2 0.843e3 0.103e2 0.107e2 0.7903
(1.22) (0.79) (1.43) (0.94) (1.17) (1.25) (0.76)
UnrestrNetAsPC  0.182e2 0.190e2
(2.59) (2.40)
NAInvInCapPC  0.259e3 0.258e3
(1.77) (1.73)
NARestrDebtPC ? 0.328e2 0.275e2
(1.44) (0.95)
NARestrOtherPC ? 0.859e3 0.2553
(0.02) (0.55)
Rev-ExpensPC  0.525e3 0.614e3
(0.64) (0.62)
Pseudo R-squared 0.3503 0.3593 0.3553 0.3530 0.3503 0.3508 0.3669

Note: 1. N ¼ 274 for all estimates.

2. The Z-statistics are adjusted for heteroscedasticity (Long and Freese 2006).
3.  ,  , and  indicate significantly different from zero at the 10 percent, 5 percent, and 1 percent level, respectively. Two-
sided tests are used when the anticipated sign of the coefficient is unknown, otherwise one-sided tests are reported.
4. The variables are defined in Table 1.
5. The symbol “e” stands for 10; therefore, e3 ¼ 0.001.

Additionally, the revenue minus expenditures variable (Rev-ExpendPC) is statistically significant in the bond
insurance model but is not statistically significant in the bond rating model. An alternative measure for financial
performance in the governmental funds statements is the change in total governmental fund balance per capita. In our
sample, the change in total governmental fund balance per capita differs from revenue minus expenditures because
revenue minus expenditures excludes other financing sources and uses of funds, special items, and extraordinary
items. We replaced revenue minus expenditures with this new variable in Model 1 of the bond rating model. Our
untabulated findings indicate that this new variable is not statistically significant at the ten percent level. Thus, our
definitions for the financial performance variables do not appear to affect our conclusions.

80 Public Budgeting & Finance / Summer 2014

 SUMMARY AND IMPLICATIONS

This paper focuses on the impact of those accounting numbers generated from the two additional
financial statements required by GASB 34 in the presence of accounting information from
governmental funds statements. In particular, it looks at the impact of this accounting
information on municipal insurance premiums and debt ratings, using bond issue data after
GASB 34 became effective.
Previously, Plummer, Hutchison, and Patton (2007) had investigated this issue for the bond
ratings of GO debt issued by Texas school districts. This paper examines this issue for bond
insurance premiums and bond ratings of GO debt issued by Texas cities. Plummer, Hutchison,
and Patton (2007) found three variables from the Statement of Net Assets related to bond ratings.
This study shows that only two of the three variables, unrestricted net assets per capita and
invested in capital assets less related debt per capita, impact bond insurance premiums and bond
ratings in our sample. Also, unrestricted net assets per capita reduces the impact of one of our
governmental fund variables, fund balance per capita, in our models. The behavior for our
performance variable from the governmental fund statements is statistically significant in only
the bond insurance model, while Plummer, Hutchison, and Patton (2007) report that it was
statistically significant in their bond rating model. Furthermore, its behavior in our bond
insurance model is different than the behavior observed by Plummer, Hutchison, and Patton
(2007). The coefficients for the unrestricted net assets per capita and invested in capital assets
less related debt per capita are statistically equal in the bond insurance model but are not
statistically equal in the bond rating model. Hence, the role of the government-wide and
governmental fund accounting information in determining bond ratings for GO debt from Texas
cities is not the same as for Texas school districts. Furthermore, the role of government-wide and
governmental fund accounting information in determining bond insurance premiums for GO
debt from Texas cities is not the same as bond ratings.
Several papers have studied the relationship between the interest cost on new bond issues and
municipal accounting information. One possible extension of this paper would be to analyze the
interest cost on the GO bonds of the Texas cities studied in this paper. However, the default risk
premiums on insured bonds are dependent upon the financial condition of both the issuer and the
bond insurer (Benson and Marks 2004). Hence, the role of accounting information from
government-wide statements in the presence accounting information from governmental funds
statement should be investigated in the future with the interest cost on new uninsured GO bonds.
Since our bond rating findings were not identical to the results of Plummer, Hutchison, and
Patton (2007), future studies might investigate the relationship between the accounting
information in the government-wide statements and investor and creditor decisions for other
types of governments in the presence of accounting information from governmental funds
statements.
Researchers should not focus solely on government-wide statement information because we
found that both governmental and government-wide statement information are significant in the
same model. Also, investigators of bond insurance premiums should not rely on bond ratings to
measure default risk since we demonstrate that bond insurers utilize accounting information

Benson and Marks / The Influence of Accounting Information Disclosed 81

differently than a bond rater. This observation is extremely important for state and local
governments that guarantee other entities’ bonds. Under GASB 70, they have to estimate their
exposure to possible losses for the bonds that they guarantee. The evidence in this paper suggests
that state and local governments should not rely solely on bond ratings to make their estimates of
possible losses.

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