Municipal Borrowing Costs and State Policies for Distressed Municipalities
59 Pages Posted: 30 Sep 2016 Last revised: 2 Feb 2020
Date Written: May 19, 2017
Policies on financially distressed municipalities differ across U.S. states, with some allowing unconditional access to Chapter 9 bankruptcy (“Chapter 9 states”) and others having proactive policies to assist distressed municipalities (“Proactive states”). These differences significantly affect borrowing costs. In Chapter 9 states, local municipal bond yields are higher, more cyclical, and more sensitive to default events than Proactive states. Default events have a contagion effect in Chapter 9 states, but not Proactive states. Lower local borrowing costs in Proactive states come at the expense of the state via higher intergovernmental revenue transfers in times of weak economic conditions.
Keywords: Default Risk, Municipal Bonds, Government Policy, Risk Sharing
JEL Classification: G12, G18, H74
Suggested Citation: Suggested Citation