Local government type and municipal bond ratings: what’s the relationship?

ABSTRACT

There is an extensive literature analysing the executive branch within local U.S. government jurisdictions. This has largely revolved around the differences between elected mayors and appointed city managers. Much of the academic work has considered the potential efficiency gains that may be associated with either form of government and comparative analyses between the two. However, the empirical literature has been divided regarding the relative efficiency of either form. This article attempts to add to that literature by considering how bond markets may perceive potential efficiencies that emerge from one executive type over the other by evaluating bond ratings for a sample of large municipal governments in the United States. Overall, the results suggest that municipalities headed by a city manager are associated with increased bond ratings (and thus lower borrowing costs), which may lend support that this form of administration is, on some margin, relatively more efficient than others. These results are robust to a number of specifications.

KEYWORDS:

• City managers
• city mayors
• bond ratings
• public administration
• local government

JEL CLASSIFICATION:

• D73
• D78
• H73

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ For a more detailed historical account of the development of council-manager governments, see Wheeland, Palus, and Wood (2014).

² The factors that lead to municipal governments adopting (and sometimes abandoning) the council-manager form of government has led to some academic research (see Choi, Feiock, and Bae 2013). These authors find that adoption and abandonment is dependent upon local socioeconomic characteristics and ideological preferences. Though beyond the scope of this current work, further analysis of this issue is worthy of future research.

³ See Carr (2015) and Walker and Andrews (2015) for extensive literature reviews.

⁴ Calculated from the fact that Moody’s had seven ratings categories in 1973 and 21 today, thus 20.6(7/21) = 6.87.

⁵ This was calculated as the coefficient multiplied by the number of notches.

⁶ Several important studies that have evaluated municipal governance and political budget cycles in Portuguese municipalities relevant to some of this study include Aidt, José, and Veiga (2011); Coelho, Veiga, and Veiga (2006); Martins and Veiga (2013); and Veiga and Veiga (2007). Of particular interest is the effect that indefinite re-elections might have, which may in some way be comparable to a city manager or in some cases an elected mayor. Although an important consideration, U.S. municipalities have many different rules on term length, with some cities term limited, some partisan, others nonpartisan. This issue, although beyond the scope of the current study may be worthy of future research.

⁷ See Carr (2015) for a robust literature review of this line of theorizing.

⁸ See Feiock, Steinacker, and Park (2009).