Assessing Municipal Bond Default Probabilities

154 Pages Posted: 2 May 2013 Last revised: 19 Nov 2013

See all articles by Matthew John Holian

Matthew John Holian

San Jose State University - Department of Economics

Marc D. Joffe

Public Sector Credit Solutions

Date Written: April 30, 2013


In response to a request from the California Debt and Investment Advisory Commission, we propose a model to estimate default probabilities for bonds issued by cities. The model can be used with financial data available in Comprehensive Annual Financial Reports that cities are required to publish. The study includes modeled default probability estimates for 261 California cities with population over 25,000. Our model relies on case study evidence, logistic regression analysis of major city financial statistics from the Great Depression – the last time a large number of cities defaulted – as well as logistic regression analysis of more recent city financial statistics. Independent variables in our model include (1) the ratio of interest and pension expenses to total revenue, (2) the annual change in total revenue, (3) the ratio of general fund surplus (or deficit) to general fund revenues and (4) the ratio of general fund balance to general fund expenditures.

Update (November 2013): The final version of this paper is now available on the California State Treasurer's web site.

Keywords: municipal bonds, municipal bankruptcy, default probability model

JEL Classification: H74, C35, R51

Suggested Citation

Holian, Matthew John and Joffe, Marc D., Assessing Municipal Bond Default Probabilities (April 30, 2013). Available at SSRN: or

Matthew John Holian

San Jose State University - Department of Economics ( email )

San Jose, CA 95192
United States


Marc D. Joffe (Contact Author)

Public Sector Credit Solutions ( email )

1655 N. California Blvd.
Suite 223
Walnut Creek, CA 94596
United States
14155780558 (Phone)


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