Local Government Debt Valuation

51 Pages Posted: 27 Jul 2022 Last revised: 13 Mar 2023

See all articles by Oliver Giesecke

Oliver Giesecke

Stanford University - Hoover Institution

Haaris Mateen

Columbia University

Marcelo Jardim Sena

Stanford University

Date Written: July 12, 2022


We construct a novel data set on the fiscal position of municipalities in the United States and document a secular decline in their financial health. Our data combines financial data from the Annual Comprehensive Financial Reports (ACFRs) of municipalities along with Census data of their revenue and expenditure cash flows. We find that a large share of municipalities operate with a negative net position---akin to a negative book equity position in the corporate context. We find that most of the decline originates from the accumulation of legacy obligations, i.e., pensions and other post-employment benefits (OPEBs); this is recognized by municipal bond markets through higher credit spreads. While accounting values from the ACFRs are informative, they are based on book valuations which potentially convey limited information about the economic value of assets and liabilities. Thus, we turn to the market valuation of local governments' equity by estimating an SDF that matches the valuation of a wide range of assets in the economy to prices future tax and expenditure claims. Using market prices for tax and expenditure claims, and market valuations of liability positions we find that the market values of equity are highly correlated with the book values. The negative equity position---in terms of book and market values---for some local governments suggests the presence of implicit insurance by the state and federal governments.

Keywords: Municipal finance, financial distress, public finance, fiscal sustainability, sovereign default, asset pricing.

JEL Classification: H30, H71, H72, H74, H75

Suggested Citation

Giesecke, Oliver and Mateen, Haaris and Jardim Sena, Marcelo, Local Government Debt Valuation (July 12, 2022). Available at SSRN: https://ssrn.com/abstract=4160225 or http://dx.doi.org/10.2139/ssrn.4160225

Oliver Giesecke (Contact Author)

Stanford University - Hoover Institution ( email )

Stanford, CA 94305
United States

Haaris Mateen

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Marcelo Jardim Sena

Stanford University ( email )

Stanford, CA
United States

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