The GLTD:GCA ratio: A tool for public financial management

Abstract

This paper investigates the ratio of general long-term debt to general capital assets’ influence on municipal credit ratings – signals of risk to investors – and coupon rates. Given current uncertainty levels in credit markets, it is paramount that low risk be signaled to sell debt and maintain the lowest possible debt costs for municipalities. It has been found that the GLTD:GCA ratio significantly influences credit ratings, but not coupon rates. Because this research and prior studies indicate that credit ratings affect coupon rates, findings suggest that management should explore using this ratio as a metric for municipal financial condition. It also shows that unrestricted cash and cash equivalents, the ratio of bonded debt outstanding to taxable assessed valuation, and local economic conditions are significant factors for both points of interest. By monitoring these variables and developing strategies to control and influence them, favorable credit ratings will be obtained leading to lower coupon rates and debt service requirements. The expected end result is increased available funds for critical public services.