The association of departures from spending rate equilibrium to municipal borrowing cost

The U.S. municipal bond market has grown dramatically in recent decades. Debt financing has become a more important source of capital for municipalities, yet research into the association of fiscal management and borrowing cost has not been directly addressed since before GASB's formation in 1984. We attempt to fill this void and contribute to the dialog concerning municipal managerial competence and its association with borrowing cost by studying a sample of 3285 county general obligation bonds over a 13-year period. We resolve conflicting and counterintuitive results in prior work and demonstrate that the lowest borrowing cost is achieved where general fund revenues equal general fund expenditures (i.e., equilibrium spending rate). Further, we find that the association between spending rate and borrowing cost is nonmonotonic, nonlinear, and asymmetric. We demonstrate that maintenance of a spending rate equilibrium point may be a way of achieving minimum borrowing cost. In the context of fiscal constraints and the increased reliance on credit markets by municipalities, managing to the spending rate equilibrium may reduce the borrowing costs of providing municipal services.