Regional News

California To Create Default Probability Model

DEC 6, 2012 5:22pm ET

In response to a spate of municipal bankruptcies and ongoing fiscal challenges at the local level, the California Treasurer's office has embarked on a project aimed at predicting cities' likelihood of defaulting on bonds.

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Comments (1)
This model cannot be better than using press reports, common sense and sound judgement. The key problem in creating risk models for municipalities is the fact, like most models, it relies on the availability and accuracy of historical financial statements. For municipalities, both dimensions are woefully deficient. Financial statements typically are not available for municipals until 6 months to a year after the close of the fiscal year. Furthermore, there are no quarterly statements. So, almost by definition, the information that forms the basis of the model is stale. The accuracy of municipal financials is also suspect given the SEC's limited authority to take action in the face of misleading or incomplete disclosure. Therefore, this efforts will be another waste of public resources when a common sense approach relying on available media information interpreted by a resourceful municipal analyst would provide warnings well in advance of any model approach.
Posted by mdwjr | Friday, December 07 2012 at 12:27PM ET
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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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