The Effect of State Budgetary Decisions on the Yield of State General Obligation Bonds

The purpose of my research is to identify the relationship between many state budgetary decisions and the cost of debt for the state. This research would be useful to state politicians making the budgetary decisions and potential investors deciding to invest in municipal debt. The relationship is found by comparing the yield on a ten year general obligation bond for a specific state to a host of line items taken from that state’s balance sheet. Data used is from the US Census Bureau and BondsOnline.com. Least squares regression analysis is used and the results are largely inconclusive. This sheds light on the importance of the federal government backing of state governments and the general market for municipal bonds, and begs the question if the year from which the data was collected may have influenced the results; several high profile municipal bankruptcies following 2011 may have made investors more wary of budgetary decisions than they previously were. Finally, the only variable that is even close to statistically significant is related to state pension programs; this gives credence to the huge actuarial liability that many pension programs present to state governments