Infrastructure Reporting and State Bond Ratings

Abstract

Municipal governments are given the choice of two methods for reporting infrastructure assets, the depreciation approach and the modified approach. Using a model that simultaneously estimates a state's bond rating and a state's choice of the modified approach to reporting infrastructure, empirical tests suggest that bond rating agencies evaluate the government-wide accounting information differently for states that adopt the modified approach compared to states that use depreciation accounting. The use of the modified approach may lead to either a higher or lower bond rating, depending on the level of other accounting measures.