Some of California's municipalities are so cash-strapped that California State Treasurer Bill Lockyer has commissioned a "default probability model" for city bonds that will allow California lawmakers and the public to identify the cities that are at the greatest risk of default. Under the model, each city will receive a numerical score reflecting its fiscal health.
Lockyer commissioned a San Jose State economist, Matthew Holian, and Public Sector Credit Solutions to develop the "default probability model," which will be fully transparent and available to everyone when it is published in May of 2013. Holian, the economist specializing in municipal policy issues, said the information would be "essential" for California residents, investors, decision makers, and real estate developers. "City solvency is an important and controversial issue that would benefit from unbiased, statistical modeling," Holian said.
Marc Joffe, the founder of Public Sector Credit Solutions, said his firm has collected data on "municipal bond defaults over the last 90 years and has published an open source software framework that can be used to create sovereign and municipal bond default probability models."
"Investors, political leaders and the general public would benefit from more precise measures of municipal bond risk to determine which cities are in the greatest jeopardy," Joffe said.
Joffe said the "default probability model" will generate easy-to-understand "numeric scores quantifying the likelihood of default" so bond investors will benefit from the scoring system just as "parents benefit from California's Academic Performance Index scores when considering schools."
In 2012, many prominent California municipalities -- including Stockton, San Bernardino, and Compton -- have faced or filed for bankruptcy.