SACRAMENTO, Calif., Dec. 5, 2012 /PRNewswire/ -- Responding to market concerns about municipal credit quality, the California State Treasurer's Office has commissioned a San Jose State University economist and a government-bond research group, Public Sector Credit Solutions, to develop a default probability model for city bonds.
"The new model will provide the State an approach to identify troubled cities, and increase the amount of information available to investors and the public," said State Treasurer Bill Lockyer. As Treasurer, Lockyer serves as chairman of the California Debt and Investment Advisory Commission, which issued the RFP for the work and reviewed proposals.
The San Jose State economist leading the study, Dr. Matthew Holian, specializes in Urban Policy analysis and has previously applied econometric techniques to transportation, emergency services and other municipal policy issues. "City solvency is an important and controversial issue that would benefit from unbiased, statistical modeling. The information generated is essential for households, real estate developers, investors, and other decision makers."
Public Sector Credit Solutions, was founded in 2011 by Marc Joffe, previously a Senior Director at Moody's Analytics. PSCS 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.
"News headlines notwithstanding, general obligation bond defaults have been quite rare since the Great Depression, and overall default rates are likely to remain low," Joffe said. "But 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 and two co-authors correctly predicted that municipal default rates would remain low in a November 2011 report issued by Kroll Bond Rating Agency. These findings contrasted sharply with Meredith Whitney's now discredited December 2010 forecast of "fifty to 100 sizeable defaults."
Unlike symbols issued by rating agencies, the model will generate numeric scores quantifying the likelihood of default. "Just as parents benefit from California's Academic Performance Index scores when considering schools, bond investors will benefit by using our scoring system to evaluate a city's bonds," Joffe said.
The model, which is scheduled for publication in May 2013, will be fully transparent, so that anyone can use it free of charge. The model will be available via a web page and in an Excel workbook.
SOURCE Public Sector Credit Solutions