Analyzing the financial condition of local governments using the GASB No. 34 governmental financial reporting model

The Governmental Accounting Standards Board issued Statement No. 34 (GASB No. 34), creating a new government-wide reporting model. A primary purpose of this study is to determine whether information variables from the new reporting model are associated with the default risk of local governments (a proxy for fiscal distress). This study also examines whether the information provided by the new (accrual) reporting model is incremental to information provided by the fund-based (modified-accrual) financial statements. Financial condition indicators are derived from current literature. The study uses ordered logistic regressions to analyze financial data from a sample of 287 counties and 409 municipalities. Underlying debt ratings are used as a measure of default risk.;The sum of the statistical analyses suggests that the association between accounting information and the local government's default risk varies between counties and municipalities. Results generally provide more evidence that information provided by the GASB No. 34 reporting model is associated with the local government's default risk for the sample of municipalities than for the sample of counties. Results further suggest that solvency and liquidity indicators commonly used to measure financial condition in private industry behave differently for the sample of governments in the study. This research also finds that each component of net assets, except restricted net assets, provides information relevant to assessing the government's default risk. In addition, there is evidence that the GASB No. 34 reporting model provides information incremental to that of the fund-based reporting model for the sample of municipalities but not for the sample of counties. This study extends research by Plummer et al. (2007) on the governmental activities of a sample of Texas school districts. In addition to the four financial variables examined by that study, the current study documents the relevance of nine other variables from both governmental and business-type activities using a sample of counties and municipalities. The current study adds to the body of governmental accounting literature by creating a foundation for future research on the relevance of the GASB No. 34 reporting model.