Tax Increment Debt Finance: An Analysis of the Mainstreaming of a Fringe Sector

Despite the persistent efforts of federal tax policymakers to place binding constraints on the economic development bond market in the United States, it has grown since the Tax Reform Act of 1986 and is a well established segment of the municipal securities market. This article provides an analysis of the development bond market by describing tax increment debt finance (TIF) in the United States and conducting an empirical analysis of California TIF debt. Our analysis indicates that tax increment debt finance (TIF) is no longer an obscure infrequently used financing tool, but for local governments in many states is a commonly used means of raising capital for multiple purposes. Our empirical analysis highlights the unique project-specific features of tax increment finance that bond issuers must understand and manage to enhance the credit quality and minimize the financing costs of tax increment debt.     

The Albanian approach to municipal borrowing: From centralized control to market discipline

Local governments (LGs) in transitional countries face pressing infrastructure needs, which, given the severe shortcomings of traditional funding, make a strong case for debt financing. This article explores the case study of Albania, using document analysis and interviews with mayors, civil servants, citizens and investors. We go beyond an analysis of technical aspects (macroeconomic conditions and legal constraints on borrowing) to include ‘soft’ elements (political and managerial issues, attitudes of key actors), with the aim of highlighting the approach adopted under current policies and the approach that should be adopted. Favorable macroeconomic conditions and the completeness of the legal framework have motivated policy‐makers to choose the market model. Their aim is to develop the financial market rapidly; however, the development of sound management systems at the local level is largely ignored. We argue that the role of managerial capacities, public accountability and professional mechanisms is not adequately taken into account. Future policies need to make the best use of some early experiences of public participation and build upon the extensive training in accounting and auditing issues provided to local civil servants in order to exploit other models of municipal borrowing control. Copyright © 2010 John Wiley & Sons, Ltd.     

Explaining Interest Rates in Local Government Borrowing

ABSTRACT

This article analyzes the usefulness of municipal accounting information in the interest rates agreed on by financial institutions in the European context. Most of the literature has focused on municipal bonds, mainly in the United States. Our core contribution is to study which factors determine the interest rates on bank loans to municipalities. This framework is different, since there is neither a secondary bond market nor credit ratings, and therefore information asymmetry is higher. Specifically, we investigate if municipal financial indicators and financial reports’ quality have an influence on interest rates paid by Spanish municipalities in the period 2001–2008. Our empirical results indicate that, in general, the municipal financial situation exerts an influence on the credit policy of lenders, who charge a risk premium to those municipalities with less current surplus, which is an indicator of the municipality's saving ability. Furthermore, there is also some inertia in the municipal annual interest rate (year t ? 1 interest determines around 27% of year t interest). Other findings indicate that high levels of expenditures and debt per capita increase the interest cost of municipal borrowing. Finally, municipalities that disclose full detailed financial reports pay less interest because information asymmetry and transaction costs are lower.     

Using Fuzzy Rule–Based Systems to Evaluate Overall Financial Performance of Governments: An Enhancement to the Bond Rating Process

Credit ratings remain a key feature of municipal debt management. The primary objective of this article is to develop a new methodology for evaluating the financial performance and creditworthiness of governments and to illustrate this approach for a sample of large American cities. Specifically, we develop a fuzzy rule–based system (FRBS) that uses economic, debt, and other financial information as well as a measure of financial management to produce rankings of city financial performance. The FRBS credit ratings are highly correlated with actual Moody's ratings for these cities. FRBS have the potential of enhancing the rating process by standardizing the information used and encouraging consistent rules about what combinations of inputs result in good, fair, or poor performance.     

Waste in the Sewer: The Collapse of Accountability and Transparency in Public Finance in Jefferson County,Alabama

Following failed auctions for sewer debt in April 2008, major bond rating companies downgraded Jefferson County, Alabama’s bond rating to D (default) triggering massive mandatory payments by the county to its creditors. At the time of writing, the county teeters on the brink of actual default and bankruptcy, unable to pay service on its $3.3 billion sewer debt portfolio. If the county defaults, it will be the largest municipal bankruptcy in United States history, eclipsing Orange County, California’s 1994 default. The intriguingly complex tale of the Jefferson County debt crisis is recounted here by identifying and examining failures of transparency and accountability by local bureaucratic and political actors, private financial institutions, as well as the larger regulatory framework governing public finance. Enhanced regulation of local government and the financial sector plus greater local government capacity to close accountability gaps and thus prevent future crises of similar scale in this or other jurisdictions are recommended.     

The Interest Cost Implications of the Financial Advisor Turned Underwriter

The Municipal Securities Rulemaking Board (MSRB) does not prohibit municipal financial advisors from participating in the bidding process to serve as underwriter on issues for which they provided advisory services. Some municipalities prohibit the practice, viewing such an arrangement as a conflict of interest. Using data from nearly one thousand competitively sold municipal debt issues in the state of Texas from 1991 to 1995, I test whether or not competition alone in the bidding process is sufficient to protect the interests of the issuer. For general obligation debt and state-backed school district debt these data indicate that there are no interest cost implications for the practice. For municipal and special district revenue debt I find weak evidence of some additional interest (about six basis points) when the advisor serves as underwriter, but the effect is not consistent enough throughout the data to reach statistical significance at the p<0.001 level (see note 10). What I do find is that unrated issues are much more likely to be bid on and won by the advisor, indicating that cities should be concerned about the guidance of their advisor when that advice is to take an unrated issue to market.     

Debt administration in Small Island‐States

Public debt management is an infrequent focus of public administration studies. Yet without appropriate debt management, administrators have few financial resources for public service provision. Island‐state administrators face an enhanced service provision challenge. The peculiarity of island‐state economies, the unpredictability of exogenous events and the state's endogenous choices increase debt administration's importance. Via its focus on debt management office location and the administrative constraints posed by brain drain, transparency and regionalization, this paper goes beyond typical debt management studies to engage debt administration spaces. The result is a framework for studies of debt administration in Small Island‐States.     

Private Placements and the Cost of Borrowing in the Municipal Debt Market

Private placements continue to be issued in the municipal debt market and remain a topic of interest for municipalities, investors, and regulators. Private placements are often sold without an underwriter to relatively sophisticated investors and are typically “buy‐to‐hold” transactions. Therefore, compared with traditional competitive or negotiated sales, there are fewer financial intermediaries and fewer regulatory disclosure requirements that accompany private placements. Savings on “flotation” costs can be substantial enough to make private placements a less costly method of debt offering. Conditional on selectivity in the method of sale and key market covariates, private placements offer lower arbitrage yields and issuance costs compared to both competitive and negotiated debt offerings.     

The Liquidity Crisis: The 2007–2009 Market Impacts on Municipal Securities

This article surveys developments in the municipal debt market for their practical and conceptual implications for public financial managers and scholars. It provides an overview of the market crisis of 2007–9, focusing on what fiscal stress reveals about debt costs, the incidence of risk, and management methods. The first part focuses on the systemic factors—highly leveraged subprime mortgage instruments and collateralized debt obligations—that affected credit availability, interest costs, and the changing risk profiles of the debt instruments. The second part emphasizes the new institutional architecture of the borrowing environment: the collapse of the market for variable‐rated securities, the withdrawal from the market of traditional bond insurers, the diminished availability of credit enhancement instruments from banks, the demise of the standby bond purchase agreement, and the introduction of Build America Bonds. The article presents an agenda for practitioners and scholars as they face a borrowing future that differs markedly from that of the past.     

Certificates of Participation and Capital Markets: Lessons from Brevard County and Richmond Unified School District

This article analyzes the genesis of certificates of participation (COP) in the municipal securities market. We document the trend in the use of COPs and illustrate problems in the market through case studies of the Richmond Unified School District default and the Brevard County referendum crisis. The valuable fiscal administration lessons drawn from the growing pains of a maturing sector of the municipal securities market can help municipal governments and investors avoid the tragic consequences that seem to inevitably accompany the circumvention of legal debt restrictions and public accountability.     

The effectiveness of institutional borrowing restrictions: Empirical evidence from Spanish municipalities

The need for restrictions on borrowing by subnational governments is a generally accepted notion that is justified both by public choice theory and by the fact that such restrictions are in force in the majority of decentralized countries. Furthermore, recent breaches of the Stability and Growth Pact of the European Union have led to the introduction of legislative tools aimed at balancing the budget at all levels of government have come to the forefront of interest in European public finance research. This paper is concerned with the financial situation and debt level of Spanish municipalities from 1988 to 2000. We have two main objectives: the first is to assess the value of mandatory limitations on municipal borrowing and past trends in the borrowing policies adopted by Spanish local authorities. The second is to develop an econometric model using panel data stratified by population size to measure indebtedness in Spanish municipalities. These measures enable us to formulate a series of hypotheses to explain municipal borrowing practices, which are then tested empirically. The evidence thus obtained appears to support the effectiveness of institutional borrowing restrictions to introduce some financial discipline in the borrowing policies adopted by local governments in Spain.     

On the Development of Public–Private Partnerships in Transitional Economies: An Explanatory Framework

This article develops a generic framework to explain the environment for public–private partnership (PPP) development in transitional economies. The framework stands on a tripod that includes the market, the operating environment, and the government, each containing several factors that support aspects of PPPs. The authors apply the framework to analyze the results of a multicountry survey in an effort to identify key factors that facilitate PPP development in transition countries. The identified factors are market potential, institutional guarantee, government credibility, financial accessibility, government capacity, consolidated management, and corruption control. The framework and identified factors may serve as effective tools to diagnose and monitor PPP development in a broader array of countries. The framework is applied in analyzing data from four transitional economies and several advanced economies. The efficacy of the framework is further justified by its explanatory power of PPPs’ practicality and is largely confirmed by results from a sensitivity test.     

Deep finance: sovereign debt crises and the secondary market ‘fix’

Links between ballooning national debts and official aid conditionalities are well understood. Private sovereign debt markets, in contrast, have been largely overlooked outside mainstream economics. Yet, since the 1980s, a ‘secondary market regime’ in sovereign bonds has transformed financial geographies and legal practices, facilitating the build-up of riskier sovereign debts and strengthening specialized distressed debt investors. This secondary market ‘fix’ has enabled the international financial system to muddle through successive crises. Using the recently concluded Argentine debt saga as an example, I show how the secondary market regime’s effects on debtors are intertwined with, but distinct from, those of structural adjustment programmes; in cases of resistance to neoliberalism, ‘deep’ secondary market debt structures serve to push countries (back) into the neoliberal fold.     

Financial systems,corporate control and capital accumulation

The rise of financial markets, backed by the revolution in information technology,has been one of the pillars of the new economy. Asset price inflation, financed by debt, has now become the driving force in capital accumulation and equity-linked markets for corporate control have significant effects on both corporate strategic management and the growth of the business sector. This paper develops a model to study these relationships. One component of the new circumstances is that an active market for control forces firms to boost their share price in response to the threat of take-over and, to maintain a minimum return on equity, they have to distribute dividends or buy back shares. As a consequence, the share of profits dedicated to financing internal growth is reduced, corporations increase their indebtedness and thereby become constrained by banks. The interplay of these multi-dimensional pressures delivers a straightforward, but nonetheless important lesson: everything else being equal, the more active the market for control, the lower the growth rate.     

An Options Pricing Method for Calculating the Market Price of Public Sector Pension Liabilities

State and local public sector employee pensions are widely known to be underfunded, but pension financial reports do not reveal the true extent of funding shortfalls. Pension accounting methods assume that plan investments can earn high returns without taking any account of the market risk involved. This gives a false sense of the financial strength of public sector pensions and understates risks to taxpayers. Since accrued pension benefits are legally and constitutionally protected, any pension funding shortfalls must be met by taxpayers. This benefit guarantee amounts to an effective put option on plan investments, the cost of which is not disclosed under current actuarial accounting. This paper uses an options pricing method to calculate the market value of taxpayer guarantees underlying public sector pensions. The average funding ratio declines from 83 percent under actuarial accounting to 45 percent under this options pricing approach. The typical state has unfunded public pension liabilities three times larger than its explicit government debt. Public pension shortfalls equal an average of 27 percent of state gross domestic product, posing a significant fiscal challenge in coming years. Accurate measures of public pension liabilities are important for policy makers, taxpayers, investors considering the economic environment in which to start or locate a business, and bond purchasers considering the risk premia appropriate to municipal government bonds that are in practice subordinate to public pension liabilities.     

Debt in just societies: A general framework for regulating credit

Debt presents a dilemma to societies: successful societies benefit from a substantial infrastructure of consumer, commercial, corporate, and sovereign debt but debt can cause substantial private and social harm. Pre‐crisis and post‐crisis solutions have seesawed between subsidizing and restricting debt, between leveraging and deleveraging. A consensus exists among governments and international financial institutions that financial stability is the fundamental normative principle underlying financial regulation. Financial stability, however, is insensitive to equality concerns and can produce morally impermissible aggregations in which the least advantaged in a society are made worse off. Solutions based only on financial stability can restrict debt without accounting for the risk of harm to persons least able to bear the risk, worsen preexisting inequalities, destroy or impair the net worth of households, and impose unfavorable distributive consequences. This article offers a new approach to assist policymakers in developing and evaluating regulation to take criteria in addition to financial stability into account, but which do not undermine the aim of financial stability. It calls for a luck egalitarian approach, offering policymakers options to take the debtor's choices into account while still accounting for cognitive mistakes people often make in debt decisionmaking. It offers a general framework for the underlying principles for the regulation of debt: its focus is not on any particular forms of debt or its regulation but in structuring debt regulation more generally. It offers a set of recommendations on how regulators can take concerns about luck and equality into account in regulatory design.     

Accounting for Natural Disasters: The Impact of Earthquake Risk on California Municipal Bond Pricing

While Katrina has raised awareness of the potential impact of hurricanes on municipalities along the Gulf Coast, it remains unclear if the municipal bond market considers other types of natural disaster risk in other areas. We attempt to fill this gap by conducting an analysis to determine if underlying geologic earthquake risk affects interest costs for municipal bond issuers in California. We find that earthquake risk does matter in determining the interest costs for municipalities issuing debt, but not universally—only for municipal bonds issued after Hurricane Katrina and only in relation to underlying geologic earthquake risk.     

全球经济进入"低增长陷阱"背景下的中国财税改革研究

随着全球经济进入低增长阶段,政府宏观政策的多样化和有效性在经济周期中的调控作用不断提高.政府进行的新一轮财税制度改革既是应对全球经济低增长、国内经济换挡、中美贸易战等的重要举措,也是延续分税制改革、缓解土地财政压力和降低地方债务风险的必然结果.新一轮财税制度改革通过维持增值税"五五分享"比例以稳定和调整增值税留抵退税分担机制,后移消费税征收环节并稳步下划地方以保障地方财政收入和提高地方财政支出能力,减税降费以刺激企业创新,合理化收入分配制度以扩大内需,最终实现经济的稳定增长.新一轮财税制度改革取得预期效果,还需要完善转移支付制度、预算管理制度、债务管理制度、信息披露制度等,保障政策落到实处.     

The Municipal Bond Market in a Changing Economy

Due primarily to the Tax Reform Act of 1986, the municipal bond market has undergone great changes in the last two years. Because of severe limitations on the purposes for which and processes by which tax-exempt bonds can be issued, the volume of new issues has fallen dramatically. Interest rates, while volatile, have been declining. The municipal market, although dealing with various cross-currents of unrest emanating from credit quality problems, changing buyers, disclosure concerns, and adverse court decisions, nevertheless appears well positioned to concentrate its resources on its traditional role in the financing infrastructure.     

Health Care Capital Financing Agencies: The Intergovernmental Roles of Quasi-Government Authorities and the Impact on the Cost of Capital

During the decade 1983-1992, approximately $1.4 trillion of municipal bonds were sold in 87,000 in separate issues, primarily to finance capital projects for education, electric power, transportation, health care, housing, and other public and private purpose activities. Approximately two-thirds of these financings were originated by financing authorities, quasi-government agencies which are the creation of state legislature. Despite the growing role played by quasi-public authorities in capital finance, their impacts have not been studied systematically. We first describe the issuers of tax-exempt debt in the health sector and then derive measures for describing the mix of issuers between state and local levels, and between both government and quasi-government sectors. We present abbreviated test results of the impact that different mixes have on the cost of capital. First, competition is good: using a Herfindahl index analysis we show that states with less concentrated issuers have a lower cost of capital than those with a more concentrated market, including state-level finance monopolies. On the other hand, we cannot assert unequivocally that market deconcentration, in and of itself, should be a goal. For instance, there are economies of scale in the health care finance industry that allow larger (often state-level) issuers to lower the cost of capital.