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.     

Municipal Debt Issues in Foreign Markets: Managing Currency and Interest Rate Risk

Since the mid-1980s, there has been an acceleration of state and local government interest in the taxable bond market as a source of capital. This has resulted from, among other factors, restrictions imposed on economic and industrial development loan programs resulting from the passage of the Tax Reform Act of 1986. Increased state and local government involvement in the taxable bond markets has increased competition for such capital between the public and the private sectors. In turn, the developing capital competition has expanded into overseas securities markets. Private sector corporations have frequently accessed foreign capital markets to take advantage of lower interest rates and reduced financing costs. By contrast, state and local governments have accessed such markets only recently. This article discusses the policy issues considered by a state or local government entity when it decides to borrow funds in foreign markets and discusses the issues involved in managing currency and interest rate risk when issuing municipal bonds in foreign markets. It includes a review of the hedging techniques used by the Kentucky Development Finance Authority (KDFA) to protect against changes in the Yen/Dollar exchange relationship on a recent Samurai bond issue sold by KDFA as an example of such a transaction.     

Debt Diligence: How States Manage the Borrowing Function

State-level indebtedness is large and persistent and bond issuance has become increasingly complex. In light of these conditions, professional standards have been proposed by some organizations (including the Government Finance Officers Association) seeking to persuade members to codify sets of desirable practices into policies for debt issuance. We surveyed state government debt managers to assess the comprehensiveness and prevalence of debt policies. We find little evidence of the adoption of comprehensive formal debt policies. Instead, states rely more heavily upon the guidance provided by their own sets of standard practices or "rules of thumb."     

When States Discriminate: The Non-uniform Tax Treatment of Municipal Bond Interest

There is a long history of states using tax systems to encourage residents to invest in bonds issued by jurisdictions within their state. This preferential or discriminatory tax treatment was ruled unconstitutional in 2006 by the Kentucky Court of Appeals. The Kentucky court decision, which sets the stage for this essay, was overturned by the U.S. Supreme Court in 2008. This essay addresses the possible implications of this and similar discriminatory tax policies. Such discriminatory policies are the foundation of the municipal bond market, and altering the practice would have significant implications for revenue collections and borrowing costs in most states and localities. While the Supreme Court's position has been rendered, the case has caused policy makers and administrators to scrutinize discriminatory tax policies and their impact on budgets and borrowing costs.     

Debt Issued Through Others: Conduits,Joint Powers Authorities,and Borrowing Costs in California Local Governments

The issuance of debt is a complicated and time‐consuming task requiring governments to pay substantial fixed transaction costs. Conduit financings, where one entity issues debt on behalf of a government, including bond pools, where multiple governments issue debt together, are methods that offer the potential to reduce the burdens of participating governments, ideally lowering their costs. But conduit hosts have costs of their own to cover and may not be able to offer a cost advantage to their participants. In this paper we examine debt issued under the Marks Roos Act of 1985, a law created to facilitate pooling but actually used for conduit financing. We seek to determine how issuers fare using this mechanism rather than issuing by themselves. We examine issuance costs and borrowing costs (true interest cost) and find both to be significantly lower for those governments that issued by themselves.     

Decomposing Audience Costs: Bringing the Audience Back into Audience Cost Theory

According to a growing tradition in International Relations, one way governments can credibly signal their intentions in foreign policy crises is by creating domestic audience costs: leaders can tie their hands by publicly threatening to use force since domestic publics punish leaders who say one thing and do another. We argue here that there are actually two logics of audience costs: audiences can punish leaders both for being inconsistent (the traditional audience cost), and for threatening to use force in the first place (a belligerence cost). We employ an experiment that disentangles these two rationales, and turn to a series of dispositional characteristics from political psychology to bring the audience into audience cost theory. Our results suggest that traditional audience cost experiments may overestimate how much people care about inconsistency, and that the logic of audience costs (and the implications for crisis bargaining) varies considerably with the leader's constituency.     

Another Look at the Effect of Method of Sale on the Interest Cost in the Municipal Bond Market—A Certification Model

Whether competitive bidding or negotiated sale leads to lower borrowing cost for municipal debt issuers has been studied extensively in municipal finance research. There is a potential self-selection bias when estimating the relative cost effectiveness of these two methods of sale. This article argues that sale method can be viewed as a certification mechanism as issuers self-select themselves into either competitive or negotiated groups based on their perception of the underlying degree of information asymmetry. By correcting for this self-selection bias, we find that for issues with no or little information asymmetry, neither sale method has a significant cost advantage over the other.     

Coproduction of Government Services and the New Information Technology: Investigating the Distributional Biases

This article investigates how communications advances affect citizens’ ability to participate in coproduction of government services. The authors analyze service requests made to the City of Boston during a one‐year period from 2010 to 2011 and, using geospatial analysis and negative binomial regression, investigate possible disparities by race, education, and income in making service requests. The findings reveal little concern that 311 systems (nonemergency call centers) may benefit one racial group over another; however, there is some indication that Hispanics may use these systems less as requests move from call centers to the Internet and smartphones. Consistent with prior research, the findings show that poorer neighborhoods are less likely to take advantage of 311 service, with the notable exception of smartphone utilization. The implications for citizen participation in coproduction and bridging the digital divide are discussed.     

Interest Group Competition over Policy Outcomes: Dynamics,Strategic Behavior,and Social Costs

This paper analyzes a two-period model of interestgroup competition between two groups to affect thepolicy outcome. The paper characterizes the subgameperfect equilibrium and considers the welfareimplications of the model. The subgame perfectequilibrium to this game is allocatively efficient ifand only if the initial equilibrium is allocativelyefficient and interest groups are equally adept atproducing political pressure. When rent seeking isconstitutionally protected, the notion of rent-seekingconstrained efficiency is defined as the cooperativesolution to the rent-seeking game. It is shown that arent-seeking constrained efficient equilibrium isattainable by forcing winners in political competitionto fully compensate losers.     

Surviving Information Overload: How Elite Politicians Select Information

Information in politics is overabundant. Especially elite politicians are bombarded with information. Politicians must be selective to stay on top of the information torrent. Aggregate‐level work within the bounded rationality framework showed that information selection is at the core of decision making. Yet, an answer to the question as to how individual elite politicians go about selecting information is lacking. We know that they unavoidably do, but how exactly they perform this selection task remains largely unknown. The article draws on interviews with 14 party leaders and ministers in Belgium about their information processing. We present a typology, and a funnel, of consecutive information selection mechanisms and attitudes. Politicians partially outsource their information selection to procedures and/or staffers, they personally apply rigorous rules of thumb about what to attend to and what not, and they compensate the pressure and constant risk of messing up with a large dose of self‐confidence.     

Litigation Costs, Budget Impacts, and Cost Containment Strategies: Evidence from California Cities

Litigation costs are straining many municipalities' budgets and creating more uncertainty and flux in their annual budgetary processes. A 1996 mail survey of California cities conducted by the League of California Cities, to which 210 cities (45 percent) responded, shows that the level of litigation-driven budgetary strain is intensifying. The budgetary impacts of litigation have been quite substantial, no matter whether measured in terms of overall impact, percent increase, frequency and magnitude of budget amendments, actual dollar costs, or the tendency to settle cases just to save money. Population size makes a lot of difference in the level and type of impact as well as the cost containment strategies implemented by a city. Generally, the larger the city (and the more diverse), the greater the strain litigation costs have put on the budget. A higher percentage of big cities (over 100,000) than smaller ones blame rising costs on police liability, personal injury, civil rights, tort, Americans With Disabilities Act, Fourteenth Amendment and Fourth Amendment claims. Frivolous cases are a problem for cities of all sizes. So, too, are the rising incidences of rights-related cases being filed against cities by their own employees as well as private individuals. This trend will likely increase as the nation's population ages and diversifies ethnically and racially.     

The Influence of Jurisdiction Size and Sale Type on Municipal Bond Interest Rates: An Empirical Analysis

The authors use data on municipal bond sales in Oregon from 1994 to 1997 to explore whether population (as a proxy for financial-management capacity) and sale type (competitive or negotiated sale) influence interest rates. They find that smaller jurisdictions pay an interest cost penalty in the municipal bond market, and that competitive sales result in significantly lower interest rates compared to negotiated sales. The authors suggest that measures to enhance the financial-management capacity of small governments are warranted and that state laws requiring justification for negotiated sales are appropriate.     

Different Groups, Different Strategies: How Interest Groups Pursue Their Political Ambitions

The article compares the political activities of different types of interest groups. Drawing on data from a survey of all Danish national interest groups, it demonstrates significant variation in the strategic choices of different types of groups. Groups with corporative resources direct much attention towards influencing the bureaucracy. They possess resources valued by officials and therefore have good options for utilizing a strategy targeting the administration and seeking corporatist integration. By contrast, public interest groups are more likely to use publicly visible strategies in which affecting the media agenda plays a central role. By engaging in such strategies, public interest groups can demonstrate a high level of engagement to their diffuse membership. Furthermore, the goals of public interest groups are typically conducive to pursuit through public strategies. A third category of other groups is incorporated in the analyses as a point of reference to establish patterns of strategy use. While there are clear differences between groups with regard to most strategies of influence, different types of groups are equally engaged in a parliamentary strategy. Interacting with Parliament seems to be important for groups integrated in corporatist structures as well as for those relying more on public strategies.     

Measuring How Administration Shapes Citizenship: A Policy Feedback Perspective on Performance Management

Governments increasingly require administrators to develop outcome measurements that reflect a program's impact on society. But standard approaches to performance measurement have neglected the impact on citizenship outcomes—the individual civic capacities and dispositions and social bonds of civic reciprocity and trust. The concept is adapted from the growing policy feedback literature in political science, which offers strong empirical evidence that certain policies have measurable effects on citizenship outcomes such as political participation, social capital, a sense of civic belonging, and self-worth as a citizen. Using the Program Assessment Rating Tool as an example, the authors demonstrate the failure of performance assessments to consider the civic implications of public policies. They argue that performance management systems should focus on citizenship outcomes and offer a series of suggestions on how to measure such outcomes.     

Listening to the Government: How Information Shapes Responsibility Attributions

Assigning credit and blame in systems of multilevel government, such as federal states, requires information. This paper examines how voters respond to information about policy outcomes when attributing responsibility to multiple levels of government in a European context. Using an experimental design, we show that the responsibility attributions of British voters are affected by perceptual biases, notably their feelings about the government and the European Union (EU). But interestingly, we also find that voters, regardless of their predispositions, are only responsive to information they receive from their national government, whereas they ignore information provided by EU officials. These findings have implications not only for our understanding of attribution in systems of multiple levels of government, but also for how voters use information selectively depending on the credibility of the source.