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.     

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.     

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.     

Deficits in Local Government Budgets in Israel: A Reflection of Political Cycles and an Expression of Local Autonomy

This article addresses local government budgeting in the context of two Israeli political cycles: the parliamentary election period and the municipal election period. Deficits are not unusual in any of the three types of Israeli localities: municipalities, local councils, and regional councils. And these deficits exhibit a definite pattern; they are largest in election periods. Specific examples are cited to show this hypothesis holds true for all types of localities (including Israel's three largest cities), and for both Jewish and Arab localities as well.     

State Infrastructure Banks and Intergovernmental Subsidies for Local Transportation Investment

This study reviews State Infrastructure Banks (SIBs) as an innovative financing mechanism for federal and state governments to support transportation financing for local governments, and determines the cost savings realized by local governments from receiving SIB loans rather than financing through the municipal bond market. The study finds that SIBs provide a mechanism through which local governments receive subsidized loans for their transportation investments. With the Ohio SIB, localities realized average borrowing cost savings between 34 and 184 basis points. Under the worst‐ and best‐case scenarios, 83 and 98 percent of projects, respectively, benefited from lower borrowing costs.     

An Analysis of the Joint Board or County Model as the Structural Basis for Effective Australian Local Governance

Australian policy‐makers continue to rely on municipal amalgamation as the main engine of structural reform in local government, despite strong evidence that it diminishes participation and representation without improving service efficiency. Several promising, but neglected alternative models of structural reform have been developed, including ad hoc resource sharing models, Regional Organisations of Councils, virtual local government, and agency models. In an encouraging response to the recent policy of enforced council amalgamations in NSW, the Shires Association of NSW (2004) has recently proposed a ‘Joint Board model’ of local governance and invited comment on this model. This article takes up this challenge and seeks to place the Joint Board model in conceptual context and evaluate its characteristics and simulated cost savings.     

Decentralising France: How the socialists discovered pluralism

Reversing European trends toward the consolidation of local government and the imposition of stronger central controls, the French Socialist government undertook a major legislative programme to restructure French local government. This experience is examined in the light of early Socialist commitment to municipal Socialism and their return to power in the Fifth Republic using their local power base. Local reform posed three dilemmas for the Socialists: how to avoid turning local government over to the extreme left or autogestion forces in the party; how to meet the economic demands of locally elected officials without losing fiscal and financial control; and how to enhance decision‐making powers of elected officials at all three levels (municipal, département and region) while also achieving managerial reforms. Their pluralist response was a pragmatic blend of political, economic and budgetary concessions. Participation was enhanced by vigorous efforts to revive voluntary associations; contractual arrangements were devised to put economic programmes for unemployed youth, the elderly and industrial assistance more squarely in local hands; and new managerial methods were coupled to limits on prefectoral powers and budgetary initiatives. The reforms offer important new opportunities for the growth of local government while confirming Socialist dedication to republican ideals.     

The interest cost savings from municipal bond insurance: The implications for privatization

Previous studies of privatization have considered the cost-effectiveness of privatizing more labor-intensive services. This study examines the effectiveness of public and private delivery of a more capital-intensive service: insuring municipal bonds against default. Credit enhancement for local government bonds is available from private insurance companies and from some state governments. Because of their reduced default risk, bonds backed by a third party should incur lower interest rates. This research considers two questions. Does a third party guarantee lower interest rates? Is private bond insurance more cost-effective than the credit enhancement programs of state governments in lowering interest rates?     

Cognitive Biases in Governing: Technology Preferences in Election Administration

Cognitive biases are heuristics that shape individual preferences and decisions in a way that is at odds with means‐end rationality. The effects of cognitive biases on governing are underexplored. The authors study how election administrators’ cognitive biases shape their preferences for e‐voting technology using data from a national survey of local election officials. The technology acceptance model, which employs a rational, means‐end perspective, suggests that the perceived benefits of e‐voting machines explain their popularity. But findings indicate that cognitive biases also play a role, even after controlling for the perceived benefits and costs of the technology. The findings point to a novel cognitive bias that is of particular interest to research on e‐government: officials who have a general faith in technology are attracted to more innovative alternatives. The authors also find that local election officials who prefer e‐voting machines do so in part because they overvalue the technology they already possess and because they are overly confident in their own judgment.     

Competition and Selection in Municipal Bond Sales: Evidence from Missouri

This article describes the results of an interest cost analysis of local government debt issuance in the State of Missouri. In Missouri the vast majority of municipal bonds are sold on a “no bid” basis. We discuss the theoretical arguments for and against competition and selection. Then we determine the degree to which cost differences exist while correcting for any potential selection bias. We use data on local government general obligation bonds sold from May 2004 to May 2005 provided by the Missouri State Auditor's office. We find that this substantial lack of competition imposes significant costs on Missouri governments.     

Effects of the Form of Government and Property Tax Limits on Local Finance in the Context of Revenue and Expenditure Simultaneity

This paper examines the impact of the form of government and state‐imposed property tax limits on municipal finance. We suggest that municipal revenues and expenditures are determined concurrently and estimate revenue and expenditure functions as simultaneous equations. We use the instrumental variable approach and fixed effects to address revenue and expenditure endogeneity. By testing the model on a cross‐section of rich municipal data for fiscal year 2002, we find evidence that revenues and expenditures are simultaneously determined, that potentially binding state‐imposed property tax limits effectively restrict local revenues and that the form of government is a significant predictor of local expenditures.     

Interlocal Service Cooperation in U.S. Cities: A Social Network Explanation

Local governments increasingly confront policy problems that span the boundaries of individual political jurisdictions. Institutional theories of local governance and intergovernmental relations emphasize the importance of networks for fostering service cooperation among local governments. Yet empirical research fails to examine systematically the effects of social networks on interlocal service cooperation. Do the individual networks of local government actors increase their jurisdiction's level of interlocal service delivery? Drawing data from the National Administrative Studies Project IV (NASP‐IV), multivariate analysis is applied to examine this question among 919 municipal managers and department heads across the United States. The findings indicate that interlocal service cooperation increases when jurisdictional actors network frequently through a regional association or council of government and when they are united by a common set of professional norms and disciplinary values. Manager participation in professional associations, however, does not increase interjurisdictional cooperation. The key conclusion for local government practitioners searching for ways to increase collaboration: networks that afford opportunities for more face‐to‐face interaction yield better results for effective service partnerships.     

Polity Size and Local Political Trust: A Quasi‐experiment Using Municipal Mergers in Denmark

This article examines the relationship between polity size and political trust in local government for which two schools of thought offer opposing expectations. The theoretical disagreement has received considerable attention and this article contributes with a dynamic perspective of how changes in polity size affect changes in citizens' political trust on the input‐side of local government. The case examined is the recent municipal mergers in Denmark which were implemented on 1 January 2007. The article reports an analysis of a panel based on a repeated survey of Danish citizens using an untreated control group design with pre‐test and post‐test. A quasi‐experimental difference‐in‐difference identification strategy is used to obtain the effect of municipal size on local political trust. The results show that changes in municipal size negatively affect local political trust, which is consistent with the expectation from the political economy theory that political trust tends to decrease with the size of the polity.     

Learning how to be efficient property owners and accountable governments: the case of Kyrgyzstan's cities

As a result of government decentralization and property devolution from central to local governments, many city governments in transition countries became the largest real property owners in urban areas. For transitional countries lacking sufficient democratic traditions, efficient asset management represents a dramatic and multifaceted challenge. Kyrgyzstan happened to be among the first transitional countries where cities obtained systematic technical assistance in adapting the most advanced methodology of municipal asset management, which was recently developed under the auspices of the World Bank. Based on experience of work within five pilot cities, the article summarizes factors and methods that help develop a sense of strong ownership and internalization of new asset management vision and approaches among local officials and elected members of city councils. The article presents the experience of how the government of Uzgen, a city of about 40,000 people in South Kyrgyzstan, has changed its attitudes and approach regarding management of municipal property. The article demonstrates how two key processes—improving professional aspects of municipal asset management and developing local democracy though public involvement—have been reinforced by each other. One of the main lessons from Uzgen's experience is that municipal property asset management—because it deals with tangible issues—is a perfect focal point for developing local democracy and communication between a local population and its government. Copyright © 2001 John Wiley & Sons, Ltd.     

Subnational Debt Swaps in Mexico,How Big Is Risk Exposure?

Research and practice with derivative instruments by States and Municipalities in Mexico are virtually unexplored. This paper investigates the effect of interest rate jumps and financial contagion on the risk exposure of Subnational Government debt swaps in Mexico. Unconditional risk exposure measures of debt swaps are obtained by simulating a set of stochastic processes with jumps. Simulation results confirm that risk exposure of local debt swaps increases with Poisson discontinuities while a significant effect is observed after crisis contagion is accounted for.     

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.     

Disparities in the Spending Needs of Highland Municipalities

A certain rough consensus holds that highland municipalities have higher spending needs than others, because of the particularly adverse conditions in which they provide essential public services. However, there is no empirical evidence to support this assertion. This study examines whether any relevant differences actually exist in the spending policies of highland and lowland municipalities. To this end, we make logarithmic estimations of per capita municipal spending in order to determine whether the indicators selected, which are based on local government powers, adequately reflect spending needs. Our results point to the special circumstances of highland districts as a key explanatory factor for higher municipal spending, along with demographic factors, locational population patterns, economic activity, subsidies, and local fiscal capacity.     

Federations of Municipalities: A Practical Alternative to Local Government Consolidations in Japan?

This article examines the merits of Wide Area Federations of Municipalities (MFs) as a public service delivery alternative to local government consolidation in Japan. It argues that MFs provide localities with a reasonable option to mergers where amalgamations are politically or geographically impractical, such as in sparsely populated, mountainous, and agricultural areas. Conversely, it maintains that MFs are less practical, efficient, and common in urbanized regions. These findings, the article concludes, suggest a new era of local government in Japan has begun. In this period, to be known as The Race for Local Power , national policies have provoked a new wave of municipal mergers.     

New Financing Instruments for State and Local Capital Facilities

Municipal bonds traditionally have been classified into two general types: term bonds, paid off in a lump sum at the end of the term of the loan, and serial bonds, retired in annual installments. Beginning in the late 1970s, however, a number of new fiscal instruments have been devised to meet the changing needs of the municipal bond market. While these new financing techniques are not a panacea, their careful application may uncover some real opportunities for meeting the needs of local government for expanded capital facilities.