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.     

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.     

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.     

Federal Intervention in the Municipal Bond Market: The Effectiveness of the Build America Bond Program and Its Implications on Federal and Subnational Budgeting

The American Recovery and Reinvestment Act of 2009 (ARRA) included several new federal programs intended ostensibly to “unfreeze” the credit markets as a result of the global financial crisis. One such program, the Build America Bond (BAB) program, aimed to lower the borrowing costs for state and local governments by increasing their access to capital and providing a more generous federal subsidy than the traditional indirect tax exemption subsidy. BABs are taxable bonds sold by subnational governments, which carry a 35 percent direct federal payment subsidy to the borrower. In creating this program, the federal government hoped that the large direct federal subsidy along with greater potential investor interest in taxable securities would result in lower borrowing costs for state and local governments vis‐à‐vis traditional tax‐exempt bonds. This research study examines the relative effectiveness of the BAB program and details the various quantitative and qualitative implications on federal and subnational budgeting by moving from an indirect to a direct federal subsidy approach in facilitating state and local government capital raising.     

State Mandated Accounting, Auditing and Finance Practices and Municipal Bond Ratings

The accounting, auditing, and finance practices of municipal governments often are legally constrained by regulations imposed by state governments under whose jurisdiction cities are created. These practices may impact on municipal security risks and returns, either directly in the bond market or indirectly through such market intermediaries as bond rating agencies. The purpose of this article is to assess the impact of state mandates on municipal bond ratings.     

Implications of GASB's New Reporting Model for Municipal Bond Analysts and Managers

This article explores the implications of the new Government Accounting Standards Board (GASB) Statement No. 34 reporting model for municipal bond analysts and managers. Bond analysts and state and local government managers have overlapping objectives for the use of governmental financial information, but managers also face the costly task of implementing the new model. The new and improved financial information provided by the new reporting model will permit users of the information to better understand a government's long-term and short-term financial position and changes in financial position. The new model also has important ramifications for evaluating performance, particularly regarding the reporting of net costs for each program or function.     

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.     

Determinants of Municipal Bond Ratings for General‐Purpose Governments: An Empirical Analysis

In the wake of the destabilization of the tax‐exempt bond insurance industry, this paper presents an ordered probit model of the determinants of the credit ratings of 965 county and city governments from throughout the nation. The underlying Moody's rating of these governments is posited as a function of a vector of publicly available economic, demographic, governmental, fiscal, and financial variables. The empirical results demonstrate the relative importance of economic base diversity, the growth rates of earnings, and population as well as existing full faith and credit debt on credit ratings. Additionally, our findings support the proposition that the existence of tax limits reduce the perception of credit quality, while expenditure limits raise credit ratings.     

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.     

Testing the Effects of Sale Method Restrictions in Municipal Bond Issuance: The Case of New Jersey

Can state governments save money by restricting the practice of selling tax‐exempt bonds through negotiation, or do such regulations impose additional costs? Circumstances in New Jersey recently created a natural experiment to test this proposition. This study finds significant cost savings for those issues sold through competition both before and after such restrictions were put in place. All else equal, issues sold competitively after the policy change did not have significantly higher interest costs, despite a shift in volume toward competitive sales, suggesting that there exists room for increased use of competitive sales without incurring a cost penalty.     

The Australian Experience of Municipal Amalgamation: Asking the Citizenry and Exploring the Implications

Debate over municipal amalgamations in Australian continues to dominate local government reform agendas, with the putative need to achieve economies of scale and scope consistently set against anti‐amalgamation arguments designed to preserve extant communities. Following from an examination of recent episodes of consolidation in Australia, this paper reports on citizens' attitudes to amalgamation garnered from a national survey of 2,006 individuals. We found that generally, citizens are ambivalent toward amalgamation, although attitudes were influenced by particular demographic characteristics and attitudes to representation, belonging, service delivery requirements and the costs thereof. The results suggest that, away from the local government sector itself, structural reform may not be the vexatious issue it is often portrayed as. The implications of this are explored here.     

Is Management Performance a Factor in Municipal Bond Credit Ratings? The Case of Texas School Districts

Municipal bond ratings are an important determinant of interest costs that a bond issuer must pay. The three major bond rating firms profess that economic and management factors are considered in assigning a bond rating. The management component is of particular interest to public administrators because they can exert more direct control over management factors. Management factors have not been studied empirically in the literature because management performance is generally difficult to quantify. However, the public education sector has seen advances in performance measures and at the same time has increasingly relied on municipal bonds to finance construction. The ordered probit estimation provides support that management performance, as measured in the districts performance on standardized test scores and success in student college admission rates, does influence Texas school district bond credit ratings.     

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.     

Municipal debt in Switzerland: new empirical results

Switzerland has experienced extensive institutional reforms at the local level that could influence local debt. These reforms have included municipal mergers, greater inter-communal cooperation, reformed political decision-making mechanisms, and the introduction of new public management measures. Many of these reforms originated at the cantonal level. However, the institutional diversity among Swiss municipalities hardly has diminished. A cross-sectional analysis for the 137 largest Swiss cities and villages in 2004 shows that direct democratic rights and a high degree of fiscal autonomy lead to a lower level of local debt. There is no statistical support for the hypothesis that reforms following the new public management guidelines had an effect on debt levels.     

State Taxation of Interstate Sales: Enforcement Problems and Prospects

In their search for additional revenues, state governments in recent years have turned greater attention to collection of use taxes. Growth in interstate mail order sales has vastly increased the potential yield from use taxes, but Supreme Court decisions have limited the ability of states to effectively collect the tax. States have attempted to overcome enforcement barriers by joining in interstate use tax compliance compacts, and promoting congressional legislation to overcome constitutional prohibitions.     

Local Transportation Sales Taxes: California's Experiment in Transportation Finance

Over the last 25 years, voters in 20 California counties approved “local transportation sales taxes” to pay for transportation projects. A growing source of revenue, they generate roughly $2.5 billion per year. Four features explain their popularity: they require direct voter approval; funds are raised and spent within the counties that enact them, so voters experience benefits directly; most automatically expire; and they usually specify the improvements to be financed. These taxes are an important revenue source, but tend to favor capital investments over operations and maintenance. They have enhanced local governments' decision‐making authority, but may have made regional transportation planning in multicounty regions more difficult to achieve.