Christine R. Martell

Development of Local Government Debt Financing Markets: Application of a Market-Based Framework

Needed is clear guidance on how to develop market-based debt financing systems in transitional and developing countries. We propose an analytical framework useful for identifying constraints to financial development and providing recommendations to overcome constraints to develop municipal financing capacity. The proposed framework is applied to five country case studies: Indonesia, Mexico, Philippines, Poland, and South Africa. The thesis of this paper is that municipal credit market development is related to improvements in the legal/regulatory framework governing local borrowing, the capacity of financial institutions to assess risk, and borrower capacity to support and manage debt.

Impact of State-Level Tax and Expenditure Limits (TELs) on Government Revenues and Aid to Local Governments

This article investigates the impact of state-level tax and expenditure limits (TELs) on state government revenues and aid to local governments. Using an instrumental variable approach to control for endogeneity, the authors find that the general fund TELs (i.e., revenue and expenditure limits) have led to substantial increases in tax and nontax revenues. States with procedural limits (i.e., those with voter approval and/or legislative supermajority requirements votes) have significantly lower tax revenues. For states with these procedural limits, their ability to impose new or higher taxes is limited by the rules for passing such legislation. This study also finds that states with general fund TELs have higher levels of aid to local governments, while those with procedural TELs have lower levels of aid. Local government property tax limits do not have any impact on taxing authority of states and have only marginal impacts on the state-aid programs.

Impact of Unfunded Pension Obligations on Credit Quality of State Governments

This study reviews the funding status of state‐administered pension plans and their impact on state credit quality. As the fund ratio (actuarial assets/actuarial accrued liability) of state‐administered pension plans decreases, states are more likely assigned a lower rating. Moreover, rating outlooks are sensitive to the fund ratio, especially for migration between stable and negative outlooks for states with lower fund ratios. These results are a timely pretest to the 2013/2014 implementation of GASB Statements No. 67 and 68, serving as a benchmark to assess whether new reporting requirements will yield information to alter the markets response to unfunded pension liabilities.

Municipal Government Accountability in Brazil

Abstract While decentralization has long been promoted in response to over-centralization by the federal government, less research has examined to what extent decentralization has yielded municipal accountability. Decentralized arrangements are believed to allow more governmental responsiveness to local demands, varying tastes, and consumer mobility. They also mobilize political participation and strengthen democratic structures. Yet, concerns about decentralization highlight the importance of subnational government institutional development and fiscal discipline. Central to the concerns is whether municipal governments have the capacity to manage their own resources responsibly and accountably. This paper examines, through qualitative study, the strategies used by municipal government officials and institutional arrangements in Brazil to improve the accountability and transparency of local government. The results show that efforts to increase economic, administrative, and political accountability are significant and interrelated.

Municipal Investment, Borrowing, and Pricing Under Decentralization: The Brazilian Case

Abstract Very few researchers have addressed the long‐term financing arrangements of municipal governments in developing countries. No research has evaluated empirically either the elements that affect municipal borrowing in developing countries or what those elements reveal about the municipal credit system. Analyzing Brazilian municipal loan and financial data with a series of simultaneous equations, this paper addresses the following questions: What factors determine municipal government investment levels, borrowing levels, and borrowing prices? What do empirical data reveal about the character of the Brazilian municipal credit system? The results show that investment, borrowing, and borrowing prices are interconnected. Furthermore, while some signs of a market‐based system exist, there is evidence that investment and borrowing decisions are made within an administered market.

Bond Insurance and Liquidity Provision: Impacts in the Municipal Variable Rate Debt Market, 2008-09

This article explores the effects of credit enhancement, and downgrades to credit enhancement providers, on the costs to municipal issuers for holding variable rate debt during the 2008—09 market crisis. Although municipal issuers were potentially subject to pressure on their debt issues due to credit contraction, the extent of the problem has not been well researched, especially regarding credit enhancement. This study empirically investigates whether liquidity providers affect the cost of municipal variable rate debt and whether the impact is affected by credit downgrades of liquidity providers. Several important contributions are made. First, this research emphasizes the role of liquidity provision as a form of credit enhancement. Second, the value of liquidity provision is examined in the environment of credit downgrades to liquidity providers. Third, the research tests capital market efficiency using variable, as opposed to fixed rate debt, which allows for the identification of liquidity risk and default risk.

Building Bond Repayment Capacity in Developing Countries: A Study on Property Tax Collections and Debt Affordability in Mexico

This article uses a multinomial regression model to analyze the bond repayment capacity of issuers of municipal bonds in Mexico. The study emphasizes the role that property and land-based taxes have in the enhancement of repayment capacity, as these are highly underutilized levies with important revenue raising potential. The findings show that there is no statistically significant link between these taxes and the chosen proxy for repayment capacity. This follows from an institutional and legal framework that creates an artificial environment of fiscal solvency. The Mexican case is instructive on how not to create a subnational bond market.

Determinants of the Credit Rating Fee in the Municipal Bond Market

Improving transparency of prices paid by government can improve market and government efficiency. Governments regularly pay to access capital markets, yet municipal bond issuance costs remain largely hidden from public view. This study examines factors associated with credit rating fees using a decade of Texas municipal bond issuance data. We find that rating fees are lower in a competitive environment, when issuers have experience and a relationship with the rating agency, and higher when the issue is large and more complex. The findings provide evidence that credit rating agencies (CRAs) retained pricing power following the credit crisis despite reduced reputational quality.

Tribute to Richard E. Zody

Public budgeting is multifaceted. It draws from areas of study and practice ranging from management to administration to planning. Guided by analysis - enhanced by computational and technical advances - and political systems, it overlays the public sector at every level of government, including local, state, national, and international. It is also the domain of both academics and practitioners. This tribute honors Richard E. Zody by focusing on the multifaceted nature of public budgeting to reflect the career of a man committed to many of these dimensions. The central focus of his career was on improving public budgetary and management systems, and in doing so, he deftly drew from the many dimensions of budgeting. Dick demonstrated in his study, writing, teaching, and application an intellectual interest in two particular themes: the relationship between academics and practitioners; and budgeting and management, which includes the use of analytical skill and strategic planning. Through these interests, Dick impacted many lives.

Fiscal Governance, Information Capacity, and Subnational Capital Finance:

This study posits a theory that a country’s capacity to resolve information problems directly relates to the development of subnational government (SNG) capital markets. Based on a sample of fifty-two countries with various degrees of market-based approaches to public debt finance, we evaluate how the capacity to resolve information problems covaries with alternative measures of SNG debt in 2007 to 2014. Empirical findings show that transparency and depth of credit information resolution and extent of disclosure in the private sector positively relate to SNG debt levels, other institutional capacities held constant.