Martin J. Luby

The Sale and Lease of Public Assets Fiscal Savior or Sacrilege

In recent years cities and states have expanded the use of public–private partnerships (P3s) to the sale and lease of existing infrastructure and facilities for large sums of up-front cash. Proponents have viewed these practices as effective and innovative ways to raise sorely needed funds and address pressing fiscal problems. If P3 revenues are used to finance operating expenditures, these practices represent a fundamental departure from the traditional principles of balanced budgets for state and local governments. In financing capital project they are an expensive alternative to traditional tax-exempt financing and productive efficiencies in the private sector are unlikely to offset higher costs of capital. Furthermore, these practices are unlikely to improve infrastructure pricing and use and entail significant policy/economic risks as governments lose control of infrastructure for significant periods of time. The adoption of these sales or leases can be traced to political and institutional failures and inappropriate analysis.

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‐a‐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 and Local Government Bond Refinancing and the Factors Associated with the Refunding Decision

The decision to refinance existing debt is a significant one made increasingly by public financial managers. Since state and local governments are somewhat limited by the Internal Revenue Service (IRS) in their ability to refinance debt, the decision to refund bonds is critical due to the potentially large economic benefits associated with refinancing bonds in the future at lower interest rates. Because of these potential benefits, it would be instructive for policy makers to know some of the covariates associated with this important debt management decision. To that end, this study analyzes refinancing bonds sold by California state and local government issuers between 2000 and 2007. The authors attempt to understand and record a list of issue-specific characteristics, market dynamics, and issuer-related data that are more likely to be related to likelihood to refinance. The authors then discuss the policy implications from these empirical findings.

The use of financial derivatives in state and local government bond refinancings: Playing with fire or prudent debt management?

The esoteric area of financial derivatives has become quite salient in light of the financial crisis of the last few years. In the public sector, state and local governments have increasingly employed derivatives in their bond financings. This paper analyzes state and local governments’ use of a specific type of municipal derivative instrument (a floating-to-fixed interest rate swap) in a specific type of transaction (bond refinancing). The paper provides a case study of an executed bond refinancing transaction that employed a floating-to-fixed interest rate swap quantifying the substantial long-term costs financial derivatives can impart on state and local governments. The paper concludes with some specific lessons learned about debt-related derivative usage for public financial managers and offers some suggestions for further empirical and theoretical research in this area of public financial management.

Public Corruption in the U.S. States and Its Impact on Public Debt Pricing

Summary This study evaluates the levels of public corruption in the American states and their impact on the prices of public debt sold by underwriting banks to retail investors. Results suggest that the markups paid by retail investors to underwriters decrease significantly with the incidence of public corruption. The relationship remains significant even when existing anti-corruption enforcement efforts are taken into consideration. Extant literature shows that the issuers of public debt from relatively more corrupt jurisdictions receive lower prices from underwriting banks in wholesale transactions. We develop and empirically show the mechanism through which this can occur. We offer the first evidence that the public debt market exerts disciplining pressures on the American states with greater levels of public corruption. When purchasing state-issued public debt, retail buyers appear to demand narrower markups by factoring in public corruption. This, we argue, is an important reason why underwriting banks offer lower prices when dealing with less disciplined fiscal sovereigns.

State and Local Financial Instruments

The ability of a nation to finance its basic infrastructure is essential to its economic well-being in the 21st century. This book covers the municipal securities market in the United States from the perspective of its primary capital financing role in a fiscal federalist system, where subnational governments are responsible for financing the nation’s essential physical infrastructure.

An historical analysis of the use of debt-related derivatives by state governments in the context of the great recession

Debt-related financial derivative usage by state and local governments became a very salient topic over the last few years in light of the Great Recession and its impacts on the efficacy of these financial instruments. However, there has been a dearth of systematic research on the types and kinds of derivatives state and local governments have actually employed in recent years. While anecdotes of financial derivative usage has grabbed the headlines (such as the case of Jefferson County, Alabama), there has been little research examining the derivative portfolios among states or local governments pre- and post-Great Recession. Using descriptive research, this paper attempts to rectify this gap in the literature for state governments as a means of better understanding how the recent financial crisis has impacted the critical debt management decision to use financial derivatives.

Too Close for Comfort: Does the Intensity of Municipal Advisor and Underwriter Relationship Impact Borrowing Costs?

This research explores the intensity of the relationship between municipal advisors and underwriters, as well as their quality and location, to assess the resulting impact on borrowing costs for negotiated debt. The findings from this research have practical policy implications related to the proper composition of a local governments debt financing team. In addition, the empirical findings shed light on central aspects in debt management networks as determined by the round‐trip transaction (RTT) theory, which point at new levers that subnational policy makers may use to gain efficiencies when accessing the municipal debt market.

Not All Refinancings Are Created Equal A Framework for Assessing State and Local Government Debt Refinancing Measures

In this ongoing era of fiscal stress, state and local governments have increasingly turned to financial measures to help balance their budgets. One financial tactic commonly employed is debt refinancing. This article details the common refinancing strategies employed by state and local governments. Based on these strategies, typical refinancing transaction types are constructed and evaluated based on an assessment framework that relies on four debt refinancing principles developed in this article. Based on this assessment framework, the article concludes with a series of general recommendations for state and local governments to consider when refinancing debt.

The impact of the great recession on the financial management practices of state and local governments: part I

The Chief Financial Officers Act and subsequent legislation require federal agencies to produce corporate-style financial statements. Arguments for financial statements drew on private sector analogies and suggested policy makers and managers would use the information to make better public policy and management decisions and improve accountability for financial management and program performance. Nearly all major government agencies have unqualified audit opinions and improvements in financial management are claimed. But benefits for policy making and management are not yet well understood. This paper examines the question by comparison with the private sector and by examining what agencies say about the uses and users of financial statement information. The emerging challenge in the evolution of federal financial reporting is to develop better government-specific analytical tools and other financial information for policy makers and managers.