Bond Banks: A State Assistance Program That Helps Reduce New Issue Borrowing Costs

Abstract

During the last decade both the annual amounts that state and local governments borrowed and the interest rates paid for this debt have repeatedly reached record high levels. Further, throughout 1981, interest rates remained near record high levels with the Bond Buyer 20-year index over 10 percent. Thus, increasing debt burdens coupled with high interest rates are exacerbating the well-publicized financial problems of many municipalities. It is not surprising, therefore, that state and local governments are seeking ways to minimize borrowing costs on their new long-term bond issues. One state assistance program that holds promise in reducing borrowing costs is the formation of a state bond bank. The purpose of this paper is to investigate empirically whether bond banks lower municipal borrowing costs, and if so, to what types of issuer do the benefits accrue.1