Savings Lost

Abstract

Refinancing (“refunding”) outstanding debt for interest savings represents a significant amount of annual issuance in the $4 trillion municipal securities market. We conduct a “counterfactual” analysis of select taxable advance refundings by state and local governments between 2018 and 2020. Instead of advance refunding their not-yet-callable tax-exempt bonds with taxable bonds, municipal issuers could have waited until the call date and then refunded these bonds with tax-exempt bonds. A comparison of the actual savings to the “counterfactual” savings reveals that waiting until the call date would have been substantially more beneficial, providing over 58% more savings. We estimate that in aggregate taxable advance refundings cost taxpayers billions of dollars. We introduce the notion of proficiency to assess the effectiveness of debt management ex-post. The counterfactual methodology and the resulting proficiency measure should be of interest to both the chief executives and taxpayers of state and local governments. Routine counterfactual analysis, combined with reported proficiency, is certain to result in more disciplined and systematic debt management practices.