Revenue Bonds Research Articles

Local Debt Financing in the Shadow of Storms: Disrupted and Destructed?

Natural disasters often pose sudden and drastic organizational environmental shocks for local governments, leading to administrative disruptions and public finance risks. In the short term, disasters may disrupt debt financing. The disaster shocks may increase the costs of debt if they hurt revenue bases or decrease the costs of debt if generating “constructive destruction” to the local economy. Using a panel of U.S. County governments between 1999 and 2019, we find that weather-related disasters decrease the likelihood of issuing general obligation bonds and increase the probability of issuing revenue bonds and short-term bonds in the subsequent 6 months. Conditional on borrowing, disasters increase the bond yields for short-term bonds. Thus, natural disasters may disrupt the timing of local government long-term borrowing but do not necessarily destroy public finances.

The origin of LYONs: A case study in financial innovation

The origin of LYONs: A case study in financial innovation

Зарубіжний досвід використання муніципальних фінансових інструментів

The municipalities and united territorial communities of Ukraine after the Russian aggression have a huge deficit of financial resources to reconstruct all the destruction caused to the infrastructure. One of the possible ways to obtain funding is to attract private resources. The best practices of other states show that it is possible through the municipal financial instruments, particularly the municipal debt securities. The purpose of the article is to analyze the best practices of attracting financial resources by the municipalities and territorial communities and establish the most efficient financial instruments for Ukraine. It was determined that the municipalities use several mechanisms to attract additional funding and they are evolving continuously. Depending on the purpose for the allocation of the resources and financial health of the territorial community the local authorities choose the best and the most cost-efficient way to issue the debt securities and determine their nominal value, maturity, coupon interest rate and backing. It was established that the maturity and the type of the coupon interest rates depend heavily on the economic situation in general and the volatility on the capital markets, so the local authorities prefer to issue short and medium-term securities with the variable interest rates. For the capital projects the municipalities tend to issue revenue bonds. It was substantiated that for Ukraine it is preferable to issue medium term revenue bonds as they do not require the international credit rating and depend on the quality and efficiency of the investment project they are to finance. The service of the debt is at the cost of the revenues from the project so it is not an additional burden for the limited local budget resources.

COVID Response: The Municipal Liquidity Facility

At the onset of the COVID-19 pandemic, state and local governments were among the sectors expected to experience the most severe distress. The combination of a sharply deteriorating revenue picture, a pressing need for additional expenditures, delays in the receipt of substantial taxes owed, and an inability to access the financial markets raised serious concerns among many observers about the ability of state and local governments to meet their public service delivery responsibilities. In April 2020, the Federal Reserve announced the establishment of the Municipal Liquidity Facility (MLF) to help municipalities manage the cash flow challenges that the pandemic produced. The MLF ultimately offered three-year loans at penalty rates to a set of eligible municipal issuers that included states, large cities and counties, and a number of revenue bond issuers. Research suggests that the MLF, in spite of lending to only the State of Illinois and the Metropolitan Transportation Authority, contributed to a healing in the municipal securities market as a whole. Effects on real economic outcomes like employment in the sector are harder to attribute to facility.

Municipal Bonds and their Impact on Project Financing

Municipal bonds are an option available to many cities to rise long-term financing to finance the infrastructure projects. This study aims to develop and find local measures of creditworthiness that are suitable and applicable for local government units in Kurdistan Region of Iraq. Different variables are recognized to see the effect on the issuance of municipal bonds, macroeconomic variables measured by revenues and expenditures per capita, cost of capital, and unemployment rate. Municipal status variables have subgroup variables of municipality size, financial reporting quality, outstanding debt, and financial distress. Various financial ratios, comparative and cross-sectional analysis, horizontal and vertical analysis were used. These ratios and analysis have been used to determine the municipal status variable. The results of the study were limited to the largest 3 sample municipalities; each is the central local government unit at the governorates and was not generalized for all municipalities in Kurdistan Region. The study found that macroeconomic and municipality status affects the issuance of municipal revenue bonds. Based on the study results, municipal bonds are highly recommended. Also, instructions from the Ministry of Local Government need to be established and to enforce municipalities about the declaration date of publishing audited financial statements.

Działania antykryzysowe w obszarze kultury w trakcie pandemii SARS-CoV-2. Stan obecny i wnioski de lege ferenda w zakresie zwiększenia partycypacji obywatelskiej oraz instytucjonalnej

The aim of the article is to analyse alternative legal solutions in the field of supporting cultural institutions during the epidemic. A review of the activities of the Ministry of Culture and National Heritage in the area of supporting cultural institutions in Poland during the epidemic as of May 2020 was carried out. Based on the analysis, de lege ferenda conclusions regarding new possibilities of financing the activities of such institutions were identified. The authors present legal solutions concerning the transfer of 1% PIT, deduction of donations, issue of revenue bonds and financing in the form of treasury securities. The conclusions of the research conducted by the authors are embedded in the area of economic analysis of law (Law&Economics).

United States – Measures Affecting Trade in Large Civil Aircraft – Second Complaint – Recourse to Article 21.5 of the DSU by the European Union (US – Large Civil Aircraft (2nd Complaint) (Article 21.5 – EU)), DS353

This compliance proceeding under Article 21.5 of the Dispute Settlement Understanding (DSU) concerned measures adopted by the United States to comply with the Dispute Settlement Body (DSB) recommendations and rulings in US–Large Civil Aircraft (2nd Complaint). The types of measures at issue that were found to have caused adverse effects to the European Union (EU, formerly European Communities) in the original Panel and Appellate Body proceedings were NASA aeronautics R&D instruments; United States Department of Defence (DOD) military research instruments (‘assistance instruments’); the business and occupancy (B&O) tax rate reduction in the State of Washington in relation to Boeing's production of the 787; property and sales tax abatements related to Industrial Revenue Bonds issued by the City of Wichita, Kansas; and the FSC/ETI subsidies.

Bond Index Approach to the Evaluation of Transportation P3 Market in the U.S.

Private investment through revenue bonds has become an important source of financing for public agencies seeking to implement public–private partnership (P3) projects. It has been a long-standing assumption that private financing exceeds the limited investment opportunity attributed to P3 projects in the pipeline. This assumption, however, remains unexamined. Basic economics theory states that prices go up if demand exceeds supply. Therefore, this study presents the construction and performance of the P3 surface transportation bond index to evaluate private capital for P3 projects. The index will help encourage private investment in P3 projects in addition to measuring the return of such investment on a market basis. The index can also disclose the risks of P3 revenue bonds and potentially offer an investment instrument in the secondary market.

How attractive are municipal bonds for the passive competitiveness: the case of immunization of municipal bonds

Purpose This paper study regional attractiveness through passive portfolio investment based on duration, immunization and convexity (in case of higher interest rate volatility) of municipal bonds by using data from Standard and Poor’s. The massive variety of financial incentives to promote regional investment attractiveness is dependent on governmental strategy. Municipal bonds are the one of the most efficient ways of direct investments in the region, however, it is still a question of a good balance between a certain rate of return and an adequate risk. The purpose of this paper is to analyze the investment opportunities in municipal revenue bonds. Design/methodology/approach This study developed a model of investing using municipal bonds with the case of their immunization and analyze attractiveness of such investment. The theoretical model assumes a situation where the local government finances its capital projects through municipal revenue bonds. Such situations influence strongly on regional or local competitiveness provided by local government policy. Findings An analysis of the municipal bond market indicates that both municipal general and revenue bonds had stable and good level of yields to maturity in the past ten years. Their standard deviations were very low and in the past two years almost approached the level of standard deviations of treasury bonds. With the duration of 4–6 years on 5-year investment in municipal revenue bonds and their immunization, it is possible to provide good returns for investor. Research limitations/implications The limitation of this study concerns theoretical situation where local government will use non-market-based policy to reduce the interest rates and that will influence on rise of municipal bond liquidity premium (price distortion). This situation will make municipality bonds less attractive for investing, especially because of lower liquidity on secondary market. Also, this model is applicable in regions that have developed financial markets. Practical implications This research suggests governments a sustainable framework to use municipal bonds as a strategy for capital targeting in regions. Social implications This research is related to professional investors’ strategy with projects that have the highest investment potential; this is good way for an adequate allocation of resources (regional competitiveness). Originality/value This paper analyzes very rare subject involving local government strategy of finance and portfolio investment in municipal bonds. There is a huge gap in the literature on this issue. Also, this study provides the model that can be used as a case for higher local competitiveness.

Municipal bonds as a tool for financing capital investment in local government units in Palestine

Municipal bonds are an option available to many cities to raise long-term financing to finance the infrastructure projects. This study aims to develop and find local measures of creditworthiness that are suitable and applicable for local government units in Palestine. Different variables are recognized to see the effect on the issuance of municipal bonds, macroeconomic variables measured by revenues and expenditures per capita, cost of capital, and unemployment rate. Municipal status variables have subgroup variables of municipality size, financial reporting quality, outstanding debt, and financial distress. Various financial ratios, comparative and cross-sectional analysis, horizontal and vertical analysis were used. These ratios and analysis have been used to determine the municipal status variable. The results of the study were limited to the largest 11 sample municipalities; each is the central local government unit at the governorates and was not generalized for all municipalities in Palestine. The study found that macroeconomic and municipality status affects the issuance of municipal revenue bonds. Based on the study results, municipal bonds are highly recommended. Also, instructions from the Ministry of Local Government need to be established and to enforce municipalities about the declaration date of publishing audited financial statements.

Research on the Influence of Information Accuracy on the Coupon Rate of Local Government Special Bonds in China

The pilot policy of revenue bonds for special project implemented in June 2017 is essentially a transition from packaged issuance to unpacked issuance, which has improved the information accuracy in terms of identifying municipal and county local governments in China. In order to examine the impact of information accuracy on the coupon rate of local government special bonds, this paper regards the pilot policy as a quasi-natural experiment and conducts an empirical study by using the propensity score matching method. The empirical conclusions show that the increased accuracy of information due to the pilot policy has significantly increased the coupon rate of China’s local government special bonds. However, increasing the information accuracy blindly may trigger the Matthew Effect and increase the financing costs of local governments continuously, which is not conducive to the sustainable development of China’s local government special bonds. Therefore, it is necessary to strengthen the management of optimal information accuracy and increase the intensity of information disclosure, so as to realize the financing restriction mechanism of China’s local government special bonds market under the balance of the interests between market entities and the government.

Delayed Benefits: Effects of California School District Bond Elections on Achievement by Socioeconomic Status

Contradictory evidence of the relationship between education funding and student achievement could reflect heterogeneous effects by revenue source or student characteristics. This study examines potential heterogeneous effects of a particular type of local revenue—bond funds for capital investments—on achievement by socioeconomic status. Comparing California school districts within a narrow window on either side of the cutoff of voter support required to pass a general obligation bond measure, I use dynamic regression discontinuity models to estimate effects of passing a bond on academic achievement among low- and high-socioeconomic-status (SES) students. Results consistently suggest that passing a bond increases achievement among low- but not high-SES students. However, these benefits for low-SES students are delayed and emerge six years after an election. Effects are larger in low-income districts and in small districts, where benefits of capital investments are experienced by a larger proportion of students.

The Impact of Government Intervention on Municipal Bond Liquidity Premium: Evidence from China

Government intervention is an important factor which restricts the development of municipal bond market in China. Based on the revenue bond innovation pilot policy implemented by the Ministry of Finance in 2017, this paper uses municipal bond trading data of Chinese inter-bank bond market from May 2017 to June 2018 and the two-stage least squares method to study the impact of government intervention on the liquidity premium of municipal bonds. The results of the empirical research show: (1) The liquidity risk of municipal bonds is a factor that affects the yield spread, and the marginal impact of liquidity risk on the yield spread is about 4.6 basis points. (2) After the implementation of the revenue bond innovation pilot policy, the reduction of local government intervention significantly reduced the liquidity premium level of municipal bonds. Based on the above conclusions, we propose policy recommendations for the development of the municipal bond market in the short and long term.

Does financial advisor quality improve liquidity and issuer benefits in segmented markets? Evidence from the municipal bond market

PurposeUsing a unique sample of about 563,000 competitively bid municipal revenue bonds with financial advisors issued during the period 1998–2012, the purpose of this paper is to examine the role and influence of financial advisor quality in the municipal bond market.Design/methodology/approachThe authors use a sample of about 563,000 competitively bid municipal revenue bonds with financial advisors issued during the period 1998–2012. The authors estimate a selection model where the authors identify the factors leading to the selection of a high-quality financial advisor. The authors then, using the inverse mills ratio from the first regression, estimate the association of high-quality advisor (and other factors) with the cost of borrowing.FindingsThe results suggest that high-quality financial advisors provide a credible signal to market participants about issue and issuer quality. This signal translates to a greater number of bids for issues that use high-quality financial advisors, resulting in improved liquidity and lower borrowing costs for these issues. The results also show that the beneficial effects obtained by using higher quality financial advisors are prevalent across all categories of issues such as for refunding and non-refunding issues, and for both insured and non-insured issues. The benefits are also generally observed for issues of most size categories. The results also suggest that the passage of the Dodd–Frank Act requiring mandatory registration of financial advisors and enhanced scrutiny has only increased the benefits to issuers from using higher quality financial advisors.Originality/valueThis paper differs from previous research in several important ways. First, the study is, to the authors’ knowledge, the first study that explores the relationship between financial advisor quality and liquidity in the municipal sector. The authors show using higher quality financial advisors enhances liquidity for the issues by attracting a significantly large number of bids. Second, the sample is exclusively comprised of competitively bid revenue issues all of which rely on financial advisors. This enables us to examine more unambiguously the influence of financial advisor quality, without the confounding effects of issues without financial advisors. Third, time coverage (1998–2012) and size of the sample (roughly 563,000 bond issues) enables us to conduct varied sub-sample analyses with greater power since the resulting sub-sample partitions themselves are of very large size. This provides better and additional insights into the role of financial advisor quality. The more current data when compared to prior research enables us to examine the impact of financial advisor quality inter-temporally with special attention devoted to the period after passage of the Dodd–Frank Act.

Political Competition and Rule-Based Financing in the Municipal Bond Market

I study the link between the choice of rule-based contracts and political competition through the municipal bond market. I provide evidence that when the probability of losing office is high, mayors are more likely to issue revenue bonds over general obligation bonds and to choose competitive bidding over negotiated sales. This relationship can help explain trends in public financing and spending. The choice of revenue bonds and competitive bidding insulates public officials from referendum checks and allegations of impropriety but requires higher interest rates and administrative costs.

Determinants of Yields in Private Colleges’ Revenue Bonds

This study examines the yield spreads of 3,362 revenue bonds issued by 213 private colleges and universities in the United States. The authors find that the bond ratings of Moody’s and S&P have the most important effect on the spreads and that higher ratings result in lower debt costs. Furthermore, the college financial grades of Forbes have a similar effect on the ratings of the private colleges’ revenue bonds. They also find that private colleges can save 34 to 40 basis points in financing costs by issuing premium bonds because of greater demand by investors who seek a larger tax exemption from higher coupon payments. Additionally, private colleges who purchase insurance can finance bonds at lower interest rates. For example, bond insurance can result in a decrease of approximately 52 basis points in the yield spreads. Additionally, colleges with better quality credit and colleges located in states with high income tax rates have a greater likelihood of issuing premium bonds.

State-sponsored Financing and the Costs of Low-Interest: Results when comparing SRF to Traditional Revenue Bonds

State-sponsored Financing and the Costs of Low-Interest: Results when comparing SRF to Traditional Revenue Bonds

Determinants of Yields in Private Collegess Revenue Bonds

This study examines the yield spreads of 3,362 revenue bonds issued by 213 private colleges and universities in the United States. We find that the bond ratings of Moody’s and S&P have the most important effect on the spreads and that higher ratings result in lower debt costs. Further, the college financial grades of Forbes have a similar effect on the ratings of the private colleges’ revenue bonds. We also find that private colleges can save 34 to 40 basis points in financing costs by issuing premium bonds due to their greater demand by the investors who seek a larger tax exemption from higher coupon payments. Further, private colleges who purchase insurance can finance bonds at lower interest rates. For example, bond insurance can result in a decrease of approximately 52 basis points in the yield spreads. And, colleges with better quality credit and colleges located in states with high income tax rates have a greater likelihood of issuing premium bonds.

Determination on the volume of project revenue bonds in PPP project: A case of Chongqing rail transit line 9

PPP has become an important means for the government to ease the financial pressure to provide public goods and services. However, there is a widespread shortage of construction funds in PPP projects.The construction funds rely heavily on project company capital and loans from financial institutions, it is not conducive to the rationalization of the structure of financing. Under this background, we introduced the project revenue bonds into the PPP project which is rarely studied. Applying the research results to the first phase project of Chongqing Rail Transit Line 9, a case study was carried out to enhance the operability of the PPP project revenue bond issuance mechanism. We found that it is reasonable and necessary to apply project revenue bonds in PPP projects, and determine the most appropriate scale of issuance through the case. We provide a solution for PPP projects to solve the construction fund shortage problem, and provide a reference for our country to promote and implement the PPP project.

Obligacje przychodowe jako narzędzie zwiększające zdolności inwestycyjne gmin wiejskich w Polsce

W pracy zaprezentowano zagadnienia związane z pojęciem gminy jako podstawowej jednostki samorządu terytorialnego, polityką budżetową oraz finansowaniem inwestycji gminnych przy pomocy obligacji przychodowych. Głównym celem pracy było pokazanie pozabudżetowych sposobów finansowania inwestycji gminnych ze szczególnym uwzględnieniem obligacji komunalnych i przychodowych. Obligacje przychodowe mają wiele zalet jako źródło realizacji inwestycji gminnych w porównaniu z kredytem lub pożyczką. Są one emitowane w celu sfinansowania projektów inwestycyjnych lub przedsięwzięć, z których dochody mają stanowić źródło spłaty tych emisji. Z punktu widzenia oceny ryzyka inwestycyjnego obligacje przychodowe, podobnie jak i ogólnie obligacje komunalne, są zaliczane do najbardziej bezpiecznych papierów wartościowych, co wynika z publicznoprawnego statusu jednostki samorządowej. Istotnym atrybutem emitenta komunalnego jest fakt, że jednostka samorządowa nie może zbankrutować. Przeprowadzone badania ankietowe wśród 132 gmin wiejskich w Polsce pokazały, że podstawowym źródłem pozabudżetowego finansowania dla gmin są dotacje unijne oraz kredyt i pożyczka. Gminy nie korzystają z obligacji przychodowych (oprócz dwóch), ponieważ nie mają wiedzy na temat takiego instrumentu finansowego, a także obawiają się nadmiernego zadłużenia gminy. Wydaje się, że ważnym powodem takiego stanu rzeczy jest ostrożność gmin oraz niechęć do korzystania z instrumentów, które nie są im dobrze znane.