Revenue Bonds Research Articles

Some Lessons in the Political Economy of Megapower: Wppss and the Municipal Bond Market

The municipal bond market is the institutional mechanism for allocating capital to cities and other tax-exempt borrowers. A key function of this market is to provide investors and borrowers with information that allows them to gauge relative degrees of risk in bond sales, including the possibility of default. The present study examines the risk signals communicated by the municipal bond market to potential investors in five nuclear power plant proposed by the Washington Public Power Supply System (WPPSS) during 1973–1982. The behavior of WPPSS bonds is compared with other electric revenue bond issues floated during the same time period. Based on pooled regression analysis, it is concluded that the municipal bond market did not encourage least-cost capital or energy choices in the Pacific Northwest, and it cannot be expected to forecast the full risks of megapower projects such as WPPSS.

Target Efficiency of State Home Ownership Programs

The United States government has promoted home ownership for over 50 years. The U. S. tax code provides a tax exemption on income earned on state and local mortgage revenue bonds issued to finance home ownership subsidy programs. The president's tax proposals to Congress would eliminate federally tax-exempt mortgage revenue bonds (MRBs). A total of 45 state housing finance agencies (HFAs) issue MRBs and impose income limits on program participants even without a federal requirement to do so. In 1983, a U.S. General Accounting Office report concluded that most MRB-financed single-family housing programs aided higher-income households in the majority. This author's study found, however, that the majority of assistance went to low- and moderate-income households. One-third of the HFAs did provide a majority of assistance to higher-income households. The study conducted for this article determined that the income limit imposed on program participants was an effective control on the degree to which low- and moderate-income households were program beneficiaries. The existence of legislative and executive oversight powers did not, however, have a significant impact on single-family program performance. National income limits or income-limit guidelines could result in greater target efficiency in home ownership programs.

Rejoinder to Matthew R. Marlin's "Reevaluating the Benefits and Costs of Industrial Revenue Bonds"

Matthew Marlin's analysis does not support his position. Our earlier research of industrial revenue bonds is correct and we continue to argue that the IRB program creates economic inefficiencies, increases the federal deficit, and serves no apparent public purpose. The elimination of the program is in the best interest of the nation.

Reevaluating the Benefits and Costs of Industrial Revenue Bonds

In a recent article in this journal it was argued that the costs of Industrial Revenue Bonds exceed their benefits and the program, therefore, should be abolished. This note reevaluates the benefits and costs as presented in that article. It is concluded that the costs enumerated in the previous study were overstated whereas the benefits were understated. Among the social costs discussed, only transaction costs and distributional consequences are found to be valid. Absent from the previous study's benefit considerations was the increased capital formation resulting from low-interest Industrial Revenue Bonds.

Inequality in Metropolitan Industrial Revenue Bond Programs

Industrial revenue bonds (IRBs) have become an increasingly popular, though expensive and controversial, tool of economic development at the state and local levels. That controversy has focused on the economic impact of IRBs: Whether or not they meet the intended goals of creating jobs and stabilizing the tax base of local communities, and whether the benefits are worth the costs. Though IRBs are often justified, at least in part, as a particularly useful program for older, urban, minority communities, little research has been done on the participation of racial minorities and women in IRB programs. This article examines Chicago's IRB program and finds that minorities have not participated equitably. Racial minorities and women are underutilized in many firms receiving this form of publicly subsidized financial assistance, and minority-owned businesses receive a disproportionately small share of the loans. Policy recommendations are offered to assure equitable participation of racial minorities and women in IRB programs.

ON THE DISTRIBUTIONAL IMPLICATIONS OF MORTGAGE REVENUE BONDS AND CREATIVE FINANCE

The presumed benefits of below-market mortgage financing have been used to justify tax-exempt mortgage revenue bond financing and other government policies. This paper analyzes the extent to which ...

State, Local, and Federal Economic Development Policies: New Federal Patterns, Chaos, or What?

Federal economic development policies and those of state and local governments are potentially complementary, but they are not necessarily consistent in practice. Increasing emphasis on these policies by state and local government, coupled with potential changes in federal tax and spending strategies, provide considerable potential for conflict. State and local economic development policies have a momentum of their own, but many are dependent on aspects of federal tax and spending policy. Industrial revenue bonds and tax-exempt financing of infrastructure are threatened by potential changes in federal tax law. Local development efforts have depended heavily on financing from federal programs such as community development block grants and urban development action grants-programs potentially threatened by attempts to cut the federal deficit. The Reagan administration's major economic development initiative, enterprise zones, has languished in Congress, but many states have adopted the concept. While federal, state, and local officials will probably continue to clash over some development policies, some interesting possibilities for cooperation exist.

The Statewide Economic Impact of Small-Issue Industrial Revenue Bonds

The Statewide Economic Impact of Small-Issue Industrial Revenue Bonds

Competitive versus Negotiated Municipal Revenue Bond Issues: An Investigation of Underpricing

* This study of new issues of municipal revenue bonds has two objectives. The first objective is to compare reoffering yields and net interest cost of municipal revenue bonds sold by competitive bid with comparable bonds sold by negotiation. Previous studies suggest that primary market yields for comparable issues may be higher on negotiated issues than on competitive issues (see [2], [3], [5], [6], [7], [11], and [12]). Results presented here indicate that negotiated issues have higher reoffering yields and net interest costs than competitive issues receiving three or more bids, ceteris paribus. A second objective is to analyze the yield adjustments as the bonds move from the primary to the secondary market. Past researchers have attributed the primary market yield differential between competitive and negotiated bonds to underpricing of negotiated bonds. However, if the yield differential between competitive and negotiated issues is in fact due to underpricing, yields on negotiated issues should decrease relative to other issues in the secondary market. No evidence of this price adjustment for negotiated issues is found. This suggests that the primary market yield differential is not due to underpricing. One explanation for yield differences on the primary market that do not result in relative price adjustments on the secondary market is an inadequate specification of uncertainty in the model. West and Fabozzi [19] note a relationship between the level of uncertainty and the prevalence of negotiation. If uncertainty is not adequately specified in the primary market, the variables indicating the method of issue and the number of bids could be picking up this difference in the level of uncertainty. Differences in uncertainty could result from differences in general economic conditions across issues or differences in issuers' previous market activity and hence underwriters' familiarity with them. Issues subject to less uncertainty may thus tend to go competitive and receive more bids. Section I discusses the determinants of municipal bond interest cost on the primary market and the determinants of yield adjustments on the secondary market. Section II presents the empirical analysis. A brief summary of the results is given in Section III.

The Interest Cost Savings from Experience in the Municipal Bond Market

When issuing bonds for purposes of financing capital improvements, issuers sell their securities to an underwriting syndicate through one of two methods of sale. Traditionally, governments have sold their bonds through competitive bidding. Under this method, each underwriting syndicate interested in purchasing the issue submits a sealed bid for the price it is willing to pay. The syndicate submitting the lowest bid wins the purchase of the issue. Most general obligation bonds continue to be brought to market through this method of sale. An alternative method known as the negotiated sale has gained popularity with issuers and underwriters. With this method, representatives from a unit of government with a proposed offering meet with a preselected underwriting syndicate to negotiate an interest rate for the issue. Whereas competitive bidding relies upon competition among underwriters to obtain the most favorable interest rate, negotiation places the burden on the management team representing the issuer. The popularity of the negotiated method has grown with the increasing use of revenue bonds; for example, in 1982, 69 percent of the total dollar volume of both types of issues was sold through negotiation compared to 17 percent in 1970.1 The criticism of negotiation has been that it results in a higher interest rate than competitive bidding. The nearly unanimous conclusion of research supports this assertion.2 The implication is that administrators representing the issuer lack knowledge of the municipal bond market to negotiate successfully with the representatives of the underwriter.3 However, that research does not distinguish among negotiating issuers based on their experience in the marketplace. Yet, previous experience in the bond market should be a significant determinant of effectiveness in negotiations. Negotiating issuers with more experience should have a lower interest cost, ceteris paribus, than those with less experience. If experience is a determinant of interest rates in negotiated sales, failure to control for its effect in previous research may have produced biased estimates of the cost differential between the two methods of sale. This study examines the following two research questions: first, what effect does previous experience in the bond market have on the net interest cost of bonds sold through negotiation; second, what is the difference in cost between the two methods of sale when the previous experience of negotiating issuers is controlled.

The Application of Comprehensive Community Economic Analysis

Community Economic Development in the 1970s might best be characterized by a push for financial incentives aimed at encouraging industrial development and/or the renovation of older city centers. Industrial revenue bonds and their accompanying lower interest rates and federal tax breaks became a part of nearly every state’s incentives package aimed at luring business away from others. Federal grants and loans were combined with private funds to build glittering downtown shopping malls, convention centers, and housing complexes. Local governments were encouraged to organize special taxing districts. These districts used public funds to support private industrial and housing development with the promise of ultimate community fiscal benefit.

An economic analysis of industrial revenue bonds and the demand for labor

In this paper the standard theory of the derived demand for inputs for the firm has been used to examine the effect on employment of a subsidy to the capital input via an industrial revenue bond. While the effect theoretically is ambiguous in sign, an empirical examination of the industrial revenue bond program in Chicago suggests that, ceteris paribus, employment does increase in firms selected for the program. The estimates of the arc crosselasticity of demand for labor for the groups of firms that participated in the Chicago program range from −.27 to −1.07. Systematic variations in the cross elasticity of demand for labor are found.

Interest rate effects of commercial bank underwriting of municipal revenue bonds: Additional evidence

This study analyzed data for municipal revenue bond issues sold in 1979 to identify the impact of commercial bank eligibility on the interest cost to the issuing state or local government. The empirical evidence developed suggests that commercial bank eligibility had no statistically significant effect on the interest cost of municipal revenue bonds sold competitively or by neogotiation, when other factors explaining the interest cost are taken into account properly. Nor did bank eligibility increase the power of the model to explain the interest cost of the bono issues. The theoretical and empirical weaknesses of some earlier studies that report opposite findings are analyzed.

The Effects of Statutory Portfolio Constraints on Tax-Exempt Interest Rates: Note

1. lntroduction Whether or not the tax-exempt bond market is segmented is an issue of continuing controversy among academic researchers and market participants. The segmentation issue has been addressed on several levels, including studies of the effects of restrictions on bank entry in the underwriting of revenue bonds, the impact of private purpose revenue bonds on the cost of tax-supported state and local govemment bonds, and the effects of banks and bank demand on yield spreads within the tax-exempt market. Hendershott and Kidwell (1978), in a study particularly relevant for the present one, have offered empirical evidence suggesting that changes in the supply of securities issued by governmental units in one state relative to national new issue volume are associated with systematic changes in relative yields. Other studies (Forbes and Petersen 1975; Kaufman 1976; and Leonard 1983) have called attention to the persistence of yield differentials on tax-exempt bonds that differ only in the state or region of the issuer. While these studies suggest the possibility of geographic or local market segmentation, for the most part there have been few attempts to provide a rationale for the existence of such segmentation. This study attempts to fill the gap by analyzing the effects on tax-exempt interest rates of state laws that regulate both bank portfolio holdings of tax-exempts and the cash management practices of state and local governments (SLGs).

Geothermal district heating for reno, Nevada, U.S.A.

The City of Reno is one of the most obvious candidates for geothermal district heating in the United States. Lying within a helt of major thermal anomalies, it has within its boundaries the Moana Hot Springs geothermal reservoir and probably other reservoirs, and only 14 km to the south is the major reservoir at Steamboat Hot Springs. This paper discusses the alternative heat sources that can be used, and selects Steamboat as the most conservative choice for a “worst-case” analysis of the details and economics of a model district heating system. A closed 16 km transmission loop between Steamboat and downtown Reno is envisaged, carrying 121°C water in the supply line and 65°C in the return line. This loop is isolated by heat exchangers from both the 176°C geothermal fluids at the Steamboat end of the line, and from the Reno user systems at the other. Detailed analysis of thermal demand densities in different parts of the City led to a model distribution network 48 km long, that serves the optimum grouping of zones of concentrated heat users. A large proportion of existing heating systems are hydronic and retrofitting of the selected buildings to the district heating system is relatively straightforward. Total peak load for the proposed system is 138 MJ s −1 (139 MW t) and annual consumption is 1.1 × 10 15 J. Capital costs total about $55.4 million, in 1981 dollars. The economic analysis shows this system could provide considerable savings relative to the cost of natural gas, if revenue bond financing at 13% is employed for the construction and startup of the system. Even more favorable economic results could be achieved if a geothermal resource could be developed closer to downtown Reno, eliminating the high cost of the 16 km transmission pipeline. Reducing the service area to the most concentrated area of heat use in downtown Reno produces an even more viable system, about half the size of the full system.

Productivity Improvement in Local Government: Its Place among Competing Priorities

Forbes, R. and E. Renshaw, of Present Developments and Needs for State Bond Banks, Finance Officers Special Bulletin (Chicago: Finance Officers Association, September 1, 1972). Hendershott, P. and D. Kidwell, Impact of Relative Security Supplies, Journal of Money, Credit and Banking (August 1978), pp. 337-347. Hopewell, M. and G. Kaufman, to Municipalities of Selling Bonds by NIC, National Tax Journal (December 1974), pp. 532-554. Hopewell, M. and G. Kaufman, Commercial Bank Bidding on Revenue Bonds: New Evidence, Journal of Finance (December 1977), pp. 1647-1656. Jarrett, J. and J. Hicks, The Bond Bank Innovation: Maine's Experience (Lexington, Kentucky: Council of State Governments, 1977). Joehnk, M., and D. Kidwell, Comparative Cost of Competitive and Underwritings in the State and Local Bond Market, Journal of Finance (June 1979), pp. 725-731. Joehnk, M. and D. Kidwell, A Look at Competitive and Underwriting Costs in the Bond Market, Public Administration Review (May/June 1980), pp. 222-225. Katzman, M. Municipal Bond Banking: The Diffusion of a PublicFinance Innovation, National Tax Journal (June 1980), pp. 149160. Kessel, R. A Study of the Effects of Competition in the TaxExempt Bond Market, Journal of Political Economy (JulyAugust 1971), pp. 706-738. Peterson, J., The Rating Game (New York: The Twentieth Century Fund, 1974). Sorenson, E., Negotiated Bond Underwritings: Implications for Efficiency, Journal of Money, Credit, and Banking (August 1979), pp. 366-370.

Some factors determining municipal revenue bond interest costs

This paper tests for variations in risk premiums on municipal revenue bonds that are related to the geographic location of the issuer, the issue's second rating, and secondary collateral provisions. The empirical findings indicate that investors required risk premiums that depended on local economic conditions. Issuer borrowing costs were also shown to be related to factors that cause or reinforce segmentation of the tax-exempt bond market.

Effects of hospital revenue bonds on hospital planning and operations.

A recent paper in the Journal drew attention to "the new medical-industrial complex" in the United States.1 It set forth the great growth of the private profit-making enterprise in the provision of health-care services and pointed to some problems inherent in that development. This paper describes yet another element — the role of private for-profit enterprise in financing the construction and renovation of hospitals — and points to the effects of this role on hospital planning, operations, and costs.Up to the middle 1960s, philanthropic contributions were the largest source of capital for community hospitals. In addition, many hospitals were . . .

Financial Planning During Times of Economic Uncertainty

Traditional sources of revenue for water utilities, including general obligation bonds, special assessment bonds, and revenue bonds, are described. The financial crunch of the 1970's forced utilities to adapt new methods to generate revenue. The following are discussed: internal expense controls such as retrofitting pumping stations and expediting billing procedures; internally‐ generated revenue sources such as collecting fixed expenses through initial monthly fees, connection fees, and general facility charges for new customers; and innovative methods of external financing such as floating rate bonds, put bonds, warrants, and tender offerings.

Buying Bonds for Business

Tax-free Industrial Revenue Bonds (IRBs) have become a very popular method of stimulating economic development among local communities. IRBs impose few direct costs upon the issuing jurisdictions while the perceived benefits, to business people and communities, are substantial. However, important social costs are associated with the use of IRBs: reduced federal tax revenues, dilution of the municipal bond market, legal and administrative expenses, and lowered real national output. A study of the use of IRBs in Ohio between 1974 and 1978 showed that few social benefits were generated to offset the real social costs of the program. IRB investments were not directed toward high unemployment areas, and the jobs they created did not appear to yield disproportionately direct benefits to the low-income segments of the issuing jurisdictions. These findings suggest that the federal government should effectively abolish the IRB program by removing I RBs' tax-exempt status. If this proves politically impossible, then IRBs should be directed instead toward severely distressed areas. This form of targeting is consistent with the role envisioned for IRBs in the Reagan administration's enterprise zone concept.