No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Financial Engineering by City Governments: Factors Associated with the Use of Debt-Related Derivatives
Abstract
Despite significant coverage in the financial press in recent years, financial engineering by city governments via the use of financial derivatives such as interest rate swaps remain an understudied area of urban financial policy. Indeed, press accounts and other case or conceptual urban studies research emphasizing the downside of these transactions are some of the only sources of information on these instruments. These stories and studies often allude to or speculate on a more basic question: Why would a government choose to enter into a complex financial instrument like a debt-related derivative? This research posits three exploratory hypotheses—financial health, financial experience and/or financial sector influence, and governance structure—culled from media accounts and the urban studies literature on the use of debt-related derivatives by city governments in the United States. It empirically explores these hypotheses by examining the various fiscal, financial, and issuer characteristics of the largest 50 U.S. cities and their choice of whether to use debt-related derivatives. The research finds that the characteristics of government most associated with debt-related derivative use are declining financial condition, increased financial experience and/or financial sector influence, and prior use of interest rate swaps.
... The incremental, stop-start, gradual and piecemeal emergence of this redevelopment is particularly revealing for what is says about the capacity of some US city governments to use speculative financial and taxation instruments. If indeed, as some have suggested, we are witnessing the financialization of US urban redevelopment policy (Farmer and Poulos, 2019;Kirkpatrick, 2016;Launius and Kear, 2019;Pacewicz, 2013Pacewicz, , 2016Singla and Luby, 2020;Sroka, 2016Sroka, , 2020Teresa, 2017;Weber, 2010), then it appears to be an on-going, geographically variegated and uneven process. As neither a prominent flagship or landmark development nor a story of terminal downtown decline, we want to suggest that most US cities are likely to constitute a marginalized majority that muddle through, tacking a path between the ever-present spectre of "failure" and the distant prospect of "success" (Williams and Pendras, 2013). ...
... With a history that chimes with many of the more fiscally conservative and risk-adverse states of the US geographical South, Kentucky's sizable rural and small town population combined with its governance through a small and mid-sized county-dominated legislative process, structures the context for both Lexington (and nearby) Louisville city government. 2,3 While there is evidence of US cities turning to more risky forms of financing redevelopment (for an overview see Singla and Luby, 2020), this is far from a spatially-uniform pattern that can be assumed to play out smoothly and without contradiction from one city to the next. What the Lexington case suggests is that the use of these instruments is more likely to involve a complex and uncertain cajoling and negotiating by city government, in which the limits to what they are capable of achieving under certain financial systems and land ownership patterns become all too readily apparent. ...
... One important aspect of this wider growth in "exposure" (Levine, 1989) has been the emergence of various financial instruments, including some that involve the creation of debt (Singla and Luby, 2020). Finance agencies of various stripes have seen their roles expand, alongside a range of others making claims over financial expertise to facilitate the financial engineering undertaken by many US city governments (Hackworth, 2007;Sbragia, 1983;Singla and Luby, 2020;Weber, 2002;Weber and O'Neill-Kohl, 2013). ...
Since the 1980s US city governments have increased their use of more speculative means of financing economic redevelopment. This has involved experimenting with a variety of financial and taxation instruments as a way of growing their economies and redeveloping their built environments. This very general tendency, of course, masks how some cities have done well through the use of these instruments while others have not. The work to date has tended to pivot around a “winner-loser dichotomy”, which emphasises either the capacity of US cities to be able to experiment and speculate through the use of one financial instrument or another or their failings with these instruments, resulting in bankruptcy and fiscal crisis. This paper presents a case study of Lexington, Kentucky and using archival research and interviews we argue that speculative financial instruments are harder to choreograph for some cities than for others. We draw particular attention to US cities beyond those that tend to be over-represented in the metro-centric academic literature. This argument has conceptual significance. Building theory out of the experiences of US cities such as Lexington, Kentucky turns attention to the work required by city governments as they seek to finance the redevelopment of their downtowns. We make the case for a continued appreciation of the messy politics around the use of financial instruments, and its indeterminate, open and unpredictable nature in an era of fragile and uncertain entrepreneurial US urban policy-making.
... Financial competency and agency can be achieved by state and local governments to match the growth of the municipal capital market and the variety of financial services on offer (Bifulco et al., 2012;Bland & Overton, 2016;Greer et al., 2018;Hildreth & Zorn, 2005;Singla & Luby, 2020). Specifically, paying attention to the process of issuing debt, which represents a significant source of friction between the public and private sectors, is critical (Johnson et al., 2014;Martell et al., 2021;Simonsen & Robbins, 1996). ...
... Issuing tax-exempt bonds to build everything from schools to bridges to water towers is common for communities of all sizes, from the smallest rural communities to the major metropolitan cities (Johnson et al., 2014). More recent innovations in the municipal capital market have expanded its use to more creative financing structures with varying levels of risk, such as bonds to fund pensions or bonds issued with unconventional features, such as those with derivatives or those with corporate backers (Greer et al., 2018;Singla & Luby, 2020;Whitaker, 2018). Decisions on how much and for which purposes to borrow are subject to organizational expertise as well as an understanding of state-specific rules that govern debt management, federal-level tax and disclosure rules, and a comprehension of dynamic market conditions. ...
State and local governments seek to save money through fiscal efficiency. One such mechanism widely studied in the literature is through the choice for financial underwriting of debt. The extant literature generally suggests that state and local governments can lower borrowing costs through a competitive method of sale. In a meta‐analysis of 418 effects from 97 studies, we find that competitive sales do enjoy a statistically significant reduction in borrowing costs However, these effects are moderated when using key control variables, the use of more recent data, as well as due to measurement and methodological choices. Consequently, despite a large number of studies in this area, more research specific to small borrowers, new and understudied contexts, or those using sophisticated selection and causal methods is needed to understand whether the practical preference for competitive sales should persist.
... On the one hand, austerity and, in some cases, increasing levels of sovereign debt have made local governments much more susceptible to financial innovation that has been praised as an effective tool to reduce financing costs and even as a profit center by PSFs, regulators, and the finance press. Accordingly, previous research has highlighted financial and socioeconomic stress as a core driver for local government's use of interest rate derivatives (Mertens et al., 2019;Singla and Luby, 2020). On the other hand, finance itself and banking in particular have increasingly become financialized through technological advancements, the adoption of new calculation methods, and increasing competitive pressures reinforced by the liberation and deregulation of European financial markets. ...
... As a core instrument of contemporary capitalism (Bryan and Rafferty, 2006), derivatives introduced corporate style debt management practices and rationalities to local government and created new bonds with global financial markets. Previous research (Deruytter and Möller, 2020;Hendrikse and Sidaway, 2014;Lagna, 2015;Mertens et al., 2019;Petzold, 2014;Singla and Luby, 2020;Tickell, 1998;Trampusch and Spies, 2015) and empirical evidence from municipalities of varying size, socioeconomic situation, and political affiliation suggest the occurrence of a structural change rather than individual cases of policy experimentation, overambitious banking, misconduct or even bribery (all of which might be part of the story but cannot account for its systematic diffusion). While the introduction of debt management approaches to the municipal government was often associated with the prospect of increasing fiscal and political leeway for highly indebted local councils, market volatilities during the financial crisis turned many of these derivatives toxic and, in some cases, caused additional fiscal and political stress for already cash-strapped local governments. ...
Over the past decade, a tide of financial analyses has washed over the African continent. These reports by international consultancy firms predict fundamental economic transformation, or “Africa Rising,” a slogan that signifies an emergent middle class and investment-ready domestic consumer markets. However, in promoting the Africa Rising narrative, the consultancy firms also have directed attention to the role of the private sector for public financing. This chapter illustrates that process through a specific example: the securitization of remittances. By recasting remittances as future flow receivables, African states claim increased foreign exchange reserves and thus improve sovereign credit ratings. This financial technique allows governments to access foreign capital markets by issuing sovereign bonds based on asset-backed securities, thus bypassing channels of public credit, such as multilateral foreign aid. The international consultancies serve as intermediaries in this network of migrants, local development banks, and international institutional investors, leading to new forms of debt-financing.
... On the one hand, austerity and, in some cases, increasing levels of sovereign debt have made local governments much more susceptible to financial innovation that has been praised as an effective tool to reduce financing costs and even as a profit center by PSFs, regulators, and the finance press. Accordingly, previous research has highlighted financial and socioeconomic stress as a core driver for local government's use of interest rate derivatives (Mertens et al., 2019;Singla and Luby, 2020). On the other hand, finance itself and banking in particular have increasingly become financialized through technological advancements, the adoption of new calculation methods, and increasing competitive pressures reinforced by the liberation and deregulation of European financial markets. ...
... As a core instrument of contemporary capitalism (Bryan and Rafferty, 2006), derivatives introduced corporate style debt management practices and rationalities to local government and created new bonds with global financial markets. Previous research (Deruytter and Möller, 2020;Hendrikse and Sidaway, 2014;Lagna, 2015;Mertens et al., 2019;Petzold, 2014;Singla and Luby, 2020;Tickell, 1998;Trampusch and Spies, 2015) and empirical evidence from municipalities of varying size, socioeconomic situation, and political affiliation suggest the occurrence of a structural change rather than individual cases of policy experimentation, overambitious banking, misconduct or even bribery (all of which might be part of the story but cannot account for its systematic diffusion). While the introduction of debt management approaches to the municipal government was often associated with the prospect of increasing fiscal and political leeway for highly indebted local councils, market volatilities during the financial crisis turned many of these derivatives toxic and, in some cases, caused additional fiscal and political stress for already cash-strapped local governments. ...
Under the hegemony of New Public Management, local governments have been targeted by professional service firms (PSFs) resulting in outsourcing, reorganization, and marketization of public services. More recently, the local state has also increasingly been exposed to the influence of financial market actors, dynamics, and rationalities. The chapter illustrates this process of state financialization by tracing the emergence and consolidation of municipal debt management policies including the use of interest rate derivatives in the UK and Germany. This process is interpreted as a techno-political project crucially driven by private expertise and actively spearheaded by particular PSFs, namely treasury management advisors and brokers. Five stages of their involvement are identified and empirically illustrated: The crafting of a new debt management narrative, the provision of trial portfolio analyses, the canvassing, brokering, and contracting of derivative deals, the actual debt management operations, and crisis management.
... The combination of post-2008 major political and economic transformations and the variegated, recombinant nature of how these played out in local state finances and geographies, fed into a renewed methodological focus on 'conjunctural analysis' in urban studies (Peck, 2017a(Peck, , 2017b. In this, temporal and geographical unevenness and particularity in local state and financialisation relations internationally have been increasingly emphasised (see, inter alia, Mader et al., 2020, Muldoon-Smith & Sandford, 2023Pérignon & Vallée, 2017;Singla & Luby, 2020). So addressing the range of agency in different realms while acknowledging structural constraints such as the path dependency of institutional configurations, accounts in this vein have focused on the context-specific enabling conditions (institutions, governance structures, regulations) at multiple scales and explored the agency of state actor bricolage, experimentation and improvisation in navigating funding, financing and governing arrangements as well as wider public contestations (Deruytter & Bassens, 2021;Peck & Theodore, 2019;Ward, 2022). ...
... Therefore, the idea of financial engineering has been introduced as a good tool for structural management. It is used as a tool for the processes of design, innovation and developing and operating financial instruments, which is very important in the financial field (Singla & Luby, 2020). DL is widely used in classification and prediction, and can be well used in theor y in the optimization of time indicators of financial engineering. ...
The present work aims to optimize the time index of financial engineering to improve the efficiency of financial decision-making. A Back Propagation Neural Network (BPNN) model is designed and optimized by the Ant Colony Algorithm (ACA) based on the bionic algorithm and Deep Learning (DL). After introducing the basic knowledge of neural networks and bionic algorithms, the advantages and disadvantages of the algorithms are integrated for maximal effects. Besides, ACA optimizes the weights and thresholds in the neural network in complex problems to reduce the relative error, enhance the stability and accuracy, and improve the classification speed of the BPNN model. The experimental results indicate that the classification accuracy of the ACA model is 91.3%, and the area under the receiver operating characteristic curve is 0.867. Moreover, the running time of BPNN based on ACA is 2.5 s, the error is 0.2, and the required number of iteration steps is 36 times, better than the test results of similar algorithms. These results demonstrate that the improved BPNN based on ACA has higher classification efficiency, better efficiency and smaller errors than the traditional BPNN. In terms of financial engineering decision-making, the time index of decision-making has been significantly improved, which is conducive to reducing the decision-making risk of financial institutions and has a positive effect on improving the overall operational efficiency of enterprises.
... Additionally, the increase in the need to use derivatives can often become self-enforcing and unsustainable, as with rising levels of indebtedness. Just like a speculative or Ponzi borrower requires new debt in order to pay back previous debt, Singla and Luby (2018) find that declining financial health and prior use of interest rate swaps are two of the most important determinants in the use of such swaps. ...
This paper analyses the development of sub-sovereign debt in the Eurozone, based on a sample of 58 regional and municipal governments for the period 2004–17. The findings show that when examined from the prism of sub-sovereign debt, Eurozone countries cannot be readily divided into core and periphery, as conventionally done nationally. For many countries, a significant domestic variegation in local economic conditions is identified. Driving forces in the rise of debt positions are also varied. Despite such variegations, the analysis also confirms the overarching role of national governments in setting the fiscal and financial boundaries within which local governments operate.
... The state plays an active role during the process of financialization (Haila, 2000;Lauermann, 2018;Shatkin, 2016;Singla and Luby, 2018). For instance, the state sets up functioning credit systems which allocate interest-bearing capital to real estate and infrastructure projects. ...
The miraculous growth of China, particularly in its large cities, has received much attention in recent decades. Most literature, however, concentrates on large and developed coastal regions or globalizing cities such as Beijing, Shanghai, Guangzhou, and Shenzhen; far less is known about central or western cities, where the unprecedented growth and new construction are also taking place. Moreover, little is known about the actual process of their city making, especially from a financial perspective. To address these gaps, in this article we examine the making of the new Wuhan, capital city of Hubei Province and central China, to interrogate the actual process by which underdeveloped or developing Chinese cities resort to financialization to achieve planning aims, build new spaces, and fund infrastructures. Through case studies, fieldwork, and interviews conducted during the past several years in the contexts of three typical projects - Zhongshan Avenue (ZA), East Lake Greenway (ELG), and 27 Riverside Business District (RBD) - we examine their modalities, evaluate their effects, and articulate specific institutional arrangements: the local financing platform (LFP), the project land package, and various actual efforts to construct these projects. Through these case studies, we contribute to the literature on urban China by highlighting the close relationship between planning strategies and urban financialization. Our findings highlight China’s ‘state entrepreneurism’, especially the active role of the local states when producing new spaces. We call for further attention to the variegated modalities and effects of financialization across different contexts, in particular that of emerging Chinese cities.
Local elected leaders make decisions that affect service delivery and quality of life. But budgetary constraints mean that cities cannot indefinitely expand and improve services. Maintaining fiscal balance may be prudent, but doing so can impair service delivery. How are elected officials incentivized to make those trade-offs? Do voters actually care about the financial health of their city government? This research examines these questions in two ways. First, it uses data on elections, local finance, and the political environment in 44 large city governments to demonstrate a relationship between signals of financial health and voter support for incumbents in local elections. Second, it tests those findings using an experimental design that manipulates two dimensions of the political environment, crime rate, and financial health via credit rating. Both demonstrate that voters in local elections hold elected officials accountable for changes in financial health.
Financial engineering is constantly changing and encountering new problems. Financial engineering helps us detect emerging trends and challenges, such as fintech’s effect on banking institutions or environmental change, and design novel solutions. Still, many areas remain open to exploring the contribution of FE research in finance. This study has adopted combined qualitative research approaches through bibliometric analysis. The research was conducted from 2007 to 2022. Study findings and conclusions are supported by an analysis of bibliographic coupling, co-occurrence & co-citation of 343 research publications taken from the Scopus database, and analysis was performed using software tools such as VOS-Viewer and Biblioshiny with R Studio. Based on the results of these analyses, the study was able to conclude the trends and characteristics of research on financial engineering in the financial market. The study identifies prominent authors, journals, and institutions using bibliometric analysis. The current study highlighted the most cited research articles and identified the seven most emerging thematic clusters. The originality extracted from research findings compels and motivates extensive research in FE in the future. The emerging areas and themes identified from the study, i.e., (1) FE and adoption of AI & IOT Applications for RM, (2) investment decision and business crisis, and (3) recent developments and mathematical application in risk analysis. The novelty of the study lies in its focus on financial engineering in emerging financial markets, the adoption of a bibliographic overview methodology, the integration and evaluation of previous research, the identification of trends and research gaps, and its value as a resource for researchers and practitioners. These aspects make it a unique and valuable contribution to the field of financial engineering.
Local governments facing extreme fiscal stress have few options. One that has historically been rare is filing for Chapter 9 bankruptcy. The limited number of cases has prevented systematic study of municipal bankruptcy. But given the results of bankruptcy for individuals, there are reasons to believe that bankruptcy can provide a financial fresh start for local governments. This research leverages six municipal bankruptcies in the years immediately following The Great Recession to explore the effects of bankruptcy on local government financial health. It employs a variety of empirical approaches to generate a counterfactual for the bankrupt governments and assess the effects of bankruptcy: synthetic control, propensity score matching, staggered difference‐in‐differences, and an event study. The results show that bankruptcy is associated with no declines and some meaningful improvements in financial health. These findings suggest that Chapter 9 bankruptcy may provide extremely stressed local governments with a potential path forward.
While municipalities in the United States face many challenges, one of the most critical is an aging stock of infrastructure. Concurrent with this issue is a new fiscal reality where local governments face unfunded pension liabilities, difficulties in raising revenues, and potentially declining state and federal support. As a result, meeting infrastructure needs may require alternative strategies (e.g., green bonds or social impact bonds, public-private partnerships, or privatization) beyond traditional financing mechanisms like general obligation bonds. Though these tools are available to a wide range of governments, not much is known about how frequently they are used and why some governments choose to use them while others do not. Using a survey of local governments, this research explores the extent to which cities are already using or considering using alternative tools to meet their infrastructure needs and the factors associated with the decision to use or pursue using those tools. It finds that the factors associated with the use of these tools are dependent on the nature and type of tool, with alternative funding tools like developer fees more associated with a decline in political support for municipal bonds and alternative financing tools like green bonds associated with budgetary imbalances.
This report discusses the financialization of urban governance and the built environment as an explicit state strategy, focusing on municipal finance and the use of financial products by the local state and (semi-)public sector. A number of lessons can be drawn regarding the temporality and spatiality of financializing ‘the urban’. Firstly, the financial crisis that started in 2007 has not resulted in a definancialization of the city. Secondly, despite a number of common trends, the literature also highlights the diversity of experiences. Yet it would be too easy to conclude that the financialization of the land, housing and real estate is exclusively a Global North phenomenon, as it extends into the Global South. Finally, the literature notes an emerging gentrification-touristification-financialization nexus. The role of the state in all of this is variegated and often ambiguous.
In the decade leading up to the global crisis of 2007-2008, local governments in the United States used increasingly complex financial structures to underwrite major capital projects. These structures offered potentially lower borrowing costs while also carrying greater financial risk, and in most cases, the bond structures imploded when the crisis hit. Why did some local governments gravitate toward this part of the risk spectrum while others did not? This article develops several explanations for local government risk-taking with a case study of the Chicago Public Schools’ use of auction rate securities and interest rate swaps. We argue that the school district’s exceptional use of these instruments was due to administrators’ familiarity with these instruments, Chicago’s long history of using creative techniques to defer tax increases and service cuts, and lack of knowledge about the extent to which investment banks were propping up these securities markets.
During and after the Great Recession, many local governments were compelled to declare fiscal emergencies, lay off workers, and cut services while others weathered the recession without needing to take such actions. In this paper, we construct a measure of fiscal distress using comprehensive annual financial reports, budgets, and media coverage and then use it as a dependent variable to model fiscal distress as a function of past financial performance and socio-economic environment. The empirical models show the relative importance of fiscal reserves, debt, and revenue composition in predicting local fiscal distress.
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 government's 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.
This book unpacks the urban development process, identifying the players and processes that contribute to periodic construction booms. Debunking the notion that booms occur to accommodate growth or are propelled by a natural process of creative destruction, it develops novel theories about how real estate markets are “performed” through historically and locally-specific professional practices. The book focuses on three main causes of overbuilding in commercial real estate: financial instruments and regulatory changes that boost liquidity in global capital markets; the practices of local intermediaries that help construct demand for new assets; and local government policies that provide incentives for development while simultaneously removing the detritus from earlier waves of expansion. To illustrate the interplay between these dynamics, the book documents the case of Chicago's downtown during the “Millennial Boom,” roughly 1998 through 2008. Relying on market data and interviews, it shows how the city's recovery from the recession of the early 2000s was a relatively jobless one and did not upend the secular trend of population loss. Moreover, modest innovations in building technology did not suddenly afflict older buildings with a case of mass obsolescence. This period of frenzied commercial construction was instead a response to the availability of public and private finance validated by the brokered and subsidized preferences of existing occupants for more modern premises. The book ends with policy proposals to slow capital circulation and alter the professional practices associated with speculative overbuilding.
Keywords: urban development, real estate, financialization, Chicago history, urban planning, development finance, urban politics, capital markets
The 100th anniversary of the International City/County Management Association provides an excellent point to review and assess research on the performance of the council-manager form of government. The development of the council-manager form arguably has been the most important innovation in American local government over the last century, yet its impact on the performance of municipal governments is not well understood. This article reviews and assesses the empirical evidence for 10 propositions that council-manager governments perform better than mayor-council governments. This evidence indicates that although progress has been made on demonstrating differences in representation and functionality, the proposition that council-manager governments are better managed than mayor-council governments has yet to be seriously engaged in this literature. Filling this critical gap requires progress in two areas: the development of theory to explain why council-manager governments are better-managed organizations and the production of evidence assessing the major propositions of this theory.
Problem, research strategy, and findings: Leasing government infrastructure to private investors has been proposed as a practical way to increase both public revenue and investment in aging facilities, yet questions remain regarding lease value. In particular, some recent private auction bids surpassed government's lease estimates for U.S. roads and parking systems by hundreds of millions of dollars. We argue such discrepancies are largely explained by the use of structured finance or financial engineering techniques; these lower capital costs and maximize quick investor payouts, yet are often ignored in lease agreements because governments do not understand them. Our approach models the separate effect of several deal parameters on the investment return of a hypothetical tolled facility. We find even modest financial engineering (such as interest rate derivatives and swaps, deferred payment sweeps, or mark-to-market accounting practices) increases the current value of future facility revenues far more than changes in lease length, tolls, or operating costs. The public sector undercharges for its infrastructure when it ignores how private investors package and assess future revenue.
Public administration and management (PAM) scholars have long recognized that financial resources are the lifeblood of public
organizations. Less appreciated is how the study of public financial management (PFM) can inform the theory, research, and
practice of PAM broadly. In this article, we argue that PFM research brings a variety of conceptual, analytical, and empirical
insights to bear on some of public administration and management's timeless questions. To illustrate this claim, we synthesize
findings from a variety of research across the PFM subfield.
Existing private sector models of derivative use do not readily translate into the public sector that faces the joint objectives of value maximisation and provision of a privately unprofitable mission good. This paper develops and tests a model explaining public sector derivative use in terms of budget discrepancy minimisation. Hypotheses are developed and tested using logistic regression over a sample of Australian Commonwealth Government entities. It is found that public sector derivative use is positively correlated with liabilities and size of the organisation. This is consistent with management of budget discrepancies.
This study tests a measure of financial condition using government-wide information as required under the new financial reporting model set forth in GASB Statement No. 34. The measure consists of four financial condition dimensions in cash, budget, long-run and service-level solvencies, and 11 financial condition indicators. Results show that the measure is relatively reliable and valid and that government-wide information reported under the requirements of GASB Statement No. 34 provides a useful reporting framework to evaluate financial condition of a government. Additionally, financial condition among states varies greatly and there is much room for improvement.
I present a new Stata program, xtscc, that estimates pooled ordinary least-squares/weighted least-squares regression and fixed-effects (within) regression models with Driscoll and Kraay (Review of Economics and Statistics 80: 549–560) standard errors. By running Monte Carlo simulations, I compare the finite-sample properties of the cross-sectional dependence-consistent Driscoll-Kraay estimator with the properties of other, more commonly used covariance matrix estimators that do not account for cross-sectional dependence. The results indicate that Driscol-Kraay standard errors are well calibrated when cross-sectional dependence is present. However, erroneously ignoring cross-sectional correlation in the estimation of panel models can lead to severely biased statistical results. I illustrate the xtscc program by considering an application from empirical finance. Thereby, I also propose a Hausman-type test for fixed effects that is robust to general forms of cross-sectional and temporal dependence. Copyright 2007 by StataCorp LP.
This paper provides an overvie of topics in nonstationary panels: panel unit root tests, panel cointegration tests, and estimation of panel cointegration models. In addition it surveys recent developments in dynamic panel data models.
Municipal bankruptcy has historically been an extremely rare event. However, with the onset of the global financial crisis in 2007, many cities in the United States were under fiscal stress, coinciding with an uptick in the number of bankruptcies. This study leverages the proximity and similarity of three Chapter 9 filings in the State of California – the Cities of San Bernardino, Stockton, and Vallejo – to assess the relationship between fiscal stress and bankruptcy. In particular, it explores whether these three cities were explicitly under more fiscal stress than other, comparable cities in California. Using two models for fiscal health, the study finds that while the bankrupt cities were clearly under duress, the existing models of fiscal health did not indicate that the stress experienced by the bankrupt cities was demonstrably more extreme than the conditions faced by numerous other cities. The study concludes that models of fiscal health are unable to account for political or managerial choices that may be driving decisions to file for bankruptcy protection. In addition, the study suggests that the existing models do not account for certain factors that may drive the bankruptcy decision including issues relating to unfunded liabilities to pensions and other post-employment benefits.
This study examines the relationship between managerial networking and the fiscal health of city governments in the United States that faced a serious budget crisis during and immediately after the Great Recession. Do public managers’ ties with external stakeholders help improve the fiscal health of these cities? Or do these ties bind city officials to decisions that further exacerbate the fiscal difficulties of their governments? These questions are answered using data from a survey of municipal governments across the United States with a population of 50,000 or more, and financial data from Comprehensive Annual Financial Reports (CAFR) covering more than 200 cities and for three fiscal years. Using instrumental variable regression to address possible common source bias and simultaneous causation, there is strong evidence that an external networking orientation is associated with a decline in city government fiscal health, whether the measure used is perceptual or CAFR-based.
Der Beitrag untersucht die Beziehung des Networkings von Managern und der fiskalischen Verfassung von Stadtverwaltungen in den Vereinigten Staaten, die sich mit einem Haushaltsnotstand im Zuge der letzten Weltwirtschaftskrise konfrontiert sahen. Helfen die Netzwerke von Führungskräften in der Verwaltung, die Finanzprobleme dieser Städte zu überwinden? Oder binden diese Netzwerke die Verwaltung an Entscheidungen, die die Haushaltsprobleme weiter verschärfen? Diese Fragen werden mittels Daten eines Surveys von Kommunalverwaltungen in den Vereinigten Staaten mit mehr als 50.000 Einwohnern sowie Finanzstatistiken (Annual Financial Reports), die mehr als 200 Städte über drei Jahre hinweg erfassen, beantwortet. Basierend auf Regressionen mit instrumentellen Variablen, die Methodenbias- und Kausalitäts-Probleme adressieren, finden wir einschlägige Belege dafür, dass externes Networking mit fiskalischen Problemen assoziiert ist, unabhängig davon, ob Einschätzungen oder Finanzstatistiken als Messgrundlage benutzt werden.
Note: Um die Übersetzungen der Zusammenfassungen übersichtlich und einfach verständlich zu gestalten, wurde bei allen personenbezogenen Bezeichnungen immer das generische Maskulinum verwendet, das sowohl Personen des männlichen als auch des weiblichen Geschlechts einschließt.
Translation credit: Alexander Kroll of Florida International University and Johanna Smyth
While the passage of Statement No. 34 by the Governmental Accounting Standards Board (GASB, 1999) created a more robust financial reporting model, local officials continue to struggle with defining financial condition, interpreting it from annual financial statements, and communicating it in a systematic way. This review presents a framework for analyzing, interpreting, and communicating financial condition within the fund and government-wide reporting structure. It specifically responds to the void in the public administration literature for a manageable, yet comprehensive, approach to financial condition analysis. The goal is to help local officials conceptualize financial condition from the interpretation of resource flow and stock as presented in annual financial statements.
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. © Craig L. Johnson, Martin J. Luby and Tima T. Moldogaziev 2014. All rights reserved.
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.
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.
Jefferson County, Alabama undertook a series of risky financial maneuvers in 2003 that included issuing large amounts of variable rate and auction rate securities as well as engaging in numerous interest rate swaps in order to lower the burgeoning costs of repairing its sewer system to comply with federal regulations. These complex financial instruments, intended to lower debt service costs on the county's $3 billion in outstanding sewer warrants, led the county to financial bankruptcy in the wake of the financial markets collapse. This paper explores the choice of securities by analyzing the risk of adjustable rate securities and interest rate swaps, examining the Jefferson County case in detail, and providing some lessons for future financial management within the context of unexpected events such as the current recession.
Financial condition analysis is a critical task for public managers, but it is still unclear which indicators are the most salient measures of financial well-being. The financial health of Detroit, Michigan is unequivocally poor, providing an interesting case to evaluate the financial condition indicators that currently exist. We calculate the key financial indicators using data from Detroit over the last 11 years. We find the indicators fall into three groups: those that show no sign of impending financial crisis, those that show a steady worsening financial condition, and those that demonstrate a substantial change immediately prior to filing bankruptcy.
Understanding the financial condition of local governments is important for public managers and elected officials as they work to align revenues with p ublic demands for services, while maintaining financial solvency. This task becomes even more important when the economic and financial environment, over which local officials have little to no control, is collapsing around them. This article seeks to expand the literature of measuring financial condition of local governments by testing the validity and reliability of the Financial Condition Index (FCI). The FCI is a framework for evaluating financial condition that was initially developed by Groves, Godsey, and Shulman and later applied in US state-level studies by a number of scholars. The results from this article cast serious doubt on the applicability of using the FCI, and the four associated solvency dimensions, as an appropriate methodology for evaluating local government financial condition.
Municipal governments play a vital role in American democracy, as well as in governments around the world. Despite this, little is known about the degree to which cities are responsive to the views of their citizens. In the past, the unavailability of data on the policy preferences of citizens at the municipal level has limited scholars’ ability to study the responsiveness of municipal government. We overcome this problem by using recent advances in opinion estimation to measure the mean policy conservatism in every U.S. city and town with a population above 20,000 people. Despite the supposition in the literature that municipal politics are non-ideological, we find that the policies enacted by cities across a range of policy areas correspond with the liberal-conservative positions of their citizens on national policy issues. In addition, we consider the influence of institutions, such as the presence of an elected mayor, the popular initiative, partisan elections, term limits, and at-large elections. Our results show that these institutions have little consistent impact on policy responsiveness in municipal government. These results demonstrate a robust role for citizen policy preferences in determining municipal policy outcomes, but cast doubt on the hypothesis that simple institutional reforms enhance responsiveness in municipal governments.
Now that state governments issue comprehensive annual financial reports in accordance with Statement No. 34 of the Governmental Accounting Standards Board, it is possible to generate a consistent and comprehensive set of government-wide financial information. We use the information to develop financial ratios to benchmark government financial performance from information beyond the traditional general fund, and test the hypothesis that such information is incorporated into the assessment of credit risk. We provide an empirical analysis of the incorporation of government-wide financial information into state government credit ratings, which provides a positive empirical test of the theory of certification and demonstrates how information from the government-wide financial statements is infused into financial markets.
The increasing use of debt-related derivatives over the last 10 years, combined with the recent global financial crisis' impact on these instruments, greatly affected the finances of many state and local governments in the United States. Some observers believe the negative effects could have been minimized had governments established prudent financial risk management policies governing these products. This research describes and analyzes debt-related derivatives policies at the state level. It finds that while 30 states used debt-related derivatives between 2005 and 2010, only 20 states have policies guiding financial derivative practices, with the policies being of varying breadth and depth.
Do municipal bonds sold through competition have lower interest rates for issuers than negotiated sales? Research done in the 1970s and 1980s suggests that, all else equal, interest costs are generally lower for competitively bid municipal bonds compared to negotiated bond sales. William Simonsen and Mark D. Robbins explore this question in light of changes in the municipal bond market that suggest a need to revisit this question. Their findings indicate that on average, and all else equal, competitive sales result in lower interest cost to issuers compared to negotiated sales, and that this difference increases with the number of bids received. This research has added salience given several recent scandals and alleged improprieties in the municipal bond market.
We reviewed the fiscal 2003 financial statement footnote disclosures of the fifty states and the 100 largest cities in the United States (US) to ascertain the nature and extent of derivative activities among US state and municipal governments. There were 23 state governments and 23 municipal governments that have engaged in such transactions with an aggregate notional value approaching $32 billion. These governments enter into these transactions primarily to hedge the interest rate and cash flow risks associated with their long term variable rate demand obligations and auction rate debt. Our findings also indicate that the widespread implementation of GASB TB 2003 - 1 has improved the quality of state and municipal disclosures with respect to their derivative activities. In June 2008, the GASB issued its Statement 53 which mandates the accounting measurement of these derivative financial instruments at their fair value on the statement of net assets and promises to further improve their footnote disclosure.
This article examines the specific mechanisms that have allowed global financial markets to penetrate deeply into the activities of U.S. cities. A flood of yield-seeking capital poured into municipal debt instruments in the late 1990s, but not all cities or instruments were equally successful in attracting it. Capital gravitated toward those local governments that could readily convert the income streams of public assets into new financial instruments and that could minimize the risk of nonpayment due to the actions of nonfinancial claimants. This article follows the case of Chicago from 1996 through 2007 as the city government subsidized development projects with borrowed money using a once-obscure instrument called Tax Increment Financing (TIF). TIF allows municipalities to bundle and sell off the rights to future property tax revenues from designated parts of the city. The City of Chicago improved the appearance of these speculative instruments by segmenting and sequencing TIF debt instruments in ways that made them look less idiosyncratic and by exerting strong political control over the processes of development and property tax assessment. In doing so, Chicago not only attracted billions of dollars in global capital but also contributed to a dangerous oversupply of commercial real estate. Copyright (c) 2010 Clark University.
Obra en que se estudian los efectos de la reestructuración de las grandes ciudades en Estados Unidos, desde las perspectivas urbanística, administrativa y social. Con base en el análisis de la política económica neoliberal, se revisan sus efectos en la forma de gobierno de estas ciudades a la vez que se agravan los problemas de inequidad, exclusión y desplazamiento en las zonas urbanas.
Although the use of derivatives, particularly interest rate swaps, has grown explosively over the past decade, derivative financial instrument use by nonprofits has received only limited attention in the research literature. Because little is known about the risk management activities of nonprofits, the impact of these instruments on the ability of nonprofits to raise capital may have significant public policy implications. The primary motivation of this study is to determine the types of derivatives used by nonprofits and estimate the frequency of their use among these organizations. Our study also extends contemporary finance theory by an empirical examination of the motivation for interest rate swap usage among nonprofits. Our empirical data came from 193 large nonprofit health care providers that issued debt to the public between 2000 and 2003. We used a univariate analysis and a multivariate analysis relying on logistic regression models to test alternative explanations of interest rate swaps usage by nonprofits, finding that more than 45 percent of our sample, 88 organizations, used interest rate swaps with an aggregate notional value in excess of $8.3 billion. Our empirical tests indicate the primary motive for nonprofits to use interest rate derivatives is to hedge their exposure to interest rate risk. Although these derivatives are a useful risk management tool, under conditions of falling bond market interest rates these derivatives may also expose a nonprofit swap user to the risk of a material unscheduled termination payment. Finally, we found considerable diversity in the informativeness of footnote disclosure among sample organizations that used interest rate swaps. Many nonprofits did not disclose these risks in their financial statements. In conclusion, we find financial managers in large nonprofits commonly use derivative financial instruments as risk management tools, but the use of interest rate swaps by nonprofits may expose them to other risks that are not adequately disclosed in their financial statements.
The present paper develops and tests a model explaining public sector derivative use in terms of budget discrepancy minimization. The model is different from private sector models. Private sector models do not readily translate into the public sector, which typically faces different objectives. Hypotheses are developed and tested using logistic regression over a sample of Australian Commonwealth public sector organizations. It is found that public sector organization derivative use is positively correlated with liabilities and size consistent with the hypotheses concerning budget discrepancy management. Copyright 2004 Accounting and Finance Association of Australia and New Zealand..
Emanuel Says He Didn’t Do Risky Interest-Rate Swaps, but He’s Done 4
- Gillers Heather
Banks Kept CPS in Shaky Bond Market
- Gillers Heather
- Jason Grotto
Damage to City Budgets: Self-inflicted with Help from Wall Street
- Schoen John
The Rise and Fall of the Municipal Swaps and Derivatives Market
- Akheil Singla
Risky Bonds Prove Costly for Chicago Public Schools
- Grotto Jason
- Gillers Heather
Bad Interest Rate Swaps Contribute to Detroit Water Crisis and Financial Crisis.” The Detroit Metro Times
- Guyette Curt
Debate Test Members’ Financial IQs
- Javers Eamon
Philadelphia Swaps Cost Taxpayers $331M: Report.” Bloomberg News
- Varghese Romy
Dirty Deals: How Wall Street’s Predatory Deals Hurt Taxpayers and What We Can Do about It
- Bhatti Saqib
Detroit Resurrected: To Bankruptcy and Back
- Nathan Bomey
Exclusive: A Financial Time Bomb in Chicago
- Mihalopoulos Dan
The Financial Engineering of Infrastructure Privatization: What Are public Assets Worth to Private Investors?
- Philip Ashton
- Doussard
- Marc
- Rachel Weber
Measuring Financial Condition: A Study of US States
- Wang
- Xiaohu
- Dennis
- Lynda
- Yuan Tu
- Sen