Analyzing the determinants of state short-term debt issuance : does fiscal stress influence the level of short-term municipal borrowing?
Askew, Emily E.
Thesis (M.P.P.)--Georgetown University, 2010.; Includes bibliographical references.; Text (Electronic thesis) in PDF format. States often rely on short-term notes as a way to finance uneven cash flows within a fiscal year. Qualitative evidence suggests that, in recent years, states are increasingly turning to short-term debt to finance operating deficits. If states are indeed using short-term debt for deficit financing, policymakers should be concerned. This practice could obscure fiscal problems, expose states to unnecessary market risk, and cause the overall cost of borrowing to increase. Unfortunately, the reasons for which states issue short-term debt have been difficult for those outside of ratings agencies to study empirically. There has been no easily accessible and comprehensive data collection in this area, and the public data is available lacks the level of detail needed for a meaningful analysis. This paper uses detailed data from Thomson Reuters to predict the issuance levels of two different types of debt: cash flow debt and capital financing debt. It then uses a fiscal framework to asses whether acute fiscal stress, measured by the size of a state's budget gap, does in fact contribute to short term debt issuance. The findings indicate that, in contrast to expectations, budget gaps do not exert a strong direct influence on short-term debt levels. The pressure of budget gaps may be expressed indirectly through changes in specific expenditures and revenues. The strongest influences on the amount of short-term debt levels - both cash flow and capital financing - are debt and deficit policies intended to limit long-term debt levels and imbalanced budgets. This suggests that short-term debt may be used as an alternative method for long-term debt financing by policymakers who find themselves increasingly constrained by debt limits and balanced budget requirements. In other words, states may be using short-term debt to circumvent restrictions intended to limit overall indebtedness. This practice could inhibit the effectiveness of those policies, and hamper efforts to assess the true amount of debt that states must repay. To avoid these outcomes, states should consider establishing comprehensive debt plans, and improving the collection and dissemination of debt expenditure data. The federal government, particularly the U.S. Census and the Municipal Securities Rulemaking Board, could assist states in this effort. This research also raises interesting questions about the extent to which states make their financing decisions based on sound financial policies. Future research should focus on the effects of political culture, government structure, and market forces on short-term debt levels. Finally, more studies should assess the quality and availability of debt data - this is important to both researchers, and to the general public who ultimately pays for these debt management practices.
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