State and Local Financial Instruments

State and Local Financial Instruments

Policy Changes and Management

Studies in Fiscal Federalism and State–local Finance series

Craig L. Johnson, Martin J. Luby and Tima T. Moldogaziev

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.

Chapter 5: Subnational government debt financial management I: financing principles and policies

Craig L. Johnson, Martin J. Luby and Tima T. Moldogaziev

Subjects: economics and finance, public finance, politics and public policy, public administration and management, public policy


In the life of a community, debt issuance decisions can be of remarkable importance. This chapter covers the principles and policies that should guide such decisions. The financing–investment decision is appropriately represented by the sale of long-term debt to finance a major capital infrastructure investment. Such a financing and investment decision represents the essence of the debt decision, which is to contractually trade expected future revenues for a large increase in current funds. Debt financing has an inevitable budgetary impact – the debt must be serviced over the life of the issue, and principal and interest payments may crowd out future spending. The sale of debt creates a future liability that must be repaid as debt service expenditures until the debt matures. The more that is paid in future debt service expenditures, the fewer funds available to finance the rest of the budget. Indeed, ‘because of the large, binding and long-term nature of debt obligations, debt issuance and management practices should be guided by a formal debt policy’ which is based on fundamental debt financing principles. Debt policies should be grounded in basic financial economic and democratic principles that help create a sustainable capital financing program. Issuing and managing debt is a public trust. Debt policies should specifically detail what that public trust entails and administrative practices emanating from those policies should strengthen the trust between government officials and the citizens they represent.

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