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 6: Subnational government debt financial management II: bringing an issue to market: networks and practices

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


Financial autonomy for state and local governments in a decentralized system is predicated on these governments’ ability to effectively and efficiently raise resources through the capital finance markets. If subnational governments lack this skill and expertise, justification for autonomous subnational financial decision making weakens. However, bringing a bond issue to market is not a quick or simple task. It is an extended process that does not begin and end on the bond pricing date. Rather, it starts with the capital budgeting process and often ends decades later when the government entity makes its final debt service payment on the bonds. In addition, capital financing is not a closed system but rather relies on the skills and counsel of many types of financial intermediaries and consultants who reside both inside and outside of government. This chapter details the management network that state and local governments rely on to bring a municipal securities issue to market. It places the debt management network in principal–agent theory identifying the potential conflicts of interest that reside in the network. Also detailed are the various specific decisions debt managers need to make that can have considerable economic implications for their securities transactions both in the short and long run. The chapter concludes with a discussion of the academic research that addresses many of these debt management decisions as a means of providing some empirical justification behind industry best practices.

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