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 13: ‘Non-traditional’ capital financing mechanisms

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


This chapter details some of the evolving capital finance mechanisms beyond traditional municipal securities that subnational governments have begun to utilize in recent years. Given the sizeable capital needs at the subnational level, governments have turned to other ‘innovative’ financing strategies such as federal loans and credit support, public–private partnerships and infrastructure banks. The federal government has encouraged the use of these financial measures and made it easier and more attractive for subnational governments to use them as a way to more efficiently access capital. This chapter discusses these strategies in depth and details some of the trade-offs associated with their use especially as it relates to issues of fiscal federalism. As described in previous chapters, state and local governments have historically funded their capital activities either on a pay-as-you-go basis or a pay-as-you-use basis. Pay-as-you-go refers to funding capital with government taxes and fees as such revenues are realized. Pay-as-you-use financing entails the use of debt finance in leveraging future fiscal resources for payment of capital costs in the current period. Historically, state and local governments employed debt finance via the selling of tax-exempt municipal bonds to raise capital on an up-front basis. These bonds were primarily repaid with the state or local government’s own-source revenues.

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