Assessing Local Governments’ Debt Financing Strategies

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This dissertation assesses the importance of a specific debt instrument, the Certifi- cate of Obligation in the state of Texas. It conceptualizes the Certificate of Obligation as a type of contractual debt that enables local governments to finance their capital projects. This dissertation is guided by three research questions: (1) What are the various types of debt instruments employed by local governments and what are their relative advantages? (2) How prevalent is the use of a specific debt instrument such as Certificates of Obligation? And why would some local governments prefer to issue them while others do not? (3) To ... continued below

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Lung, Wei-Liang December 2013.

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  • Lung, Wei-Liang

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Description

This dissertation assesses the importance of a specific debt instrument, the Certifi- cate of Obligation in the state of Texas. It conceptualizes the Certificate of Obligation as a type of contractual debt that enables local governments to finance their capital projects. This dissertation is guided by three research questions: (1) What are the various types of debt instruments employed by local governments and what are their relative advantages? (2) How prevalent is the use of a specific debt instrument such as Certificates of Obligation? And why would some local governments prefer to issue them while others do not? (3) To what extent does the local institutional environment, e.g., the executive authority of city managers in the council-manager form of government, affect debt financing behaviors of local governments? To examine the first research question, we created a typology to represent four ideal types of borrowing methods: (1) Contractual Debt, (2) Voter Approval/Special Tax Debt, (3) Guaranteed, and (4) Non-Guaranteed Debts. The typology examines whether or not the state mandates the referendum requirement for the use of each of these debt instruments, and at the same time determines whether each debt instrument is secured by multiple or single revenue sources. Using data we collected among municipal governments in Texas, we conducted two empirical analyses. The first analysis tests the hypothesis that Certificates of Obligation have higher borrowing costs compared to GO bonds, since a GO bond is often issued under the pledge of the bond issuers’ full-faith credit and taxing authority. We employed a two-stage least square analysis to test the general proposition in the state of Texas. Based on 741 Certificates of Obligation and GO bonds issued between 2008 and 2011, our analyses show that Certificates of Obligation are likely to incur True Interest Costs (TIC) similar to those of GO bonds. The second analysis explores factors explaining the use of Certificates of Obligation in 225 Texas charter cities. Based on Heckman’s two-stage, we found that a local government’s decision to issue Certificates of Obligation to be partly explained by the characteristics of local population, i.e., median household income, population growth, and the percentage of senior citizens living in the jurisdiction. In the case of GO bonds, we found that population size, property tax rate, debt burden, and the percentage of population with at least a college education, to be an important determinant of GO bonds. The volume of GO issuance by local governments was also related to the level of regional competition, i.e., government density. Additionally, we found that local political institutions matter and that they affect debt financing behaviors of local governments.

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  • December 2013

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  • Nov. 8, 2014, 11:56 a.m.

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  • Nov. 16, 2016, 12:30 p.m.

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Lung, Wei-Liang. Assessing Local Governments’ Debt Financing Strategies, dissertation, December 2013; Denton, Texas. (digital.library.unt.edu/ark:/67531/metadc407780/: accessed December 11, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; .