Public Finance Management

Public Finance Management

Structural Drivers

Fiscal imbalances

Many budgetary problems are the result of “the mismatch of long-term revenue sources with the future stream of expenditures for existing levels of services.” Yet some costs cyclically go up, just as many local governments’s ability to fund them declines.  Service demands from high unemployment occur just as the tax base is retreating.

Financial shocks

Small towns that have a large single employer that goes out of business or leaves the area are particularly susceptible to insolvency.

Poor financial management

Sometimes the planning by those in charge is so poor that it puts the jurisdiction in jeopardy.  The classic case is Orange County, CA, in which the comptroller-treasurer Robert Citron was involved in derivatives trading that ultimately put the rich county 1.5 billion in debt. Although he served prison time for his incompetence, it did not stave off bankruptcy.

Tax revenue loss

At least three major reasons are important when considering the loss of revenue by jurisdictions.  Some revenue loss is relatively temporary and comes with the boom-and-bust housing and commercial real estate cycles. Thus, the more high-growth areas such as California, Florida, Texas and Nevada, in general, are going to be affected by this factor. Long-term cycles of urban and rural decay as well as depopulation can also reduce property values and overall tax base. The case of Detroit is a notable example. A third reason for revenue loss is the change of structural tax relations.  California local government has been kept lean and therefore more vulnerable in downturns, since the passage of Proposition 13 in 1978 which kept local property tax revenues highly restricted. A national trend has been the drop in state aid as well as federal grants.

Political Facilitators

Ineffective State government oversight

However, while many states restrict access to bankruptcy court, they often do not proactively provide the oversight needed by ailing cities.  Requiring balanced budgets does provide one means of decreasing the likelihood of excessive borrowing, but it is hardly sufficient.

Lack of transparency & unaware citizenry

Sometimes the citizens are unaware of the real implications of the policies and practices of their government.  The example of the City of Bell, CA, with its city manager and council extorting money from citizens through illegal means, was a particularly flagrant case in point.

Fiscal policy incompetence

Fiscal policy incompetence need not be malicious or active, but the result of decades of program accretion beyond the local government’s ability to fund.  The City of New York came to its crisis in 1975 with 19 city hospitals and a full-fledged university system of its own. Another manifestation of the problem of policy incompetence arises when there is dysfunctional infighting and when special interest demands are impossible to control.

Question 2:

Currently the credit rating in the city is high I prefer CABS    in my effort to meet promises to the community .Am focused to decrease the student teacher ratio in all of the schools in the district, to ensure that 50% of the classrooms have smart technologies and lastly my plan to build a new high school within the next 3 to 5 years. I prefer this option because

• There is Immediate capital facilities funding without tax rate issues & increases
• Repayment deferred & shared with projected future population with projected higher property valuations
• CAB dollars immediate for leverage in supplementing state bond funds, Build America Bonds, & federal interest subsidies

• Immediate construction with CABs avoids inflationary increases for needed projects

• Immediate financing in recent years results in relatively low interest rates

3. Three things I learned from the lecture.

The lecture was very effective I learned the structural drivers and political facilitators of local government bankruptcy.

The lecture also teaches schools that use CAB enjoy the following benefits. Have immediate funding another importance is deferred repayment; there is leverage in supplementing bond funds. Use of CAB also avoids inflationary increases for needed projects finally it has low interest rates.

From the lecture banks prefer to lend smaller amounts of money to more people, whereas bond underwriters can lend larger amounts and still remain profitable. Governments can save costs by issuing bonds from financial institutions that do not have an intermediary. Banks, for example, lend money to borrowers from the funds deposited by other individuals. In this case, the bank serves as an intermediary. To save taxes if a state, local government or non-profit organization borrows money from a bank it likely has to pay interest to the bank that may be taxable.

4. (3) things from the lecture that need to be explained in more detail

The comparison between current interest bonds and current appreciation bonds did not come out well I propose this to be elaborated further with examples for easy understanding. The lecture should also have explained more about the current interest bonds .For easy comparison with the current appreciation bonds; this will make me understand the hypothetical examples given in the lecture.

The lecture needs to explain more about the relationship between the relationship between the predictors of local government bankruptcy and capital appreciation bonds. The lecture has discussed only one way of paying long term debts through bonds my view is that we should also be taught the alternative ways rather than debts.

In the lecture equity financing and long term debt should be explained further in more details.

References

Diamond, D. W. (2011). Debt maturity structure and liquidity risk. The Quarterly Journal of Economics, 709-737.

Tobin, J. (2003).An essay on the principles of debt management. Cowles Foundation for Research in Economics at Yale University.