Association for Public Policy Analysis & Management

Panel: Public Policy Issues in the Municipal Securities Market

(Public and Non-Profit Management and Finance)

State and local governments finance most of their major infrastructure projects through long-term bonds, known colloquially as "municipal bonds." For most of the 20th century federal government policy has had limited influence on this market. Unlike stocks or corporate bonds, federal regulators do not have direct authority over the financial or other information that governments must disclose to bond investors, or how investors buy or sell bonds. However, throughout the past decade the federal government has stepped up its presence in this market. The Securities and Exchange Commission has publicly criticized the market's structure and dynamics and brought several high profile securities fraud cases against governments and municipal market participants. Meanwhile, Congress is actively considering removing some or all of the federal tax exemption for municipal bonds, and also expanding the Treasury Department's ability to intervene in fiscally distressed local governments. Moreover, legislation recently introduced in the House would bring state and local governments' financial statements under direct SEC oversight. All this suggests that federal policy matters more than ever in the municipal securities market.

The papers in this panel explore the implications for municipal bond issuers and investors of several potential changes in federal policy. Min Su's paper examines how investors respond to information, contained in local government financial statements, about how actual local spending and revenues deviate from budgeted revenues and spending. These types of financial disclosures are the subject of pending federal legislation. Konul Amrahova examines the potential financial impact  to governments and investors of scaling back or eliminating the municipal bond tax exemption. Finally, Justin Marlowe's paper examines how an issuer's past borrowing history affects its cost of capital on future borrowings. These "anchoring" effects are also the focus of considerable recent attention from federal regulators.