Tài chính doanh nghiệp - State and local governments in the financial markets

Money and Capital Markets20C h a p t e rEighth EditionFinancial Institutions and Instruments in a Global MarketplacePeter S. RoseMcGraw Hill / IrwinSlides by Yee-Tien (Ted) FuState And Local GovernmentsIn The Financial Markets Learning Objectives To understand why state and local government borrowing has grown so rapidly in recent years.To explore the various ways in which state and local governments raise the funds they need.To examine the marketing process through which state and local government bonds and notes reach investors, and to learn why these instruments are attractive to investors.IntroductionThe borrowing and spending activities of state and local governments have been one of the most rapidly growing segments of the financial system in recent years.State and local governments are pressured by rising populations and inflated costs, while many investors are attracted by the high quality, ready marketability, active secondary market, and tax exemption feature of state and local debt obligations.Growth of State and Local Government Borrowing$ BillionsU.S. Municipal securitiesData Source: Board of Governors of the Federal Reserve SystemGrowth of State and Local Government BorrowingWhat factors account for the strong growth in municipal borrowing?Rapid population growthUneven distribution of population growth across the U.S. – smaller outlying communities were transformed into citiesUpgrading of citizens’ expectations concerning the quality of government servicesRising construction and labor costsSources of Revenue and ExpendituresFor U.S. State and Local Governments( For 1998-99 in Millions of Dollars)General revenues by source: Property taxes .. 240,107 Sales and gross receipts taxes .. 290,993 Individual income taxes .. 189,309 Corporation net income taxes .. 33,922 Revenue from Federal Government 270,628 Other (other taxes, charges, revues, etc.) 409,505Total revenues .. 1,434,464General expenditures by function: Education . 483,259 Highways . 93,018 Public welfare . 218,957 Other (public safety, environment, interest, etc.) 607,134Total expenditures 1,402,369Data Source: Economic Report of the PresidentSources of Revenue and ExpendituresFor State and Local GovernmentsCash Inflows:Taxes (property, sales, income, miscellaneous)User feesSpecial assessmentsIntergovernmental transfers from federal and state governmentsBorrowings (net market value of municipal debt sold)States, Cities, Counties, School Districts, and Other Local GovernmentsCash Outflows:Schools and other educational facilitiesTransportation facilities (highways, airports, commuter systems, etc.)Social services (income and medical support, housing, public safety)Industrial development incentivesAdministration and employee payrollsInterest and debt repaymentsMotivations forState and Local Government BorrowingState and local governments borrow moneyto satisfy short-term cash needs and maintain adequate levels of working capital,to finance long-term capital investment like building schools and highways, andfor advance refunding of higher cost securities.$Types of Securities Issued byState and Local GovernmentsShort-term securities are generally issued to provide working capital.Tax-anticipation notes (TANs)Revenue-anticipation notes (RANs)Bond-anticipation notes (BANs) – for temporary financing of long-term projects until the time is right to sell long-term bondsTypes of Securities Issued byState and Local GovernmentsLong-term securities are used mainly to fund capital projects.General obligation bonds (GOs)Revenue bonds – payable only from a specified source of revenueStudent-loan revenue bonds (SLRBs)Life-care bondsHospital revenue bondsIndustrial development bonds (IDBs)Types of Securities Issued byState and Local GovernmentsIn recent years, several new municipal instruments were developed.Floating-rate bondsOption bondsLottery bondsSecuritized bondsKey Features of Municipal DebtTax exemptionLess tax revenue can be collected from the high-bracket investors. However, the interest cost for municipal governments is low relative to the rates paid by other borrowers. High credit ratingsMost municipal issues are considered to be of investment quality rather than speculative buys.Key Features of Municipal DebtSerializationMost municipal bonds are serial securities.Serialization refers to the splitting up of a single bond issue into several different maturities.How Municipal Bonds are MarketedThe selling of municipals is usually carried out through a syndicate of banks and securities dealers.These institutions purchase the securities from the issuing government units and then resell them in the open market at a higher price.Prices paid by the underwriting firms may be determined by competitive bidding or by negotiation.Problems in the Municipal MarketMany observers question the social benefit of the tax-exemption privilege.Although state and local governments can borrow more cheaply, the federal government must tax more heavily to make up for the lost revenue.Many important investor groups (such as pension funds) have little need for tax shelters.The Outlook for State and Local GovernmentsWith slower economic growth and less federal support, more states will be under pressure to force cities, counties, and school districts to deal with their own problems and find their own funding sources.At the same time, the need for local government services and the interest of investors are not likely to fade, thus ensuring the future growth of the market for state and local government debt securities.Money and Capital Markets in CyberspaceFind out more about state and local government activity in the financial markets at: ReviewIntroductionGrowth of State and Local Government BorrowingSources of Revenue and Expenditures for State and Local GovernmentsMotivations for State and Local Government BorrowingChapter ReviewTypes of Securities Issued by State and Local GovernmentsShort-Term SecuritiesLong-Term SecuritiesInnovations in Municipal SecuritiesKey Features of Municipal DebtHow Municipal Bonds are MarketedChapter ReviewProblems in the Municipal MarketProblems Regarding Tax ExemptionThe Outlook for State and Local Governments