A Surplus Optimization Approach to Managing Municipal Debt

Robert Brooks ()

Public Finance Review, 2005, vol. 33, issue 2, 236-254

Abstract: This article considers appropriate debt-funding strategies for state and municipal governments in the presence of a positive, tax-exempt term premium. In this context, the term premium measures the additional expected funding cost from issuing fixed-rate debt as opposed to issuing floating-rate debt. The correlation between a measure of income from rate-sensitive assets and the tax-exempt floating rate is the principal focus of the analysis. A single-period framework is used to identify the most important information required to design the optimal proportion of tax-exempt floating-rate debt for a municipal government. From this analysis, there are several compelling reasons for municipal entities to increase the quantity of floating-rate debt. This framework is used to assess the optimal state government debt maturity structure based on historical data.

Keywords: municipal bonds; municipal financial management; debt maturity decision; single-period model; floating-rate debt (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:33:y:2005:i:2:p:236-254

DOI: 10.1177/1091142104272601

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