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Abstract: 

State and local governments must manage through a range of risks, including economic risk, natural disaster risk, credit risk, and transaction pricing risk. Market makers face these risks as well. The Great Recession has affected, and continues to affect, state (and local) government finances. A study team of eight public budgeting and finance professors, led by James K. Conant, has intensively tracked the finances of six states over the past six years. In this issue of MFJ, they assess and compare each of the six states according to specific short- and long-term responses on a standard set of revenue and expenditure criteria for the most recent three fiscal years (2010, 2011, and 2012). Their results illuminate state-specific preferred approaches to achieving budgetary balance in this difficult economic period. A geographic area occupied by several different debt issuing entities has a common vulnerability to a localized natural disaster. Public administration professors Carol Ebdon and Pat O’Neil and doctoral student Gang Chen examine the aftermath of fl oods in Omaha, Nebraska, on three issuers of debt—the city, the airport authority, and a public power district. This case study highlights the overlapping risk of mitigation and response to natural disasters for a community that relies on multiple entities for essential services and suggests that both local officials and market participants should consider the overlapping financial risks of natural disasters. Credit enhancement of debt instruments was an extremely attractive feature for investors and issuers alike, only to be materially undermined by the demise of bond insurers starting in 2008 because of their ventures outside the municipal bond market. Although state-created credit enhancement programs exist in a majority of states to reduce issuer credit risk, little is known about their structure. Public affairs professor Todd Ely inventories this market segment and its key characteristics, concluding with the opportunities they present and some cautions. Debt issuers sell their debt issues to a municipal securities broker/dealer firm (or a syndicate of firms) for resale to investors. These firms expect compensation for the underwriting services (to handle the transaction between issuer and investor) and for brokerage services (to hold the issues for a period with capital at risk). Municipal advisors Lori Raineri and Keith Weaver and public policy professors Mark Robbins and Bill Simonsen provide a small test of the distinction between underwriting versus brokerage for selected bond transactions based upon a measure of trade risk. Their conclusions of a distinction in practice, although limited, suggest that issuers and regulators might find value in understanding this key distinction in the pricing and sale of municipal securities and the degree of assumption of risk by broker/dealers.

Keywords: State budgeting, Great Recession,disaster management, state credit enhancement programs, bond insurance, underwriting, brokering

Affiliations:  1: Georgia State University.