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Abstract: 

Regulating the municipal debt market requires a balancing of competing policy objectives. Public administration professors Robert Greer and Tima Moldogaziev, and instructor Andrew Grandage provide a conceptual framework for assessing the policy tradeoffs over time. In doing so, they identify four core objectives in the governance of this important market that allow them to examine alternative regulatory configurations of balanced, over-regulated, and under-regulated scenarios. Future research to test their framework is suggested. Financial derivatives are used by state and local governments to obtain a desired cost of capital given the risks associated with these instruments. The growth and decline in their use is the subject of the research by public affairs professor Akheil Singla. Professor Singla provides a review of the evolution of this debt-related derivatives market in conjunction with a deep dive into the characteristics of these instruments over a 10-year period as found in the financial documents of states and the governments of the 50 largest cities by population. Congress has ended advance refunding of tax-exempt securities. Fixed-income expert Andrew Kalotay notes problems with the all-too-frequent (old) structure of above-market 5% coupons with a 10-year call and reviews replacements. He shows the need for debt managers and municipal advisors to use option-adjusted spread methodology going forward. Mutual funds hold a large share of all outstanding municipal securities. Finance professors Patrick Cusatis and Oranee Tawatnuntachai trace the differences between open-end and closed-end funds to test whether one offers higher risk-adjusted returns and if so, whether that performance is persistent. For a sample of funds over a 20-year period, the authors find that although both types of funds invest in the same municipal bond market, their return performance patterns differ. This issue of MFJ shows the range of research on the municipal market, from regulatory tradeoffs, to the types of debt instruments used by governments, to the different ways that investors can enjoy the benefits of the market.

Keywords: Municipal Debt Market Governance; Municipal Swaps and Derivatives; Advance Refunding; Closed-End and Open-End Municipal Bond Funds

Affiliations:  1: Georgia State University.