Finish the finance economic short essay with quailty work.
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Ch11.1.pptxBorrowing and Debt
State and local governments borrow money for three primary purposes.
To finance capital projects
To support and subsidize private activities
To provide cash flow for short-term spending or for special projects
State/local governments may also borrow to refinance debt at a lower interest rate.
Borrowing and Debt
The key characteristic of capital goods is that a relatively large initial expenditure is required to purchase facilities that then generate benefits over a number of years.
Borrowing and Debt
State and local governments finance capital purchases using two methods.
By building up a reserve of funds from taxes over several years (pay-as-you-go)
By borrowing the funds to be repaid with interest from taxes in future years (pay-as-you-use)
Borrowing and Debt
The pay-as-you-use finance method recognizes both the irregular nature of capital expenditures and the fact that those who will benefit from the actual capital facility are the future residents of the jurisdiction.
By borrowing now, but effectively paying for the facility with future taxes, those who receive the benefits will be paying for them.
The downside is that it may lead to overcapitalization.
Borrowing and Debt
State and local governments have traditionally financed capital expenditures with three types of funds.
Federal grants
Borrowed funds
Current revenues (taxes)
Borrowing and Debt
Borrowing to subsidize investment by private individuals and firms has become the second major component of state and local borrowing.
State-activity tax-exempt bonds effectively transfer their tax-exempt borrowing authority to private individuals and firms that otherwise would be financed through taxable debt.
Borrowing and Debt
Finally, state and local governments borrow to even out cash flow between periods when the governments receive revenue or to correct a short-term budget shortfall resulting from an error in revenue forecasting.
This is not used for financing deficits, only to cover temporary budget shortfalls when spending and revenues don’t match.
Borrowing and Debt
State and local governments borrow by issuing bonds.
A bond is a promise to repay the amount borrowed at a future date plus annual interest in the form of fixed payments for a fixed number of years.
Borrowing and Debt
The majority of state and local bonds represent long-term debt.
Long-term debt carries a repayment period of more than one year.
Historically, long-term debt accounts for about 90% of state and local debt.
Long-term debt can be used for any reason except cash-flow borrowing.
Long-term debt is appropriate for financing capital projects on a pay-as-you-use basis.
Borrowing and Debt
Long-term state and local bonds are of two types.
General obligation (GO) bonds pledge the full faith and credit of the issuing government as security.
The government must use funds from any available source to pay the interest and repay the investors
If the government is unwilling or unable to repay the bondholders, the government is said to default on the bonds.
Borrowing and Debt
The second type of long-term bond is called a revenue (nonguaranteed) bond.
The revenues from a particular source are pledged to pay the interest and repay the principle to investors.
If the revenues from the designated source are not enough to repay the principle and interest, the bondholders take the loss.
Revenue bonds carry more risk than GO bonds.
Borrowing and Debt
Private-purpose tax-exempt bonds typically are revenue bonds known as private-activity bonds.
The security of these bonds depends on the economic success of the private individuals or firms that are subsidized.
Borrowing and Debt
How are state and local bonds sold?
The issuing government will employ the services of a number of intermediaries in the process of selling bond.
Bond council attorneys
Financial advisor
underwriter
The bonds are given a credit rating by at least one bond rating firm.
An active market for existing state and local bonds is needed.
Borrowing and Debt
Census bureau data show
Long-term debt accounts for more than 98% of the total debt of state and local governments.
Long-term debt for private purposes has been 4% of GDP since 1997.
School districts incurred the largest increase in long-term debt since 1992.
Borrowing and Debt
States differ substantially in the level and composition of their outstanding debt.
Research studies suggest that interstate differences in the level of debt are related to differences in federal aid, the importance of school-age children in the population and a variety of institutional and political characteristics.
States also differ in the use of traditional non-taxable state/local bonds to finance private purposes.
Capital Investment
In 2011, state and local governments spent nearly $336 billion or $1,100 per person on capital investment.
This represented about
2.2% of GDP
11% of total state/local expenditures
15% of outstanding long-term debt
Capital spending represents about 14% of local spending and 6% of state spending.
Capital Investment
The magnitude of real capital expenditures by state/local governments has been relatively stable since 2000.
Capital expenditures averaged about $343 billion in 2010 dollars.
Note though, that real expenditures on capital tend to rise during recessions and fall during expansions.
Annual capital outlay as a percentage of total state/local spending averaged about 12%
Capital Investment
As with most things in state and local public finance, the average numbers for spending and percent of expenditures for capital expenditures hides a great deal of variation between the states and between the local governments.
Capital Investment
Spending for projects related to highways, education, and utilities represents the bulk of state/local government capital expenditures.
For state governments the categories of highways and higher education represent about 75% of capital spending.
Among local governments, elementary and secondary education (30%) and utilities (16%) are the largest categories of spending.
Capital Investment
The composition of capital spending has been relatively stable over time.
State spending on higher education has been rising faster than other categories, while spending for corrections has slowed.
At the local level there has been a slower growth in in spending for elementary and secondary education and an increased share of spending for utilities.
