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Abstract: 

This issue of the Municipal Finance Journal considers the pricing of municipal bonds and the distribution of municipal financial aid to address local fiscal health. The relationships among issuers, financial advisors, and underwriters are central to the pricing of municipal bonds. Public administration professor Gao Liu explores the characteristics and impact of this network relationship in the issuance of bonds by California governments from 2001 to 2006. His findings buttress the value of studies and policies that address these relationships and their impact on the borrowing costs of governments. Despite the compelling argument in favor of the competitive sale for most municipal bonds, there is a persistent reliance on negotiated sales. Although the Missouri State Auditor has published several studies documenting the pricing disparity, no legislative action has resulted. Public policy professors Mark D. Robbins and Bill Simonsen update the evidence of an interest cost difference and explore “the cost of no reforms.” Local governments are dependent upon the way the state distributes financial aid. If the intent is to reflect local fiscal health in the distribution formula, it makes sense to base it on factors that are outside the direct control of local officials. In his study of Massachusetts, economist Bo Zhao offers just such a creative “non-school cost-capacity gap” measure of fiscal health and then runs simulations to test the fiscal equalization results.

Keywords: Bond pricing; borrowing costs; competitive bond sales; negotiated bond sales; fiscal equalization; “cost-capacity gap”

Affiliations:  1: Georgia State University.