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A Surplus Optimization Approach to Managing Municipal Debt

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  • Robert Brooks

    (University of Alabama)

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.

Suggested Citation

  • Robert Brooks, 2005. "A Surplus Optimization Approach to Managing Municipal Debt," Public Finance Review, , vol. 33(2), pages 236-254, March.
    • Handle: RePEc:sae:pubfin:v:33:y:2005:i:2:p:236-254
    DOI: 10.1177/1091142104272601
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    References listed on IDEAS

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