I would now like to turn to a series of topics that deserve some attention in the context of new, or relatively new, trends affecting debt management, especially at the state level. There is no particular order to their relevance other than I believe that each of them deserves some reference and commentary.
I mean here the issuance of securities outside the domestic tax-exempt and taxable markets. Less than a handful of domestic borrowers have taken advantage of these markets - among them, over several years, Los Angeles County, Alaska Housing Finance Corp., Puerto Rico come to mind. Generally, the Eurobond market has represented a possible alternative for taxable deals, although Los Angeles County chose to sell its securities as yen-denominated debt.
Also, a few years ago, we were involved in a taxable municipal issue for a manufacturer which was ultimately purchased by several Japanese banks directly. It is my belief that the likely areas for alternative taxable financings for domestic state and local governments exist in Japan or in the Euro market.
With economic integration occurring in Europe and financial markets becoming more open so that regional and local governments in Europe have a greater variety of options, there should be increased opportunity for American state and local borrowers as well to use the European markets for taxable transactions.
But because of the special, cost-benefit effects of tax exemption, unless Washington succeeds in diminishing further the volume of tax-exempt debt, external borrowings will undoubtedly represent a very meager portion of the overall size of the borrowing program for the American state and local sector.
It is our belief that debt affordability analyses have become critical. among significant governmental entities, as part of the policy apparatus that is used in designing prospective capital improvements and debt issuance and management programs. The debt affordability system should be adaptable enough to give you, as policymakers, important data under a series of economic and financial scenarios.
For example, the debt affordability model should lay out the tolerable limits of fixed costs, including annual debt service, if overall revenues were to decline in difficult economic times, such as one we are now living through. Debt affordability analyses also allow governments/borrowers to demonstrate to the rating agencies and the marketplace that the capital program is much less susceptible to political constraints and that there is a bottoms-up, quantifiable justification for debt issuance.
In addition, the debt affordability analyses can be employed for local political purposes and for educating the public and press on the rational basis for restricting or enlarging the issuer's borrowings. In the optimal situation, debt affordability output will be used as an integral part of the government's capital construction program, an element of the management and budget function, and, obviously, a key ingredient in the debt manager's decision model.
The Regulatory Environment
In recent years, it certainly appears that the [Securities and Exchange Commission] is relating much more publicly to both the [Municipal Securities Rulemaking Board] and the municipal market.
Hardly a month goes by that a commissioner of the SEC does not make some comment, pro or con, specifically about the municipal market or about an issue that bears on the market. Until recent years, there would be long absences between any comment by the SEC on the municipal market, and this includes the period following 1975 when the MSRB was created under the auspices of the SEC.
What does this greater attention mean to practitioners in the state and local government markets? In my opinion, I believe it is just fine, for it can correct more fully any possible concerns and inaccurate rumors that may be circulating.
Also, the SEC has even begun to take a look at the economic consequences for the country of state and local capital finance. Commissioner [Richard] Roberts published, a few months ago in The Bond Buyer, an article on physical infrastructure and the municipal market, relating the important economic relationship for the country between the two forces. We need more organizations in Washington making this connection.
Of course, as an industry, we are under a microscope more thoroughly now, and there are incumbent responsibilities that go along with this phase as well. As one industry spokesman put it, "If we wish to retain the market as it is or indeed build upon it, then we simply cannot get our feet in the trough."
In conclusion, the municipal market has never been more exciting, but the issues have never been more challenging for governments than they are now. [There are] a plethora of new products to consider, increased oversight, growing competition, globalization of financial institutions, all in the context of shrunken resources and substantial service demand. These challenges - combined, at the same time, with the need for public constituency support - are formidable and cannot easily be solved.
Johnson is the chairman of government Finance Associates Inc. in New York City.