Municipal Debt Finance Law: Theory and Practice.

• Author: Dotson, Betsy

This text is an analysis of municipal debt financing which places municipal securities in the larger context of public finance and municipal law. A comprehensive volume, it examines municipal debt financing from its inception to the current controversies surrounding the tax treatment of municipal securities and federal legislation affecting the issuance and regulation of municipal debt.

The authors of this book rely on underlying principles of debt management and on application of analytical techniques to examine specific financing situations. By using these techniques and state law doctrines, they demonstrate the interaction between state and federal law and the significant--some would say intrusive--role of federal securities law in the municipal bond arena.

The role of government in allocating goods and services is the function most germane to state and local debt. Using the economic concept of "market failure," the need for government intervention and public finance theories of public goods, externalities, information problems and natural monopolies is discussed. Local government allocation of public goods and services and the method of payment underlie the ensuing discussion of municipal debt financing.

Finding that state tax revenues and paper money were insufficient to fund an expanding nation, new forms of public financing emerged as states learned to use "public credit" as early as 1820. By 1842, state debt exceeded $207.9 million.

Defaults on interest payments and a distaste for excessive debt induced states to enact debt limitation provisions that were later imposed on municipalities as well.

While the text clearly outlines the classifications and characteristics of municipal securities, the municipal bond market and the mechanics of bond issuance, the focus remains on borrowing restrictions and limitations, and attempts by state and local governments to structure their obligations around them.

The authors pose several theories of justification for restrictions on borrowing. The primary principle is that debt borrowed today will be repaid over a number of years, necessarily affecting those who were not a party to incurring the debt. Restrictions and limitations are essential, the authors seem to argue, to curb the appetite of local government officials in obligating a jurisdiction to long-term debt for short-term political gain.

In this context, the use of "debt" takes on various connotations. Foremost is the constitutional and...