Refinancing State and Local Debt

• DOI: 10.1177/0160323X14521218
• Published date: 01 March 2014
• Date: 01 March 2014
• Author: Bruce J. Perlman
• Subject Matter: Governance Matters

Governance Matters

Refinancing State and Local

Debt: Decreased Current

Costs or Decreased Future

Flexibility?

Bruce J. Perlman

1

Keywords

refinancing, bonds, government debt, budget, funds

Government budget cuts have been common-

place in state and local governments for most

of the last seven years. One way state and local

governments can cope with these cuts is to

reduce the amount they must pay for the inter-

est and principle on their financial obligations,

including what they have borrowed or what

they anticipate with good reason having to pay.

If state and local governments were not cash-

strapped, they could attempt to pay off such

obligations or where permissible they could use

reserves to create investment funds to pay

them. Nevertheless, state and local govern-

ments that wish to reduce debt service pressure

on the budget can refinance their financial obli-

gations in such a way as to reduce or better

manage the recurring interest and other costs.

Cutting debt service to help absorb revenue

cuts can be an appealing avenue for helping

to restructure state and municipal operating

budgets and the funds that these budgets com-

prise. It should be done when necessary, but

always with caution, because ultimately it

diverts money from capital to operating needs.

One cost reduction approach is to refinance

direct debt such as bonds or other securities that

a state or municipality has previously sold on

the market. This refinancing is carried out by

using the various financial instruments for bor-

rowing money by issuing public debt. When

refinancing leads to lower current periodic pay-

ments, it reduces the recurring annual amounts

paid to honor existing debt obligations and

reduces the cash flow necessary for debt ser-

vice in the government budget. The idea is to

reduce the amount that state or local govern-

ments must pay in annual interest for these

obligations—even if they may pay it for a lon-

ger period—thus reducing pressure on the

budget. Borrowing is used to change the orig-

inal terms of debt repayment in such a way

that present costs are reduced even if net pres-

ent value may be decreased. Consequently, it

is an acceptable trade-off to pay less today

when financial pressures are greater and more

in the future when increased revenue is antici-

pated. The cost of extending debt buys

reduced budgetary pressure.

Another way financial measures can help

state or local governments survive falling rev-

enues is by using them to reduce or smooth the

1

Schoolof Public Administration, Universityof New Mexico,

Albuquerque, NM, USA

Corresponding Author:

Bruce J. Perlman, School of Public Administration, Univer-

sity of New Mexico, Social Sciences Bldg, 3rd Floor, Room

3004, MSC05 3100, Albuquerque, NM 87131, USA.

Email: bperlman@unm.edu

State and Local GovernmentReview

2014, Vol. 46(1) 46-51

ªThe Author(s) 2014

Reprints and permission:

sagepub.com/journalsPermissions.nav

DOI: 10.1177/0160323X14521218

slgr.sagepub.com