By Green, Jeffrey S.
Government Finance Review , Vol. 22, No. 2
The economic well being of our states and localities depends on the continuing construction and maintenance of basic infrastructure such as roads, schools, housing, public utilities, and transportation systems. GFOA has always led the effort to preserve the ability of state and local governments to issue bonds and other debt obligations to finance essential government projects in a cost-effective manner. Historically, GFOA has tried to bring together all interested parties to protect the right of state and local governments to issue debt obligations with interest exempt from federal income tax and free of significant federally imposed restrictions. GFOA has also been the acknowledged leader in recommending practices and guidelines in debt issuance and management for the consideration of state and local government issuers. This article examines the changes in the municipal bond market through the years and the important role GFOA has played in protecting the interests of issuers and in professionalizing debt management.
In 2005, state and local governments and their political subdivisions set a new record by selling more than $408 billion in debt obligations, eclipsing the 2003 record of almost $384 billion. New money issuances were about $226.5 billion, or 55 percent of the total volume. The two largest single issues were the $3.14 billion Golden State Tobacco Securitization Corporation transaction and the $2.78 billion New York State Thruway Authority highway and bridge trust fund transaction.
In 1960 the total volume was a little more than $7 billion and the average size of each issue was about $1.1 million. In 1980, the total volume had only grown to a little more than $47 billion, with an average issue size of almost $9 million. Five years later, in 1985, the volume had increased to more than $200 billion and the average issue size to more than $20 million.
If the proverbial Rip Van Winkle had been a state or local government treasurer or comptroller and had gone to sleep at his desk anytime before the 1960s (it goes without saying that prior to the 1960s the vast majority of public finance officials were white males) only to suddenly awake on December 5, 2005, at The Bond Buyer's annual Deal of the Year awards ceremony, he would not have recognized the bond issues being honored, the issuers of the bonds, or the purposes for which the bonds were issued. He would be amazed by the purposes for which these bonds were issued and by the fact that the honorees were not state or local governments issuing general obligation bonds pledging the government's full faith and credit, but rather special-purpose governments issuing bonds secured by specific revenues. He also would have great difficulty comparing the fixed-rate, long-term obligations that dominated the market prior to the 1960s with the variety of credit-enhanced, variablerate combination of short-term and long-term securities that are sold in many cases today.
The dramatic change in the nature of the market has intensified the long-standing debate as to whether state and local governments should sell their obligations by competitive or negotiated sale. In 1994, recognizing the complexity of the market, GFOA recommended that the competitive method of sale be used when conditions favoring that method exist. Among the conditions enumerated were the familiarity of the market with the issuer, the stability of the issuer's credit, the strength of the security for the repayment of the bonds, the size and complexity of the issue, and the interest rate conditions at the time of the issuance. GFOA also recommended a series of procedures that could be put into effect to ensure the fairness and integrity of a negotiated bond sale.
The 16th amendment to the United States Constitution, which authorized the federal income tax, was ratified on February 3, 1913. The amendment states that "the Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States and without regard to any census or enumeration. …