Restrictions on the
Issuance and Use of
Most national governments place restrictions on the use of debt by subna- tional governments, thereby substituting national policy for local flexibili- ty and the regulating effect of markets on municipal borrowing. As chapter 3 shows, there are several regimes for regulating debt, but in most cases there is an overarching set of rules that governs subnational debt issuance. National regulations typically cover the authority of subnational govern- ments to borrow and restrict the purpose of borrowing, the maturity, the amount of borrowing or debt outstanding, the use of proceeds, and the type of security given or recourse available to the lender. While the differ- ences can be arbitrary, short-term debt is generally that due within one year or less, and long-term debt is anything due more than a year after it is incurred. Subnational government guarantees, which ought to be treated like any other debt, also may be subject to regulation.
Subnational government autonomy is generally based on principles set “ forth in the national constitution,1 although the laws on subnational gov- ernment borrowing are often scattered across the legal landscape, reflecting the fact that defining such activities is frequently an afterthought. Deter- mining a subnational government’s legal authority to borrow and the asso- ciated legal parameters can require reconciling conflicting laws, regula- tions, and decrees. Explicit authorization and procedural requirements are essential, especially where these governments have had no experience with issuing financial obligations that are valid, binding, and enforceable.