Тема 26. Государственные и муниципальные финансы.

Text A. Municipal bonds have been issued by US local government since 1812

Infrastructure in the united States is generally financed through subnational capital financing vehicles, termed municipal bonds, which encompass the issuance of bonds by state and local governments, their agencies and quasi-public bodies generically termed special districts. While the term comprises issuers other than municipalities, the first bond of this trail-blazing genre was issued in 1812 by New York City. This pioneering debt instrument is termed a general obligation bond, which means that it is backed by the taxing power and tax revenues of the issuer.

A distinguished feature of the United States is its extensive use of municipal bonds (and notes) to provide for capital-raising needs. The nature of the market has evolved a great, as additional types of issuer and the bonds issued by them, have developed.

Evolution of the market.

It has been argued that without the ability of state and local governments to issue debt – with the growth of revenue authorities as major debt issuers and wholesale providers of basic services – today’s America. as we know it, would cease to exist.

In 1902, outstanding state and local government debt was US$2.2 billion or $27 per capita. By 1927 the amount had jumped to $14.9 billion - $125 per capita. The there was a downturn because of the Great Depression and the onset of the First World War. After the end of that war, America was faced with a 15-year drought in capital spending, a significant growth in population and a major relocation from rural to urban areas. In addition, pent-up housing demand, changing the character of transportation and a shift in structures for manufacturing facilities, all combined to produce a huge demand for additional public and private facilities. In response to that demand, the level of state and local government debt rapidly increased. So while by the end of 1960 the amount was only $66 billion, by year-end 1981 the amount was over $361 billion – 611 percent increase over 21 years. By 1998, the amount stood at 1,3 trillion.

Bond categories and their role in fiscal determinations. Generally, the two main categories of long-term obligation are classified thus: general obligation bonds that are secured by a pledge of the government’s taxing power; and revenue bonds that are secured by the exclusive (in most cases) pledge of project revenues. However, there exist hybrids of these two categories.

Initially. Us issuers were inspired by English innovations in the 17^thand 18^thcenturies. Then, over the course of time, US issuers developed mechanisms far beyond anything applied in England.

Where general obligation bonds were of the type issued the most in the early phases of the market, they have in recent times been far outpaced by revenue bonds (those backed solely by the revenue stream of a particular entity, generally user fees and service charges) and bonds issued by special districts.

England also provided the early revenue bond model via its issuance of bonds for toll roads in the 1770s. The Port of New Orleans financing in the 1880s was the first expression of an authority to demonstrate financing in the United States. Revenue bonds, in the United States, were initially issued for capital construction, but are now applied to various other purposes. Until 1957 most revenue bonds were either for utility projects (their original use) or for local public housing projects. The early 1960s saw the expansion of this mechanism for financing purposes previously financed by general obligation bonds.

In 1921the landmark legislation for the first interstate authority, The Port Authority of New York and New Jersey, replicated The port of London Act, drafted over three hundred years earlier – as noted by Robert A. Caro in a work about Robert Moses, a major force in the evolution of this market, entitled The Power Broker. The creation of this entity signaled the implementation of special districts with broad functional ad territorial jurisdictions. Special districts have played an important role in the development of area-wide metropolitan facilities.

Proxy bond issuing mechanisms

Further, there also exist proxy bond issuing mechanisms for those entities unable to gain cost-effective access (from a failure to obtain investment grade ratings) to the municipal bond market; or for those that find such a vehicle preferable for their use.

Municipal notes

In addition to long-term bonds, many issuers also use short-term note borrowing. This was especially so in the post-1960s era when the use of this option grew tremendously.

Legal frameworks for the issuance of municipal bonds

In the United States lawyers play a pivotal role in representing all the parties involved in the issuance of a municipal bond (generally the issuers, the initial purchasers and the bank responsible for making payments to investors).

A key reason for this is the provision for legal framework in the individual states of the United States that was borne out of financial ruin brought about by the unregulated and uninhabited issuance of municipal debt. Consequently, in the 1800s America suffered three successive depressions caused by the over-issuance of municipal bonds by the states, local government and special districts between 1837-43, 1873-79 and 1893-99, respectively. It was to avoid the repeat of such a crisis that the first Constitutional restrictions were thereafter imposed on state and local government spending. Subsequently, further developments in the laws governing the issuance of municipal bonds were inspired by individual histories of the states with this financing vehicle. For those reasons, individual states have some laws that are unique.

Because of the prevalence of the legal frameworks that governed the issuance of municipal bonds, the default rate did not exceed 1.1 per cent between 1940 and 1999 – despite the large number of bonds outstanding.

However, as defaults and their associated financial crises (preceding or existing concurrently) are not a thing of the past, some states (including North Carolina, New Jersey, Michigan and California) have moved towards ways of monitoring and/or managing the financial activities of their local subdivisions, agencies and special districts.

Rising role of credit rating agencies

Whereas between 1839 and 1969 there were 6,195 defaults, the vast majority (4,770) took place during the Great Depression. There were, however, 79 municipal defaults during the 1940s, 112 in the 1950s and nearly 300 in the 1960s boom years. As a result, the importance of credit and risk analysis started to play a more vital role in the eyes of the investment community, which in its early days was once dominated by institutional investors. Today individual investors instead dominate it.

The US municipal bond market has thus evolved a great deal since its early period of development. It has moved from a fragility that was prone to boom-and bust cycles to one that has grown exponentially into a stable market. It is able to withstand the minority number of defaults that still occur from time-to-time, showing the need to be aware that changing times and challenges still make local issuers vulnerable to this danger, especially where they are not as prudent as they should be. (By Mayraj Fahim, Local government adviser. www.citymayors.com)

Text B. Easing the fiscal restraints on Canadian cities.

It is now a commonly held view that Canada’s cities are critical to the economic prosperity of the country. To be competitive, our cities need to build and maintain infrastructure and they need to deliver a wide range of services to attract and retain skilled workers and businesses. Among the services they need to deliver are those that enhance the quality of life – parks, recreational and cultural facilities, public health, and police protection are examples.

Cities also face pressure from the “offloading” of services be the federal and provincial governments. Offloading has taken a number of different forms. Federal and provincial governments have shifted expenditure responsibilities onto cities. Provincial governments have reduced transfers to cities. Both the federal and provincial governments have downsized their own responsibilities (such as immigration settlement at the federal level). Finally, federal and provincial requirements have mandated that cities meet certain requirements (for example, water quality standards) without providing the funds to meet those requirements (these are known as “unfounded mandates”). In all these cases, cities feel the pressure to fill the void left b the federal and provincial governments.

Although the roles and responsibilities of cities have been changing, there has been no diversification of their revenue souses. Canadian cities still depend largely on property taxes, user fees, and provincial transfers to meet their growing expenditure needs. The result is that there is a mismatch between the expenditures for which cities are responsible and the available revenue tools. This situation has raised questions about the fiscal sustainability of Canada’s cities.

The fiscal pressures on one city, Toronto, have recently been recognized by a joint Ontario/Toronto task force that has been set up to review the City of Toronto Act with a view to making the City “more fiscally sustainable, autonomous, and accountable”. A newCity of Toronto Act could go a long way towards increasing Toronto’s ability to raise revenues. It could also provide a catalyst for changes in revenue tools for other cities across Canada.

How would cities benefit from new revenue-raising tools? Revenues from a mix of taxes would give cities more flexibility to respond to local conditions such as changes in the economy, evolving demographics, and expenditure needs. Although the property tax is, in many ways, well suited to local governments, because of the connection between many of the services typically funded at the local level and the benefit to property values and because revenues are fairly stable and predictable over time, the property tax does have some shortcomings. It does not operate as a benefit tax for commuters and visitors who use municipal services (such as roads and policing, for example). The property tax is not an “elastic” source of revenue meaning that the tax base does not increase automatically as the economy grows as do income and sales tax bases.

There is, of course, a downside to revenue elasticity as we have seen in US cities. With their relatively heavy reliance on income and sales taxes coupled with restrictions on their ability to raise property taxes (such as Proposition 13 in California or Proposition 2 ½ in Massachusetts), Us cities have seen their revenues decline significantly during recent economic downturn. Access to revenues from a mix of taxes (a mix which includes property tax) gives cities the flexibility to adapt to different economic circumstances.

What revenue-raising tools should they use? The options for new local taxes are many and include: personal income taxes, payroll taxes, corporate income taxes, general sales taxes, and excise taxes (including taxes on hotel/motel occupancy, meals, fuel, liquor, tobacco, vehicle registration, and land transfer). Regardless of the tax chosen, cities should piggyback onto existing provincial taxes wherever possible to minimize administrative costs.

Why should cities levy their own tax rates? It would be better if cities set their own tax rates so that they can achieve local autonomy, accountability, and predictability. When federal or provincial governments allocate a portion of their taxes to cities based on a formula (as is currently being done with provincial fuel taxes in Vancouver, Victoria, Calgary, Edmonton and Montreal, for example), revenue sharing is simply a transfer. Cities have no control over how much they receive from year to year and there is no relationship between the amount cities have to spend and the revenues they collect from the transfer.

Local taxing authority is not without problems, however. Since individuals and businesses can easily move between jurisdictions, a differential retail sales tax rate, for example, could encourage individuals to purchase goods and services in those municipalities with lower tax rates. A differential hotel and motel occupancy tax, fuel tax or income tax would result in similar behavioural responses. These reactions would, however, be similar to the location decisions currently caused by differential property tax rates.

Tax competition can create an environment in which municipalities become more efficient in their use of resources and more accountable to taxpayers. If individual cities can convince taxpayers that they are getting more services in return for the higher taxes, there may be less incentive to move. Nevertheless, there is a clear trade-off between the accountability and flexibility advantages of local setting of tax rates and the potential disadvantages of differential local tax rates. For this reason, it may be necessary for provincial governments to set a minimum rate to minimize tax competition and a ceiling rate to prevent excessive tax exporting.

How will cities raise new taxes? If cities were given new revenue-raising tools, they would have to decide when and how to use them. Raising taxes is never easy. One option is for cities to introduce new taxes and, at the same time, reduce property taxes (as was proposed in Winnipeg a few years ago). Although this type of substitution would give cities access to new tax sources that would grow with the economy, it would not solve current fiscal problems.

A second option is for the federal and provincial governments to reduce their taxes to provide cities with tax room. This option would require cities to convince the other governments that reallocating the tax burden in this way would be beneficial to the province and economy.

A third option is to raise new revenues with a commitment to improve service delivery. In other words, taxpayers would pay more taxes but they would receive more services. Under this option, cities would have to convince taxpayers that they would actually be receiving new and improved services in return for higher taxes.

There are many issues concerning new revenue tools for Canadian cities. At the Institute on Municipal Finance and Governance, we will be analyzing the issues and options, evaluating the use of different revenue tools in other cities around the world, and determining their applicability to Canadian cities. The future of our cities is critical to the future of our country; we need to ensure that they are fiscally sustainable now and in the future. (By Enid Slack, from www.cwf.ca)