Who’s Going to Pick Up the Trash? Using the Build America Bond Program to Help State and Local Governments’ Cash Deficits

Abstract

All over the United States, state and local governments are facing increasing revenue deficits due to the current economic recession. Even during good economic times, state and local governments experience temporary cash-flow deficits. State and local governments use short-term municipal bond debt to finance temporary cash-flow deficits caused by the normal erratic collection of tax revenue. The issuance of short-term debt secured by future tax revenue has always been a financing tool that helped local governments with cash-flow problems.

The effects of the subprime mortgage crisis and the current recession threaten state and local governments’ ability to use this financial tool. The increased cost of issuing short-term debt, coupled with the general reduction of tax revenue collected due to the current recession, has restricted state and local governments’ ability to issue short-term debt.

Without the use of affordable short-term debt, state and local governments are faced with severe cash-flow problems that threaten their ability to pay for services for their citizens. For example, local governments may be faced with the decision to layoff public safety workers such as fire fighters and police officers, reducing library and recreational park hours, or, in some cases, reducing trash pickup within their communities.

To reduce the borrowing costs for state and local government issuers of short-term municipal bonds that are used to finance cash-flow deficits, this article proposes to utilize a federal subsidized taxable bond program similar to the Build America Bond program.

Keywords: budget deficit, tax exempt bonds, taxable bonds, municipal finance, American Reinvestment and Recovery Act, state and local government, cities, and towns

JEL Classification: E62, G18, H1, H2, H29,H7, H7, H71, H72, H74, H81,K34, N2