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Municipal Debt Finance Law: Theory and Practice.

This text is an analysis of municipal debt financing which places municipal securities in the larger context of public finance and municipal law. A comprehensive volume, it examines municipal debt financing from its inception to the current controversies surrounding the tax treatment of municipal securities and federal legislation affecting the issuance and regulation of municipal debt.

The authors of this book rely on underlying principles of debt management and on application of analytical techniques to examine specific financing situations. By using these techniques and state law doctrines, they demonstrate the interaction between state and federal law and the significant--some would say intrusive--role of federal securities law in the municipal bond arena.

The role of government in allocating goods and services is the function most germane to state and local debt. Using the economic concept of "market failure," the need for government intervention and public finance theories of public goods, externalities, information problems and natural monopolies is discussed. Local government allocation of public goods and services and the method of payment underlie the ensuing discussion of municipal debt financing.

Finding that state tax revenues and paper money were insufficient to fund an expanding nation, new forms of public financing emerged as states learned to use "public credit" as early as 1820. By 1842, state debt exceeded $207.9 million.

Defaults on interest payments and a distaste for excessive debt induced states to enact debt limitation provisions that were later imposed on municipalities as well.

While the text clearly outlines the classifications and characteristics of municipal securities, the municipal bond market and the mechanics of bond issuance, the focus remains on borrowing restrictions and limitations, and attempts by state and local governments to structure their obligations around them.

The authors pose several theories of justification for restrictions on borrowing. The primary principle is that debt borrowed today will be repaid over a number of years, necessarily affecting those who were not a party to incurring the debt. Restrictions and limitations are essential, the authors seem to argue, to curb the appetite of local government officials in obligating a jurisdiction to long-term debt for short-term political gain.

In this context, the use of "debt" takes on various connotations. Foremost is the constitutional and statutory definition, as determined by judicial interpretation. Although other types of debt are incurred, they may be outside the legal definition and therefore outside the debt limits. Contract services are one example of debt which may not be subject to limits. Decisions regarding who bears the risk of failure determine if these contracts are debt subject to limitations. Moral obligations, say the authors, are another type of debt which falls outside legal limits. In this case, a public authority is created, and the state or local government may appropriate funds to the authority, without technically incurring its own debt.

Of particular interest to government relations practitioners are the final chapters on federal regulation of municipal securities and their tax treatment. Disclosure law is the focus in the examination of federal regulation, which points out differences in the municipal and equities markets and how the need for disclosure varies between the two. The chapter seeks to discover the optimal, not the maximum, level of proper disclosure. Also included is an overview of the Securities Acts of 1933 and 1934.

The concept of federalism and tax exemption concludes the book. Included in the discussion is an outline of the current tax status of specific types of bonds and related issues under legislative consideration now and, undoubtedly, in the future.

While this volume presents an extensive up-to-date study of the municipal finance law, it succeeds in placing debt financing in a broader arena than a basic legal text. Some level of understanding of the subject matter is presumed, but the explanations and case studies are thorough and clear enough to assist the nonbond counsel practitioner in reaching a higher level of understanding of and proficiency in municipal debt finance law.

Municipal Debt Finance Law: Theory and Practice is available for $125 from Little, Brown and Company, Inc., Order Department, 200 West Street, Waltham, MA 02154 (800/343-9204).

Reviewed by Betsy Dotson, assistant director, Federal Liaison Center, Government Finance Officers Association, Washington, DC.
COPYRIGHT 1992 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Dotson, Betsy
Publication:Government Finance Review
Article Type:Book Review
Date:Dec 1, 1992
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