Public Economics, Institutions, and Financial Management of Debt Financing in Local Governments

With the data from Florida cities' comprehensive annual financial reports, first, we identified and categorized debt into three groups: (1) general obligation (GO) bonds, (2) notes, loan, leases, certificates of participation (NLL), and (3) governmental revenue (GR) bonds. This dissertation investigates Florida cities' debt issuance incorporating three perspectives: institutions, financial management, and public economics. First, we introduce the relationship between the GO bond limit and local debt financing, and develop hypotheses for the empirical tests. Second, we examine how governance structure shapes a city's debt issuance. However, we did not find any effects of GO bond limit and governance structure on local debt issuance amounts. We also began this study attempting to explain the local government's debt financing from the financial management perspective. If cities have higher financial management capacity, it was argued, they are likely to issue larger debt amounts than cities with lower financial management capacity. Overall, test results present that financial management capacity has no effect on the debt issuance amount. From the public economics perspective, first, this study examines the effect of interjurisdictional competition on cities' debt issuance based on Jensen and Toma's model. Test results reveal that interjurisdictional tax competition does not influence a city's debt issuance. Jensen and Toma's model is extended to explain the relationship between intergovernmental or overlapping government tax competition and debt financing. We contend that Jensen and Toma's model is suitable to explain the relationship between overlapping government tax competition and their debt issuances. Empirical tests show that, in Florida, there is no serious problem of intergovernmental tax competition which induces overlapping governments' debt issuances. This study also applies the flypaper effect to local government's debt financing. A weak flypaper effect is found in local governments' issuances of GO bonds and NLL while there is scant wideness for fiscal illusion in GR bond issuance. We also find that local sharing is related to the flypaper effect in debt issuance but state sharing is not.