Financing local government debt in Canada: pooled versus stand-alone issues - an empirical study

Provincially legislated special-purpose bodies created to pool municipal bo nd requirements have operated in Canada for several decades. American state s have also adopted this Albertan/Canadian innovation. The organizations us e different titles, such as municipal bond authorities/corporations and bon d banks; this paper uses the generic term municipal bond bank, or MBB.:Thes e banks are separate legal entities, and the paper discusses the use of int ernalization theory as an explanation for their creation and continued use. Several U.S. empirical studies comparing the cost of municipal borrowing u nder a pooled MBB issue versus stand-alone issues were undertaken in the 19 80s. The American studies' results support the practice of pooling debt iss uance through bond banks and conclude that savings from MBB participation a re inversely proportional to unit credit rating and size. This paper presen ts the findings of the first Canadian empirical :study that compares the co st of municipal funds for pooled versus stand-alone issues. The study uses data from the Province of Ontario, as it is a large province and quantitati ve data was available; Ontario does not currently have an MBB. The Canadian study results share some similarity with the results of previous American studies in that they show that pooled financing through an MBB results, in aggregate, in cost-savings to municipal borrowers, with the greatest saving s to those units that are small and unrated and that borrow for longer peri ods. The Canadian study suggests that the few large, highly rated municipal ities that would receive little or no benefit from MBB participation and ce rtain small issuer units that have found economical, alternative methods of raising funds retain the option of issuing debt outside a provincial MBB. This paper concludes with a reference to the discussion on the impact of mu nicipal borrowing arrangements on provincial credit ratings.