Financing local government debt in Canada: Pooled versus stand-alone issues - An empirical study

Abstract

Provincially legislated special-purpose bodies created to pool municipal bond requirements have operated in Canada for several decades. American states have also adopted this Albertan/Canadian innovation. The organizations use different titles, such as municipal bond authorities/corporations and bond banks; this paper uses the generic term municipal bond bank, or MBB. These banks are separate legal entities, and the paper discusses the use of internalization theory as an explanation for their creation and continued use. Several U.S. empirical studies comparing the cost of municipal borrowing under a pooled MBB issue versus stand-alone issues were undertaken in the 1980s. The American studies' results support the practice of pooling debt issuance through bond banks and conclude that savings from MBB participation are inversely proportional to unit credit rating and size. This paper presents the findings of the first Canadian empirical study that compares the cost 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 quantitative 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 savings to those units that are small and unrated and that borrow for longer periods. The Canadian study suggests that the few large, highly rated municipalities that would receive little or no benefit from MBB participation and certain 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 municipal borrowing arrangements on provincial credit ratings.