The use of short‐term debt by general‐purpose governments

Abstract

This paper analyzes local government use of short-term debt. Though long-term debt, largely used for capital projects, is relatively well-researched, predictors for the use of short-term debt need to be further developed. We hypothesize that governments with limited cash reserves and expenditure flexibility are more likely to use short-term debt. Further, we expect that governments use short-term debt as an instrument to manage market timing for longterm debt. Using a heterogeneous sample of New York local governments, our analysis finds more illiquidity, declining prior year surplus, more salary expenditures, larger capital spending, and the timing of long-term debt increase the likelihood of using short-term debt. Applications For Practice• Evidence supports that local governments use shortterm debt in conjunction with increases in long-term debt, revealing an additional cost of issuing longterm debt. • Policies established to manage the issuance of shortterm debt can acknowledge that lack of illiquidity, higher capital project costs, increasing long-term debt, and more frequent short-term debt issuance are more likely to increase short-term debt burdens. • Long-term debt management policies can include provisions for more short-term debt issuance.

The impact of excess taxing capacity on short‐term resources

“…Prior research (Lofton & Kioko, 2021;Su & Hildreth, 2018) suggested that the decision to issue short-term borrowing is likely a two-step process. First, a government decides whether short-term borrowing should occur.…”

“…Finally, this work evaluates the impact of ETC on short-term borrowing. Prior studies have used cash management notes (Su & Hildreth, 2018) and a broader array of short-term notes (Lofton & Kioko, 2021; as measurements of short-term borrowing, but these only capture market transactions. Governments may also borrow from nonmarket sources, such as their state government, or transfer between funds.…”

“…In addition to the key independent variable of ETC, this study largely bases other variables to determine short-term borrowing on the work of Su and Hildreth (2018) and Lofton & Kioko (2021).…”

“…The ETC, therefore, is a financial slack resource, a cushion of actual resources that can be used to adapt successfully to internal or external pressure for change (Bourgeois, 1981). Moreover, governments can access financial slack in the form of short-term resources, which can include the use of General Fund unrestricted cash, interfund transfers (accessing resources in other funds), and short-term debt (an external source of financing) (Arapis, 2013;Felix, 2015;Lofton & Kioko, 2021;Su & Hildreth, 2018). Yet, a central decision-making question has been ignored: Do governments trade off financial slack in the form of ETC and short-term resources in order to manage cash flows?…”

“…Second, given that politicians and citizens often want to maintain spending, a government is likely to operate at break-even margins, in which unrestricted cash balances are used to maintain operations or even slightly decline over time with use. Third, due to operating with maintainable unrestricted cash balances, governments might be compelled to engage in short-term borrowing if unexpected events occur including cuts to state aid revenue, increases in the proportion of spending on salaries such as with new union contracts, and higher than anticipated capital project costs (Lofton & Kioko, 2021;Su & Hildreth, 2018). Therefore, though ETC increases, local governments reduce their unrestricted cash balances and increase short-term obligations.…”