Financial Engineering by City Governments: Factors Associated with the Use of Debt-Related Derivatives. Issue 3 (May 2020)

• Record Type: Journal Article
• Authors: Singla, Akheil; Luby, Martin J.
• Is Part Of: Urban affairs review. Volume 56:Issue 3(2020)
• Page Start: 857
• Page End: 887
• Publication Date: 2020-05
• Subjects: public financial management -- financial engineering -- interest rate swaps -- derivatives -- financialization; City planning -- Periodicals; Aménagement urbain; Développement urbain; Planification urbaine; Politique urbaine; Recherche; Sociologie urbaine; Urbanisme; Ville; États-Unis; Périodique électronique (Descripteur de forme); Ressource Internet (Descripteur de forme); 307.76
• DOI: 10.1177/1078087418802360
• Languages: English
• ISSNs: 1078-0874

Abstract

Despite significant coverage in the financial press in recent years, financial engineering by city governments via the use of financial derivatives such as interest rate swaps remain an understudied area of urban financial policy. Indeed, press accounts and other case or conceptual urban studies research emphasizing the downside of these transactions are some of the only sources of information on these instruments. These stories and studies often allude to or speculate on a more basic question: Why would a government choose to enter into a complex financial instrument like a debt-related derivative? This research posits three exploratory hypotheses—financial health, financial experience and/or financial sector influence, and governance structure—culled from media accounts and the urban studies literature on the use of debt-related derivatives by city governments in the United States. It empirically explores these hypotheses by examining the various fiscal, financial, and issuer characteristics of the largest 50 U.S. cities and their choice of whether to use debt-related derivatives. The research finds that the characteristics of government most associated with debt-related derivative use are declining financial condition, increased financial experience and/or financial sector influence, and prior use of interest rate swaps.