State and Local Government Bond Refinancing and the Factors Associated with the Refunding Decision

The decision to refinance existing debt is a significant one made increasingly by public financial managers. Since state and local governments are somewhat limited by the Internal Revenue Service (IRS) in their ability to refinance debt, the decision to refund bonds is critical due to the potentially large economic benefits associated with refinancing bonds in the future at lower interest rates. Because of these potential benefits, it would be instructive for policy makers to know some of the covariates associated with this important debt management decision. To that end, this study analyzes refinancing bonds sold by California state and local government issuers between 2000 and 2007. The authors attempt to understand and record a list of issue-specific characteristics, market dynamics, and issuer-related data that are more likely to be related to likelihood to refinance. The authors then discuss the policy implications from these empirical findings.