Lowering Borrowing Costs for States and Municipalities Through CommonMuni

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Released: February 2011 • Discussion Paper

Related Topics: Infrastructure, Effective Government, State & Local

Authors:

  • Andrew AngAnn F. Kaplan Professor of Business; Chair, Finance and Economics Division, Columbia Business School
  • Rick GreenCyert Professor of Financial Economics, Tepper School of Business, Carnegie Mellon University.
 
 

States and municipalities throughout the United States depend on the municipal bond market to raise funds for important investments in America’s schools, roads and highways, hospitals, utilities, and public buildings. Additionally, many individuals rely on municipal bonds as a dependable investment. Evidence suggests, however, that state and local governments that borrow money by issuing bonds and ordinary investors who buy those bonds may pay billions of dollars each year in unnecessary fees, transactions costs, and interest expense due to the lack of both transparency and liquidity in the municipal bond market. The liquidity cost alone represents approximately $30 billion per year on the current $2.9 trillion stock of outstanding bonds. This paper proposes the establishment of CommonMuni, a not-for-profit, independent advisory firm that would reduce borrowing costs for municipalities and increase returns for investors by overcoming the difficulty individual municipalities and investors have in coordinating their actions and sharing market knowledge. CommonMuni would provide individualized advice, gather and disseminate information on bond issuers and transaction prices to increase transparency, and coordinate market participants to enhance liquidity in the municipal bond market. Importantly, CommonMuni could be started for roughly $25 million, just a tiny fraction of the potential benefits.


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