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MANAGING THE MATURITY STRUCTURE OF MUNICIPAL DEBT : A SURPLUS OPTIMIZATION FRAMEWORK

This paper considers appropriate debt funding strategies for state and municipal governments in the presence of a positive, tax-exempt term premium. The correlation between a measure of income from rate-sensitive assets and the tax-exempt floating rate is the principal focus of the analysis. A single period framework is used to identify the most important information required to design the optimal proportion of tax-exempt floating rate debt for a municipal government. The main findings are that maturity matching alone is rarely the optimal strategy, and there are several compelling reasons for increasing the quantity of floating rate debt. This framework is employed to assess the optimal state government debt maturity structure based on historical data.