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# **II. Pooled Finance: Rationale, Origin, and Regulatory Context**

# A. Rationale

The United States has a large and diversified subnational bond market.<sup>6</sup> Each year, about 44,000 SNGs issue bonds in an average aggregate amount of $359 billion per annum from 2013 to 2016.<sup>7</sup> Total debt outstanding was $3.069 trillion in the third quarter of 2016 (Congressional Research Service 2016).

Despite an active and robust municipal finance market, small municipalities face challenges in accessing capital markets. Many small municipalities need to borrow a relatively small amount of capital. For example, the median size of borrowing from the Maine Municipal Bond Bank from 2012-2016 is $854,000, with the smallest amount only $30,000. For the lowest 50% of loans, the average size of a loan is $425,000. In New Hampshire, the median-size loan from 2008-2016 was $1.3 million, with the smallest amount $41,000 and the largest $37 million.<sup>8</sup> The process of hiring necessary specialized professionals including an investment bank, a bond counsel, a financial advisor and obtaining a rating is complex and expensive, relative to the size of the bond issuance. Investors are less willing to finance such a small amount of what would be an illiquid, and possibly un-rated debt issue. For these reasons, the cost of financing such small borrowings can be prohibitive.

Municipal bond banks have been offering a unique and advantageous mechanism for small communities to finance modest municipal projects by providing:

- Lower transaction costs of issuance due to economies of scale in packaging several municipal borrowings into a larger bond issue

- Increased liquidity by packaging smaller issues into a larger issue making the bond issue more attractive to buyers

- More favorable interest rates because the pool often has a better credit rating than the participating municipal borrowers, and the municipal bond bank is a more frequent issuer of debt and better known to the capital market participants

- Technical and professional assistance in the debt issuance process

- Professional and stable management for the issuance of debt as well as for the surveillance and monitoring of the municipal credits while the bonds and municipal borrowings are outstanding.

# B. Origin and Types

Municipal bond banks were established in the United States in the 1970s. The first municipal bond banks were created in the states of Vermont and Maine in 1969 and 1972, respectively. This soon was followed in the next several years by the Alaska Municipal Bond Bank Authority (1975), North Dakota

> 6 In the United States, the use of “subnational” and “municipal” are exchangeable. The municipal capital market also includes securities issued by the states or special purpose vehicles of the states.

> 7 The Securities and Exchange Commission estimated around 44,000 sub-national issuers of municipal debt in 2011. See U.S. Securities and Exchange Commission 2012. Average issuance taken from Electronic Municipal Market Access: <u>http://emma.msrb.org/MarketActivity/ViewStatistics.aspx.</u>

> 8 Author’s calculations based on publicly-available documentation in the New Hampshire and Maine bond issues and websites. The New Hampshire values are based on total outstanding loans as of the 2016 Series A issue.