To illustrate the fact that PFMs differ significantly in their operation, below we briefly explain how U.S. municipal bond banks operate and how select PFMs in other parts of the world function.
The municipal bond bank concept
Municipal bond banks exist in most cases as agents of state governments, organized as independent authorities with their own commissioners or boards of directors, many times appointed by the state governor.
There are around 15 U.S. bond banks in the same number of states. The oldest, Vermont Municipal Bond Bank, was created in 1969, and the youngest,
Michigan Finance Authority, was the result of the merging of various public finance authorities in the state in 2010. The most intense period of creation of bond banks was in the 1970s and 1980s, with only four bond banks created over 1990–2015. Bond banks are generally small and under the ownership and control of state governments. They are also directly or indirectly guaranteed by the states, and/or their bond issues are secured with interbudgetary transfers. Bond banks are predominantly found in smaller states.
The largest bond bank in terms of liabilities is the recently amalgamated Michigan Finance Authority. This entity has a broad scope, lending not only to municipalities, but also to schools (public and private), healthcare providers, and private colleges and universities. It also handles student loans in the state. The second-largest bond bank, Virginia Resources Authority, has a more typical set of customers and raises funds mainly for local infrastructure.
Overall, the size of U.S. bond banks’ activities is limited. Many bond banks administer statewide revolving funds from which loans are supplied to local authorities for specific purposes, often clean-water projects.
The cooperational approach
The cooperational approach is based on cooperation in the country in question among local authorities that have voluntarily joined forces to achieve long-term cost-efficient funding of local infrastructure projects.
The European LGFAs are examples of the cooperational approach. These agencies are frequent issuers in capital markets and are often market leaders in municipal loans in their respective countries.
Another example is found in Japan. Japan Finance Corporation for Municipal Enterprises was originally created as a central government institution in 1957. In 2008 this company was transformed into a new entity with the capital fully contributed by all local governments (prefectures, cities, towns, villages, and special wards of Tokyo) and became a joint fundraising organization for local governments.
Another example is found in New Zealand. The New Zealand Local Government Funding Agency (NZLGFA) was created in December 2011, after three years of preparations. Local authorities own 80 per cent of NZLGFA, and the central government retains the remainder. There are 31 shareholding local authorities; among these are the Auckland Council, the Christchurch City Council, and the Wellington City Council.