Spring 2016
Harvard University – Kennedy School
Syllabus: State and Local Finance - Course # MLD410
Fridays from 1:10 - 4:00PM, in room L280
Faculty Instructor: Shelby Chodos (shelby_chodos@hks.harvard.edu)
Teaching Fellow: Carlos.Lastra.Anadon (carlos.lastra.anadon@gmail.com)
The most important sentence in this syllabus is this:
“2016 is a GREAT time to study state and local finance.”
With Washington DC seemingly immobilized by partisanship, fiscal constraints and dysfunctional bureaucracy, real innovation is taking place at the state and local level.
Mayors and governors are not waiting for the Federal government and are taking the
lead on a variety of issues, from the environment to social justice, from affordable
housing to sustainable infrastructure.
But meaningful progress requires meaningful funding. That is why this class is important.
We explore how we pay for the public services and physical infrastructure that are the
foundation of modern life. We explore how states as diverse as California and Illinois
must cope with rising pension burdens and health care costs while still providing
funding for current services. We analyze how many state and local governments, from
Detroit to Baltimore, are challenged by the need to repair old infrastructure, while other
communities, from Austin to Miami, must find a way to pay for the cost of rapid growth.
And we do all this in a way that emphasizes real world examples, rather than theoretical
approaches to public finance.
Objectives of the Course
The primary objective of this course is to provide students with an introduction to issues
of financial management in state and local government. The course begins with a
survey of the primary revenue sources for state and local governments: (a) property,
sales and income taxes; (b) user charges; (c) inter-governmental assistance; and, (d)
privatization. We will examine the pros and cons of various revenue sources for
financing general government services such as mass transit, sanitation and public
schools. We will also explore the financing implications of privatization and economic
development. From there, we move to debt issuance and an exploration of the
municipal bond market. We will survey the bond market and learn how public officials
interact with rating agencies, investment bankers and investors. We will learn how
bonds are rated and priced. The course concludes with a discussion of investment
practices in the public sector in the context of cash management and public pension
funds.
Prerequisites – This is a graduate level course. There are no formal prerequisites for this
course. An introductory microeconomics course would be helpful, but is not mandatory.
Please note that students will need to have a basic familiarity with Microsoft Excel and
simple financial formula functions on Excel in order to complete the problem set. For
students who are not Excel proficient, help is available through HKS and other University
resources.
Audience - This course is designed for students who anticipate working in state and
local government, for private sector financial institutions, such as the bond rating
agencies and investment firms, and non-profit organizations. Students who have policy
interests where state and local governments play a predominant role (e.g., education,
transportation, infrastructure and economic development) should find this course
especially useful.
Expectations - Students are expected to read the assigned materials and come to class
prepared to participate in an active discussion. In some cases, teams of students may be
assigned responsibility for leading class discussion and/or role-playing key actors from
the cases.
In addition, there will be a short problem set to reinforce quantitative skills, a mid-term
policy memo, a group project and a take-home final exam. It is reasonable to expect
that grades will be determined by: the quality of class participation (15%), problem sets
(10%), the midterm policy memos (30%), the group project (15%) and the final exam
(30%). These percentages may be adjusted somewhat depending, in part, on class size.
NOTE: Because a major feature of the course is the discussion of policy issues and
financial transactions that are currently affecting state and local governments, students
should assume that timely and newsworthy materials may cause revisions in both the
reading list and the timing for discussions. These supplemental readings may help
students to be more informed about current issues in government finance, which can
often be a conversational benefit during job interviews. As a practical matter, that
means that students should allocate approximately one hour every week to reading
additional materials that will be assigned and posted through the Canvas platform
early each week for discussion in our Friday afternoon sessions.
Office Hours: Friday – 11 am to 12:30 before class. Other times can be arranged. I am
particularly interested in helping students prepare for job interviews. So, if you have an
on-campus or off-campus interview, feel free to contact me before-hand to discuss
topics/questions that might be helpful to you in an interview.
Session # 1 - State Funding of Higher Education (Jan. 29)
Our first session begins with an issue to which students can easily relate: tuition costs.
It’s a big challenge for students and their families and for our purposes, it is a big budget
item for state governments. Our readings will give you something to discuss when you
call home (which, of course you do regularly….) because one of the Kennedy School
cases assigned for this session is so old that your parents (or grandparents) might have
read it.
CASE: Graduate Student Fees in California Differentials in California Public Higher
Education, C16-87-783.
Go from reading the ancient history in that case to watching two YouTube videos about
the same issue.
https://www.youtube.com/watch?v=0v1GsBt9Tik
https://www.youtube.com/watch?v=8FyY3CpjF8c
http://www.usnews.com/news/articles/2015/04/13/state-funding-for-highereducation-inches-up-colleges-still-reliant-on-tuition
Now, go back to the case and place yourself in that time period. You should come to
class prepared with recommendations for the policy makers.
Session # 2 - Paying for Mass Transit (Feb. 5)
This week, we look at one region, Metro Philadelphia, through the lens of two cases
about Philly’s mass transit system.
CASE: Financing Public Transportation in Philadelphia: SEPTA
CASE: SEPTA’s Capital Plan
Session # 3 - Property Taxes and School Finance (Feb. 12)
Public Education from K-12 is one of the primary responsibilities and biggest budget
items of local government. In many states it is also a key responsibility of the state. The
issue of school finance and the administration of property taxes are closely linked
throughout the nation. We examine how this uneasy partnership between state and
local governments works and explore the relationship between the funding mechanisms
and arguments around educational policy.
Peterson and Strachota, Chapter 6: Property Taxes, pp. 85-111
Four short videos:
Our School Funding System, and Why Change is needed
https://www.youtube.com/watch?v=WphM3RqsBPo
MEA Secretary-Treasurer Exposes the Mackinac Center's Motivations
https://www.youtube.com/watch?v=DL8iwvTpA-Y
School Funding Myth #1: The Foundation Allowance Myth
https://www.youtube.com/watch?v=KwznWCU2Zmo
Adequate Public Education Funding - Caroline Hoxby, Ph.D. - Show-Me Institute
https://www.youtube.com/watch?v=E_azBnADP4Q
Session # 4 - The Willie Sutton Principle (Privatization and its Discontents) (Feb. 19)
HKS Case: Leasing the Pennsylvania Turnpike
This case is designed to support a discussion of the pros and cons of leasing assets as a
means of raising public resources and of having the private sector finance and operate
infrastructure.
CASE: “The Massachusetts Lottery”, HBS Case# 9-590-009
Donohue, John D., The Privatization Decision, (Basic Books) 1989, pp.215-223.
Session # 5 - The Inter-Governmental Context (Feb. 26)
A. Fiscal Federalism / Devolution
Petersen and Strachota, Chapter 2: Financing Local Government, pp. 9-27.
A quick look at the division of power and functions between the national, state and local
governments. Why is government involved and what is the appropriate role for each
division? How will the downsizing of the federal government affect state budgets?
B. Economic Development
CASE: “North Carolina and the Battle for Business,” KSG Case.
This case asks you to give the Governor advice on his industrial recruitment strategy. It
was one of HKS’ early attempts to create a web-based case with lots of unwieldy links. It
should take you at least 1 – 2 hours to get the various points of view.
Session # 6 - Techniques and Tools for Financial Analysis (March 4)
A. Net Present Value Analysis
“How to Avoid Getting Lost in the Numbers,” HBS Case 682-010
Stokey, Edith and Richard Zeckhause, A Primer for Policy Analysis,
(W.W. Norton & Company, Inc.) 1978, pp. 159-176.
Brealy, R. and S. Myers, Excerpts from Chapters 1-3 Principles of Corporate
Finance, 5th Edition McGraw Hill, Inc. 1996), pp. 13-24 (top) and 34-50.
Assignment: “Valuation and Discounted Cash Flows,” HBS Case 9-291-028, Questions 1
and 2.
“Selected Investment Alternatives,” HBS Case 9-287-010, Questions 1-4
B. Bond Pricing / Transaction Structure
Petersen and Strachota, Chapter 15: Debt Markets & Instruments, pp. 293-320.
We begin to combine the principles of net present value and the conventions of the
bond market. Why do bond prices and yields fluctuate and how are they related to the
taxable fixed income market?
Session # 7 - Debt Policies and Practices (March 11)
Petersen and Strachota, Chapter 14: Debt Policies and Procedures, pp. 263-273.
Before turning to the inner-workings of the financial markets, we will spend a day
considering why state and local governments borrow.
SPRING BREAK (March 12-20) - “Infra-Selfies” due.
Session # 8 - Introduction to Municipal Bond Markets (March 25)
How do state and local governments borrow? We will devote the next two classes to
answering this question. This class considers the tax treatment of municipal securities,
the two major types of state and local government bonds and the major provisions in
the bond indenture.
Session # 9 - Credit Ratings (April 1)
Investors place tremendous faith in the ratings of municipal bonds by independent
analysts. What do the bond ratings mean and what do the rating agencies look for? How
are the ratings used as a measure of fiscal stability for political purposes? We will also
look at the different ways to bring debt offerings to market and the advantages and
disadvantages of each approach.
Session #10 Public Sector Pensions (April 8)
Petersen and Strachota, Chapter 13: Cash Management, pp. 241-262.
Session # 11- Group Presentation (April 15)
Session # 12- Group Presentation (April 22)
Session #13 – Course Wrap Up (April 29)