Evidence from Debt Management Function By

In recent years several state and local governments have reformed their financial management practices by placing greater restrictions on the sale and management of government debt including practices related to debt refinancing. The escalating use of these debt restrictions is predicated on the belief that there may be a pervasive principal-agent problem between taxpayers and public financial managers. That is, in light of recent perceived debt management abuses in several states, some conjecture that the interests of government financial managers (i.e., agent) acting on behalf of elected officials may not be aligned properly with the debt management goals of the public (i.e., principal). Hence, statutory debt restrictions are needed to ensure that a public financial manager’s actions reflect the desires and policy goals of the public, which, in this case, are assumed to be the long-term cost efficient and effective management of state debt. However, there is concern that these debt restrictions may not be costless. That is, they may lead to more prudent management of government debt in certain circumstances but, at other times, debt restrictions, including limits on bond refinancing, may unduly restrict public financial managers and lead to a less efficacious debt management program thus undermining th