Author Archives: stan11

Acquiring Public Finance Expertise: Outsourcing For Savings and Efficiency

Consultation in Municipal Finance: The Rundown

Public finance is a complex field that frequently necessitates private consultation. In the realm of public finance, a consultant provides two major benefits: reduced costs and improved results. This comes from their ability to perform tasks in ways that internal employees would not be able to do and their ability to contribute things that are best taken from an outside source.

Reduced Costs

Public finance consultants are utilized because they can reduce costs by several means. While it is possible to maintain a public finance department, this is far more expensive than outsourcing financing to a consultant and it is generally outside the purview of all but the largest and most wealthy municipal divisions. Keeping a consultant on retainer means you have the benefits of a financial department when you need them.

Accurate Reporting and Advice

Consultants can be hired as a means of guaranteeing more accurate financial reporting. It is entirely possible for internal employees to perform financial reporting. Many departments rely on software to fill in blanks in expertise. These are very limited in their utility. Many forms of financial reporting grow complex when circumstances are taken into account and quickly outstrip the abilities of employees and software to address.

A consultant in this situation can take the details into account to provide much more accurate and thorough reporting to underwriters. They can turn acceptable reports into excellent reports and allow departments to set budgets with much lower risk. The advice consultants can provide underwriters is also invaluable. While underwriters can take steps to educate themselves it can be very difficult to do so in a sufficiently comprehensive manner. Comprehensive expertise is, in this case, what the consultant offers.

Continuing Support

Perhaps the most singularly powerful thing financial consultants can offer is an outside source of support in times of heavy workload or emergency situations. Some circumstances demand more work than a department is necessarily equipped to perform under time constraints. Trying to pull together large or complex projects will frequently produce this problem. It can be difficult to cope with this internally for several reasons, not the least of them being budget limitations associated with allowed hours. It can necessitate employees doing jobs outside their description and take time away from their prescribed duties.

An outside consultant can intervene and take on financial work as a form of relief as well as assist underwriters with immediate situations of greater complexity than they are prepared for. In this case, both the hours and expertise are most easily found in an outside source. Consultants are that outside source.

Consultants make themselves valuable by responding with agility to dynamic financial situations. They serve as both solutions to complex projects as well as stopgaps for emergency situations. Whether a department is facing a situation outside their collective or procedural expertise or a situation outside their capabilities, a retained consultant can step in and resolve the situation. This is how financial consultants interface with public finance, and it is also why they are so valuable.

This article is one of my blog posts that has been published. It can be viewed at:

To post a comment or read other comments on this blog, click on Read More below.

Some Important Things To Know Before Investing In Municipal Bonds

Taxation of Municipal Bond Interest

The interest on tax-exempt municipal bonds is exempt from federal income taxation, an important consideration to bond buyers, especially those in the higher income tax brackets.  State tax treatment is an important consideration to bond buyers as well, since the interest on tax-exempt municipal securities is exempt from state income taxes in the state where they are issued.  Most municipal bonds are tax-exempt, but some are not (i.e., they are fully taxable). The offering document for a bond issue (its “Official Statement”) will state if the bonds are tax-exempt or taxable. In general, if the bonds are issued by a municipality for a public purpose (e.g., to construct a public school building) they will be tax-exempt. If the bonds are issued by a municipality for “private activity” purposes, they will be taxable bonds and the income from these municipal bonds will be fully taxable for both state and federal income tax purposes.

Current rules on the exemption of municipal bond interest varies state-to-state. In most states, bonds issued by the state or one of its political subdivisions are exempt from personal income taxation, but not the interest on bonds issued by another state or one of its political subdivisions.

Serial Bonds

Serial bonds allow issuers (i.e., municipalities) to structure their debt by issuing bonds in varying principal amounts with consecutive maturity dates. For example, an issuer might sell $1,000,000 in bonds with annual maturities of $100,000 per year for 10 consecutive years. As serial bonds mature the issuer is able to repay the total principal over time (rather than all at once), and as such will be better able to match revenue projections with debt service payments.

Term Bonds

Single maturity or “term bonds” are debt instruments where the entire principal amount of the bond is paid on the maturity date. For example, an issuer might sell $1,000,000 in bonds, all stated to mature in 20 years. Prior to the maturity date, however, there may be mandatory sinking fund redemptions of this bond. A schedule of the mandatory sinking fund redemptions will be shown in the official statement for the bond issue. Thus, portions of this 20-year bond will be retired before the 20th year in amounts and on the dates set forth in the official statement.

Par Bonds, Discount Bonds and Premium Bonds

A par bond is a bond sold at its face (or “par”) amount (e.g., a $5,000 par bond would be sold for $5,000). A discount bond is a bond with a below-market coupon rate that is sold at a price less than par, and a premium bond is a bond with an above-market coupon rate that is sold above par. The decision to issue discount or premium bonds (or some combination of both) is made by the underwriter of the bond issue for marketing purposes. After the initial offering, changes in market rates will affect the prices of bonds, thereby making them par, discount or premium bonds depending on their coupon rate and the market rate for the bond at the time of sale. Contact your accountant or financial advisor with respect to the taxation of the discount or premium on your bonds.

Callable Bonds

Municipal bonds providing for the optional redemption or “call” by the issuer prior to its stated maturity date are known as callable bonds, and are generally callable at any time upon 30-days notice after a certain numbers of years have elapsed from the date they were issued (typically, 10 years). The decision to call the bonds is solely at the option of the municipal issuer. If the issuer decides to call its bonds, the owner will be paid back at that time, and no future interest payments will be received. Premiums can be applied to the early redemption of callable bonds, although most municipal bonds are currently callable at par. Thus, all or a portion of an issuer’s callable bond issue may be redeemed prior to the stated maturity of the bond issue. The official statement for a callable bond will describe the method of redemption.

Yield to Maturity and Yield to Call

The yield to maturity is the return to the purchaser of a fixed coupon rate bond at a certain price. For example, a 20-year 5.00% non-callable bond purchased at 105% of par will have a yield to maturity of 4.615% (the yield to maturity is less than the coupon rate since the purchaser is paying more than par for this bond). If the same bond was purchased at 95% of par (i.e., at a discount), its yield to maturity would be 5.412% (the yield to maturity is greater than the coupon rate since the purchaser is paying less than par for this bond). The yield to call is the return to the purchaser of a callable bond assuming it is called on its call date. For example, if the 20-year 5.00% premium bond purchased at 105% is callable in 10 years, the yield to call would be approximately 4.377% (i.e., less than its yield to maturity). When investing in bonds it is important to know the yield to maturity (YTM) or yield to call (YTC) in order to know the actual return of the investment – don’t just look at the coupon rate. Discuss this with your securities broker or financial advisor.
Credit Enhancements

Some municipal bonds are issued with “credit enhancement” which means that a third party promises to pay the principal and interest on the bond if the issuer fails to do so. Examples of such third parties are (1) a bank letters of credit, (2) a bond insurance company, (3) credit programs of federal or state governments or federal agencies, or (4) state school credit guarantees. With credit enhancement, an issuer can expect to sell its bonds at a lower yield to the investor due to the higher creditworthiness of its debt. Discuss any credit enhancements with your securities broker or financial advisor.

Zero Coupon Bonds

Zero coupon bonds are bonds that are sold at a discount with no periodic interest payments. All interest is effectively paid at maturity when the purchaser receives the full principal amount of the bond.

Capital Appreciation Bonds

Capital appreciation bonds (CABs) are bonds that are sold at a discount that provide for the reinvestment of the initial investment at a compounded rate until the maturity, at which time the investor receives the total par amount (or “future value”) of the CAB. CABs are zero coupon bonds.

Variable Rate Bonds
Variable rate demand obligations (VRDOs) are bonds where the interest rate varies, or changes periodically (e.g., weekly or monthly). VRDOs are typically sold with high minimum denominations (e.g., $100,000). The VRDO structure allows the securities to be sold at par. They are also known as “floating rate” bonds.

To post a comment or read other comments on this blog, click on Read More below.

Ten Common Financial Mistakes Businesmen Make

Starting or maintaining a business is a challenge, and managing finances in any type of business requires planning and discipline. The following are ten common financial mistakes that are often made by businessmen.

1. Confusing Saving and Investing
The main difference is money that is saved is money that a business can’t afford to lose. Invested money is always subject to a loss. Businessmen too often invest to save and thus have no idea what their long term savings may be.

2. Deferring Taxes
This sounds great, especially when a business is just starting. But many businessmen get behind the eight ball on this. When the business grows it will mean paying taxes on a larger amount. It’s usually better to pay taxes up front.

3. Inadequate Insurance
Depending on the type of business and the location, certain types of insurance are legally required. Not having the insurance can mean paying fines. Businesses also need adequate insurance for liabilities such as lawsuits.

4. Lack of Forecasting
Every business must have a detailed plan written out for every aspect of the business. Failure to do so means that a businessman is simply guessing about how much he’ll sell and what the expenses will be.

5. Poor Accounting
Keeping track of the finances is more than knowing there’s currently money in the bank. Proper accounting will show exactly where money is being spent and how it’s coming in. This will enable a business to make proactive financial decisions.

6. Planning on Profits the First Year
Most businesses don’t make a profit the first year. Having either enough capital or another source of income is essential. The first year of almost any business is bumpy and unforeseen costs often arise.

7. Hiring Unnecessary Employees
Hiring permanent employees means extensive record keeping and withholding a variety of taxes. This can be expensive and time consuming. For some businesses it may be better to go through a temp agency for human resource needs.

8. Not Collecting Bills
Not all clients pay for services or goods in a timely manner. Knowing how to work with clients, such as re-billing or making personal contact, to collect payments is not always an easy task.

9. Not Enough Capital
Having enough money to run any business is always a challenge. People tend to be overly optimistic when raising capital. Few business ventures run smoothly without any unexpected costs. Whatever amount is thought necessary to run the business, double it.

10. Lack of Personal Retirement Funds
Those in business sometimes neglect to put aside money for later years. It’s better to plan to put away smaller amounts of money monthly or quarterly than waiting until the end of the year.

By consciously working to avoid these mistakes a businessman will save himself a lot of time and resources. Almost all of these mistakes can be avoided by writing and sticking to a detailed business plan.

This article is one of my blog posts that has been published. It can be viewed at:

To post a comment or read other comments on this blog, click on Read More below.

The Next Financial Crisis

I viewed a recent panel discussion at the London School of Economics (“LSE”) on “The Next Financial Crisis” and found it not only very informative but also quite interesting.

The panel stated that it’s been five years since the last financial crisis, and while certain things have been done to strengthen the financial system, the measures that have been put in place will not be effective, and risks of another financial crisis still exist. They believe that it is a matter of time before the next financial crisis will occur, but predicting the exact timing is not possible. Nothing has been done to make the next financial crisis less likely to happen, and the next one may be worse that the last.

The panel includes professor Julia Black, Dr. Jon Danielsson, professor Charles Goodhart and is chaired by Dr. Malcom Knight. The video lasts about 1½ hours.

Julia Black is director of the LSE Law and Financial Project.  Jon Danielsson is co-director of the System Risk Center at LSE. Charles Goodhart is emeritus professor of banking and finance with the Financial Markets Group at LSE.

I highly recommend watching the video of this panel discussion.

Here is the link to this video:

To post a comment or read other comments on this blog, click on Read More below.

Please Don’t Network

In a recent issue of the Columbia Business School’s Chazen Global Insights I read a very interesting article on networking that offered a number of thoughtful insights and suggestions. Written by Sharon Kahn, “Please Don’t Network” is based on her interview with Mary Ann Casati, a founding partner of Circle Financial Group in New York and former partner at Goldman Sachs, who has built a career on the artful nurturing of professional and personal relationships. Here is a summary of what Ms. Casati told Sharon.

“When it comes to networking, many people have it all wrong. People spend a lot of time networking with, and following up with, a lot of people. From a productivity perspective, it can be deadly. Instead, think of networking as (1) building a lifetime of quality relationships, and (2) developing a broad enough perspective and skill set to excel in your career. That gives you a framework for prioritizing your time, including targeting people from whom you can learn and whose advice you can trust. But before they can give you good advice (or vice versa), they need to be able to place you in context – to know how you think and problem solve, your skills and aspirations. You have to develop a mutual relationship over time.” To accomplish this Ms. Casati offers the following tips:

1.  Pick your spots to network. “Use your resources wisely and attend only those optional meetings and conferences that will do the most to broaden your knowledge base and perspective. Most of your meetings shouldn’t have a specific “ask” or political agenda, but don’t waste anybody’s time, either. Have thoughtful things you want to discuss. As part of relationship building, use the times you connect with contacts to let them know not just what projects you are working on and what your particular goals are, but how you think, approach problems, and get things done, and who you are as a person.”

2. Don’t expect payback. “Relationships should be substantive, natural and authentic. They should be about enriching your life rather than expecting that someone will pull a string for you. One never stops building relationships – it’s a process that lasts a lifetime, and some of the most meaningful relationships are built gradually, overlong periods, through intermittent interaction.”

3. Cultivate five circles. “To be more efficient with your time, think of your networking strategically, and prioritize. By being aware of different types of networks, you can assess which ones are string at the moment and which others are important to focus on.” The first network (or circle) consists of friends and family. The second is the network where you work. The third consist or people in your industry. The fourth consists of people you want to emulate –people who are highly effective but whose skills or approach might differ from your own. The last network consists of people with whom you share a common interest or passion.

The following is a link to the complete article:’t%20Network

To post a comment or read other comments on this blog, click on Read More below.

Social Impact Bonds

I recently read about Social Impact Bonds (SIBs) and as a long-time professional in public finance found them to be an interesting mechanism for financing social projects. SIBs are not like traditional debt instruments where debt service is paid at regular intervals (usually semiannually) from the pledged revenues of a borrower; rather, payments on SIBs are made only if and when certain performance targets are met. Briefly, the financing structure is as follows: a government agency contracts with a private-sector intermediary to buy certain social services, and the intermediary gets paid when certain performance targets are achieved and verified by an independent evaluator. The payments are made in part from the cost savings of the project. These payments are also used to repay the investors’ principal, plus a return for bearing the financial risk of the SIBs.

 According to a recent Governing Magazine newsletter, “Last year, the first SIB in the U.S. was signed: A $9.6 million loan to an evidence-based program for young adults in New York City’s Rikers Island Correctional Facility. The program — the Adolescent Behavioral Learning Experience (ABLE) — teaches young inmates skills and counsels them on personal responsibility in an effort to reduce recidivism. Goldman Sachs provided the financing; Bloomberg Philanthropies put up money for an initial grant; and MDRC, a nonprofit agency, is overseeing its implementation. If recidivism among those in the program is reduced by 10 percent, the government saves enough money to pay back the investor’s principal. If the reductions are higher than 10 percent, investors start to make money.”

Part financial investment and part philanthropy, SIBs may be attractive to foundations, financial institutions, and pension funds.

For more information on SIBs, social innovation funds, and impact investing, I suggest reading “Social Finance: A Primer, Understanding Innovation Funds, Impact Bonds, and Impact Investing” by Sonal Shah and Krista Costa. The following is the link to this document:

To post a comment or read other comments on this blog, click on Read More below.