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Managerial Use of Debt to Fund Municipal Government Risks *
Author(s) -
Puelz Amy v.,
Puelz Robert
Publication year - 1997
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1997.tb01329.x
Subject(s) - taxable income , debt , finance , business , actuarial science , insurance policy , revenue , risk pool , purchasing , economics , key person insurance , accounting , marketing
In recent years, managers of municipalities have been forced to reevaluate the cost‐effectiveness of their risk management strategy. In many cases, individual or groups of municipalities (pools) finance a self‐insurance plan through the issuance of debt. However, no decision‐making methodology for cost‐effectively structuring the debt issue presently exists. Utilizing a math programming model, we examine a self‐insurance alternative to conventional insurance that uses tax‐exempt debt supplemented by taxable borrowing to finance a municipality's or pool's liability exposure. We implement our optimization model with actuarial and financial data from an intergovernmental risk pool (IRP) in the state of California, and simulate the effect of the trade‐offs important to sound managerial decision making. We find that significant savings are realized by using a self‐insurance plan rather than purchasing conventional insurance. We also find that managerial goals and risk preferences impact the decision when revenue flows are insufficient by themselves to reasonably fund expected losses.