Has it ever seemed as though people don’t pay much attention to how local governments spend taxpayer money? That is, until election time.
As it turns out, there’s some truth behind that. A new study by Sevgi Soylemezgil, a PhD candidate in finance at Binghamton University’s School of Management, found municipal bond call decisions are less likely to happen during open-seat election months, such as when an incumbent mayor is not seeking re-election.
The study’s findings suggest that uncertainty during administrative transitions, or when the elected official is essentially a “lame duck” due to term limits, is a more significant driver of election-based disruptions than incumbent strategy when it comes to municipal debt management.
“What I’m exploring in this research is how governments spend people’s money and whether that money is spent efficiently,” Soylemezgil said. “From what I observe, there is a disruption in the decision-making process; somebody is not making the decision to call these bonds when they should be called. I am not saying that public money is mismanaged, I am saying that it is just not spent as efficiently as it should have been.”
Soylemezgil analyzed data from 513 U.S. cities between 2005 and 2021, matched with mayoral election data, and found that bond call probability declines by 1.2–2.7% during election months with an open-seat race. However, data showed no significant change during incumbent re-election months. The results were based on the electoral race setup and did not factor in candidate party affiliations.
“If incumbents were strategically avoiding calls to please bondholders before facing voters, we would expect the strongest effects precisely when incumbents are on the ballot and have the most to gain from bondholder goodwill,” Soylemezgil wrote in the study. “Instead, the opposite pattern emerges: incumbent re-election months show no significant change in call behavior, whereas open-seat elections exhibit large and significant declines.”
Why are municipal bonds important?
Municipal bonds represent a crucial financing mechanism for local governments, funding essential infrastructure and public services.
Nearly every long-term municipal issue includes call provisions that allow issuers to redeem securities before maturity, giving municipalities the flexibility to refinance debt when interest rates decline. When a bond is not called at the right time, the city continues to pay higher interest rates than necessary, and that cost is ultimately borne by taxpayers.
Soylemezgil was inspired to conduct the research after noticing patterns in public spending around election cycles in her home country. She decided to investigate whether electoral cycles could also affect municipal finance decisions in U.S. cities. With recent research showing 95% of municipal bonds are callable, the timing of call decisions has broad implications for how efficiently cities manage their debt.
Generally, open-seat elections can create administrative disruption or uncertainty about the incoming administration’s priorities and policies, Soylemezgil said, which can leave municipal finance staff delaying certain consequential decisions until those preferences become clear.
How can the process be improved?
Because the disruption appears to stem from administrative uncertainty rather than political strategy, Soylemezgil said reforms focused on ensuring the continuity of professional finance staff during transitions could reduce the impact of elections on municipal debt management.
These could include longer tenure protections for professional finance staff and explicit call policies that survive leadership changes, so that the debt management decisions are not put on hold while staff wait for an incoming administration’s priorities to become clear.
Soylemezgil said her findings could also be useful to municipal bond investors, as the results suggest that open-seat elections would signal a significantly reduced call probability.
“Whether or not there’s a demand for change is up to the public,” she said, “but it’s important to be conscious of these issues because it affects your quality of life in the end.”
Soylemezgil’s paper, “Municipal Bond Call Decisions and Electoral Cycles: Evidence from U.S. Cities,” was published in Public Finance and Management, an international interdisciplinary journal.