Capital Structure and Performance Implications of Special-Purpose Governments

Do special-purpose governments (SPGs) mimic the capital structure of private firms, when SPGs lack the market mechanism for discipline to which private-sector entities are subject? If so, what implications do those choices have on SPG performance? This paper answers these questions. SPGs are local, quasi-governmental entities established by state legislatures who have the operating flexibility of private corporations. In the United States, there are over 50,000 special-purpose governments with outstanding (and off balance-sheet) debt totaling one trillion dollars. Despite their contribution to national fiscal health, SPGs remain relatively underexplored. Using a sample of transportation SPGs over 20 years, we find that SPGs follow Myers’ and Majluf’s pecking-order theory of capital structure. Additionally, we find that increases in SPGs’ debt predicts increases in revenues and decreases in cash flows. These results help illuminate a poorly understood branch of America’s public sector.