Public Finance Advice

If you sit on a city council, local school board, small utility or college's trustee board, I have some advice for you. Issue debt for the amount of money you need at the lowest rate the market will bear. Spend the money as you advertised, account for the debt service in your budget, and pay it back as planned. Repeat as necessary. Do not play around with swaps, swap options, and other derivatives. It may work out for you, but many times you are rolling the dice in a game you do not understand.

If you insist on ignoring this advice, at least keep three things in mind. First, except in rare circumstances you do not, and will not, have the in-house expertise to understand what you are doing. Second, no one spends time trying to sell you something if they are not going to make money off of it, and the more time they spend generally the more they are going to make. Finally, and most importantly, there is no such thing as a free lunch. Both parties to a transaction sign up because they believe they are getting some value. If you are lowering your interest costs through some transaction, sit back and ask yourself why the other side would do this deal with you. Don't delude yourself into thinking that you are saving money on interest at no risk - you are definitely giving something away. Chances are you are insuring the other side against some event, such as interest rates moving in a certain way, that they are worried will occur. At the end of the day, is that the business you really want to be in?