Sub-national pooled financing: Lessons from the United States

The World Bank
Kirti Devi
Lili Liu, Sally M. Torbert



As infrastructure projects are increasingly decentralized to sub-national governments (SNGs) in many countries, policymakers are keenly interested in developing sub-national bond markets to open up access to private-sector financing. However, the transaction costs of bond issuance are still prohibitive for small SNGs.

Pooled financing—through regional infrastructure funds, municipal funds, or bond banks—is being explored as a solution. Yet, many questions remain:

• What are the necessary governance and managerial systems?
• What are the policy requirements needed to make pooled financing work?
• Should, and how, does a pooled financing facility appraise potential projects?
• How should the pooled facility manage the default risks of borrowers, particularly for small municipalities

The just-released working paper: Municipal Pooled Financing of Infrastructure in the United States: Experience and Lessons, supported by the Public-Private Infrastructure Advisory Facility's (PPIAF) Sub-National Technical Assistance Program (SNTA), addresses these questions and provides a review of the state bond banks in the United States , which since the 1970s have become a cost-effective and stable model for expanding sub-national financing for many small municipalities, while maintaining strong credit ratings with virtually no defaults from sub-borrowers.

In the state of Maine, for example, the municipal bond bank has issued 1,814 loans to 517 government units. The bond bank has also been successful in lowering financing costs for small, unrated government agencies, with the median size loan from 2012 to 2016 being $842,000 and the smallest loan only $30,000.

It is important to note that the United States has a well-developed sub-national capital market, with an average of $359 billion worth of bonds issued annually from 2013 to 2016. Also, the necessary regulatory framework for the sub-national capital market evolved over a long period beginning with state constitutional reforms setting debt limits (1840s), use of bond counsel (late 1800s), revenue bond instrument (late 1800s), and the development of Chapter 9 of the Bankruptcy Code (1937). This was accompanied by various institutional developments such as U.S. Securities and Exchange Commission oversight, accounting reforms, credit ratings, regulations of bond dealers, disclosure of financial statements, etc.

Each U.S. state has its own independent framework for its bond bank, however most have common features, including:

• Independent, self-supporting institutions established by the state.
• Permission to issue tax-exempt bonds for public-purpose capital projects.
• Public status means bond banks do not need to earn a profit or pay taxes.
• No state guarantee (bond bank debt therefore does not contribute to state debt limits).
• No taxation power.

Credit pooling benefits issuers by spreading administrative costs across a number of participating entities. The portfolio’s geographic diversification and the use of credit enhancements can improve credit ratings. Primary security for pooled bonds are local government’s timely loan repayments, which are backed by the local government’s general obligation or revenue obligation.

Bond banks can also have additional layers of security, including: separate accounts for loan repayment held by a trustee, debt service reserve funds, authority to intercept state aid payments to local governments in case of default.

The SNTA-supported report also discusses broader lessons for developing countries that are interested in establishing pooled financing for sub-national infrastructure.

Findings were presented at a World Bank seminar in May, chaired by Carole Brookins, former U.S. Executive Director to the World Bank, which generated wide interest across the Bank’s Global Practices.

For more information about the SNTA program and funding, visit our website.