When cities are required to get voter approval for certain types of bonds, they often switch to non-voter-approved bonds instead, a workaround that tends to drive up borrowing costs.
That's among several ways in which bond referendums help shape financing decisions, according to
June Huang, an assistant professor of accounting at the University of Texas at Dallas, said she was prompted to tackle the question in 2023 after moving from Chicago to Dallas, where a proposed $1.25 billion bond proposal was all over the news. In Chicago, the public typically only hears about a borrowing after it's approved or even has gone to market.
"In Chicago, I could not think of another bond issuance I'd heard so much about," said Huang, who wrote the paper with Kimberlyn Munevar and Delphine Samuels. "This whole process was surprising to me."
The paper is the first to document the variation in bond referendum requirements across U.S. cities, and dig into data to see how the differences impact financing decisions.
It turns out that cities that need voter approval for certain types of bonds, like general obligation, are more likely to turn to revenue bonds to avoid the need of going to the voters in the first place, the paper found.
In cities with no vote requirements, unlimited-tax GO bonds account for two-thirds, or 66%, of borrowing, with limited-tax GOs or revenue bonds accounting roughly equally for the rest, Huang said.
When voter approval is required for unlimited-tax GO bonds, the issuance of ULTGOs falls by half, to 31%, the paper found. The issuance of revenue bonds swells to 51% , with limited-tax GOs making up the rest.
"Cities gravitate toward the types of bonds where they have more control over the borrowing process," Huang said.
Turning away from voter requirements may allow issuers to float bonds on a more timely basis and avoid a rise in project costs, Huang added.
Issuers that have GO vote requirements also see 27–35 basis point higher aggregate yield spreads than cities in states without referendum requirements, the paper found.
Cities in states with ULTGO requirements "face similarly elevated financing costs: average yield spreads are 18–29 basis points higher than cities without referendum requirements," the paper said.
The higher borrowing costs are likely due to the higher costs associated with revenue and LTGO bonds, the paper suggested.
The paper "confirms something that I felt right in my gut, which is that officials, when they can, will avoid going to the voters to raise funds," said Lauren Larson of the Brookings Institution, in response to the paper.
"It's not always nefarious, but there is a political factor here," Larson said, noting the political stakes for elected officials can be high.
The paper shows that bond referendum carry financial implications, she said. "There's a real fiscal cost to this decision," and policy makers who are considering imposing bond referendum restrictions may want to consider that, she said. "It might lead to some behavior that will drive up the cost of borrowing."
Cities subject to GO votes provide more bond-related disclosure on their websites than other cities, and they receive more bond-related media coverage.
Bonds issued by cities requiring voter approval are 1.5% times more likely to trade in the secondary market and 3.5% more likely to trade among retail investors, the paper said.
