Decision Sciences Journal
Volume 28, Number 3
Summer 1997
Managerial Use of Debt to Fund Municipal Government Risks
Amy v. Puelz and Robert Puelz
Edwin L. Cox School of Business, Southern Methodist University,
Dallas, TX 75275, email: apuelz@mail.cox.smu.edu
and rpuelz@mail.cox.smu.edu
ABSTRACT
In recent years, managers of municipalities have been forced to
reevaluate the cost-effectiveness of their risk management
strategy. In many cases, individual or groups of municipalities
(pools) finance a self-insurance plan through the issuance of debt.
However, no decision-making methodology for cost-effectively
structuring the debt issue presently exists. Utilizing a math
programming model, we examine a self-insurance alternative to
conventional insurance that uses tax-exempt debt supplemented by
taxable borrowing to finance a municipality's or pool's liability
exposure. We implement our optimization model with actuarial and
financial data from an intergovernmental risk pool (IRP) in the
state of California, and simulate the effect of the trade-offs
important to sound managerial decision making. We find that
significant savings are realized by using a self-insurance plan
rather than purchasing conventional insurance. We also find that
managerial goals and risk preferences impact the decision when
revenue flows are insufficient by themselves to reasonably fund
expected losses.
Subject Areas: Mathematical Programming, Municipal Finance,
Public Organizations, and Simulation.
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