Impact of Mutual Fund Flows on Municipal Governments Debt Issuance and Expenditure

Ehsan Azarmsa, Joint Program of Financial Economics PhD student

US households rely on their state and local governments for essential services, such as education, healthcare, police protection, utilities, maintenance of public buildings and recreational areas, and many others. In times of low revenue, access to credit is crucial to continue financing their services. Otherwise, they would have to cut their personnel and spending when they are needed the most.1 The primary creditors of the municipal governments are US households and mutual funds, who jointly hold more than 70% of the outstanding municipal debt. It suggests that shocks to households’ wealth or mutual fund outflows could drastically hamper the municipal governments’ borrowing ability, and consequently, reduce their ability to provide essential services.