Top 5 Things Your Public Finance Software Must (now) Do

Posted by Peter Orr on Apr 01, 2010

It's 2010 and time to raise the bar.  Public finance software has remained substantially unchanged for over a decade, and probably more like two.   In this day and age your public finance software, in addition to all the other stuff it's done since TRA86, must add the following five features: 

1. Reflect Uncertainty and Quantify Risk

Because so much brainspace is bogged down in satisfying tax rules coupled with analysts' difficulty implement models outside the ubiquitous spreadsheet, public finance analytics tend to force single point forecasts for market elements: variable rates, SIFMA/LIBOR ratios, VRDN support costs, etc.  What does this mean?  It means uncertainty is modeled with certainty which today borders on the absurd and exacerbates our species' now well documented tendency towards overconfidence.  Your public finance software needs to at least provide for the identification of cash flow risks and their modeling in a straightforward, efficient way.  

2.  Visual Interaction with the Problem     

Have you seen a video game made any time in the last 5 years?  These are true technological achievements.  What fraction of the computing power going into a video game rendering the bad guy around the corner finds its way to helping you visualize the complex financial decisions you or your clients make?  0.1%? 1% maybe?  Let's raise the bar - make it 10% and let's see what that looks like.  Unless you're able to quickly get a visual read of the problem and interact with it visually (move revenue lines, modify risk constraints, etc) your public finance analytics need a makeover.

3.  Calculate Solutions Subject to Explicit Risk Constraints   

Public finance analytics that solve for the minimum bond size achieving an overall expected debt service shape, wrapping around existing bonds and derivatives as applicable, while also measuring additional marginal risk contribution are now just a baseline.  Public finance analytics in 2010 must also allow the user to enter an explicit risk constraint to which the solution is bound.  In this way, the user sees the most cost effective, risk-adjusted solution determined from multiple financing sources on a maturity by maturity basis. 

4. Accommodate Swaps and Other Derivatives

Tax-exempt variable rate bonds aren't going away any time soon.  Therefore and despite some reporters confusion over what "speculation" is, interest rate swaps, caps, and collars probably aren't going away either.  If your public finance software doesn't analyze these very non-trivial instruments in very non-trivial ways, you're missing a very big part of the financial analysis for you or your clients. 

5. Include Refunded Bond Selection as Integral to Solution

Selecting what bonds to refund isn't always as simple as firing up your refunding screen and grabbing everything above 3% pv savings.  A number of interrelated factors go into determining the marginal contribution that an additional refunded bond has to the economics of a refunding.  Your public finance analytics should rise to the challenge. 

If you're an issuer, the features above offer you a deeper understanding of what's going on with your capital structure.  This makes you a far more knowledgeable consumer of banking and advisory services.  If you're a pubfin banker or advisor, these features are a pre-requisite to demonstrating you understand your clients. 

The world is changing fast... and public finance is no exception.