F105. State Government, Local Government (w/o Retirement Funds)

Federal Reserve definition for F105 flow of funds table

This sector comprises the government operations of the fifty states, their political subdivisions, and the District of Columbia, including debt-issuing authorities, government authorities,and trust funds.

The sector excludes state and local government employee retirement funds, shown in a separate sector in the fund grouping.

State and local governments engage in activities that include education; building and maintenance of roads; provision of water, sewers, and sanitation; mass transit; public assistance; and health care.

The activities are financed primarily through tax receipts, borrowing, and grants from the federal government.

State and local governments hold various financial assets, such as U.S. government securities, mortgages, corporate equities and mutual fund shares, and corporate bonds. Their major liabilities are municipal securities, mainly long-term obligations.

Interest earnings on most types of municipal securities are exempt from federal taxation, which enables the governments to borrow funds at lower rates than if they issued taxable securities.

When interest rates fall, state and local governments may issue securities to refinance an outstanding bond issue; the proceeds are held in escrow until the maturity date or first call when the earlier issue is repaid or paid down.

State and local governments are restricted from earning arbitrage profits that would be obtained by investing tax-exempt procees in higher-yielding investments.

Since 1972, state and local governments have been investing in U.S. Treasury securities ('SLGS', or State and Local Government Series, pronounced 'slugs'), which were introduced to assist the governments in complying with these restrictions.

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