Capital budgeting practices among Tennessee municipal governments.

• Author: Sekwat, Alex

Capital budgeting is a fundamental part of the budgetary process at the municipal level. Municipalities employ it as a tool for planning, control, and allocation of scarce resources among competing demands. In the past two decades, efforts to improve efficiency in government have spurred interest in tools that help public officials make better capital investment decisions. As a result, the capital budgeting process is becoming a vital part of financial planning and decision-making, especially in regard to development, construction, and/or acquisition of new capital facilities as well as maintenance of existing capital facilities.

Municipal governments are responsible for providing and maintaining basic capital facilities within their jurisdictions. They also administer a wide array of capital programs that are associated with urbanization and local economic development (e.g., construction of roads, schools, water and sewer systems, jails, and recreation facilities).

Role of Capital Spending

Municipalities must commit a large amount of resources to maintain their capital facilities. Government fiscal data show that local governments spend hundreds of millions of dollars on capital investments each fiscal year. During the past decade, direct capital expenditures accounted for about 20 percent of total annual spending at the local level compared to 13 percent at the state level. Thus, capital expenditures constitute a significant component of total annual municipal spending.

Because of the large amount of resources allocated for capital expenditures, capital budgeting is a crucial process. To prudently manage resources allocated for capital investments, local government decision-makers have increasingly relied on capital budgeting to define the strategic needs for their communities and match their long-term plans with their infrastructure priorities. Since the aftermath of World War II, the capital budgeting process has become a vital element of decision-making with respect to planning, managing, acquiring, and financing costly and long-lasting capital assets.

A separate capital budget may prevent a bias against capital investments during budget deliberations. Capital investments often are at a disadvantage during budget deliberations because they are politically easier to postpone or cut compared to consumption-type items featured in the operating budget. These disincentives toward capital expenditures often result in neglect of costly yet indispensable local infrastructure needs.

Research Objectives

This article examines the capital budgeting practices of Tennessee municipal governments. Specifically, the article attempts to answer the following capital budgeting questions.

1) What percent of Tennessee municipalities use a separate capital budget and a capital improvement program? Are municipal population size and capital expenditure size determinants of a separate capital budget and capital improvement program use?

2) What factors influence the use of a separate capital budget? To what degree does each factor influence the use of a separate capital budget?

3) How frequently do Tennessee municipalities use the major methods of capital financing commonly associated with financing capital facilities at the local level?

4) What percentage of Tennessee municipalities use each of the major capital budgeting decision techniques normally used by private-sector companies?

Method

The data for this study were obtained by administering a cross-sectional survey to Tennessee municipal governments in the summer and fall of 1997. The survey instrument was mailed to finance officers in all of the 321 municipal governments with a population of 1,000 or more. The survey instrument contained a variety of questions pertaining to capital budgeting practices commonly used by municipal governments.

Valid responses were received from 166 (52 percent of the total sample) governments. (Exhibit 1). The response rate by population size and type of municipality does not indicate a self-selection bias, although a small variation in the response rate is noticeable between cities and counties and among the population groups summarized.

Demographic Characteristics. To ensure that the municipal officials who completed the questionnaire understood the survey, education achievement and academic training information was...