What Drives Municipal Capital Investment? A Long-panel Data Analysis of U.S. Central Cities

• Author: Howard A. Frank,Can Chen,Yanbing Han
• DOI: 10.1177/0160323X20915266
• Published date: 01 September 2019
• Date: 01 September 2019
• Subject Matter: General Interest

General Interest
State and Local Government Review
2019, Vol. 51(3) 168-178
What Drives Municipal Capital
ª The Author(s) 2020
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Investment? A Long-panel
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DOI: 10.1177/0160323X20915266
Data Analysis of U.S.
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Central Cities
Can Chen1, Yanbing Han1
and Howard A. Frank1
Abstract
Cities across the United States are facing a severe infrastructure deficit. The challenge of financing
infrastructure capital assets has emerged as one of the most urgent issues of the country. Using a
panel data consisting of 100 American central cities from 1988 to 2012, this research reveals that city
governments are responsive to sociodemographic forces and citizens’ demands, but their abilities to
finance capital assets are constrained by city fiscal institutions and revenue capacity. This research
also compares the determinants of different components of city capital outlays such as road and
water utility capital expenditures.
Keywords
capital investment, city, United States, panel data
In the United States, cities play a key role in
The urgent infrastructure issue reflects many
funding, operating, and maintaining local
factors. The fundamental causes perhaps relate
roads and streets, bridges, airports, transit
to the flaws in current state and local capital
facilities, drinking water and sewer systems,
budgeting processes. On the expenditure side,
and other types of capital assets (Chen and
those processes tend to underinvest in
Bartle 2017). However, as widely publicized,
infrastructure maintenance (Marlowe 2012).
cities across the United States are facing a
American infrastructure is aging and in great
serious infrastructure deficit and struggling
need of repair. Yet, building new projects is
to find new ways to finance the needed expan-
politically favored even though spending on
sions, upgrades, and repairs. In 2015, more
proper maintenance of existing infrastructure
than half of U.S. city mayors highlighted
is at lower costs. On the revenue side, as people
infrastructure issues during their State of the
City speeches (National League of Cities
2015). American Society of Civil Engineers
1 Department of Public Policy & Administration, Florida
(2017) estimated an infrastructure investment
International University, Miami, FL, USA
gap of $2.1 trillion between 2016 and 2025,
and the failure of closing this gap could cost
Corresponding Author:
Yanbing Han, Department of Public Policy & Administra-
the nation almost $4 trillion in gross domestic
tion, Florida International University, Modesto A. Maidique
product as well as a loss of 2.5 million jobs
PCA 254B, 11200 SW 8th Street, Miami, FL 33199, USA.
through 2025.
Email: yhan010@fiu.edu

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Chen et al.
169
drive less and cars become more fuel efficient,
informs city policy makers on urban infrastruc-
conventional tax bases for infrastructure are
ture finance.
eroded. When elected officials are reluctant to
raise taxes and other unfunded liabilities (such
Determinant of State and Local
as pension and health care) drive governmental
revenues away from infrastructure, there is no
Capital Investment
doubt that America is experiencing infrastruc-
Capital investment accounts for a significant
ture deficit. Moreover, the investment gap was
portion of public budgets. Its decision-making
widening further in business cycles. Building
process has been an important topic in state and
new infrastructure with budget surplus during
local government studies. In particular, the
the economic booms might increase funding
question of what factors driving state and local
demand for maintenance during the subsequent
capital investment has received continuous
downturns, which results in a “vicious cycle”
attention. With different emphasis, previous
that further exacerbates the infrastructure crisis
studies suggest that macroeconomic conditions,
(Marlowe 2012).
sociodemographic characteristics, fiscal capac-
Although many government and media
ity, political and fiscal institutions, and previ-
reports have discussed the aging and decaying
ous capital investment decisions are likely to
American public infrastructure system, a sig-
affect state and local capital investment deci-
nificant research gap is that very few studies
sions. This section reviews relevant literature
empirically examine the determinants of capital
and discusses the operationalization of the
investment at the city level. Drawing from pub-
independent variables of this research.
lic finance theories (the classical median voter
model), we construct an econometric model to
Macroeconomic Environment
test how the economic conditions, citizens’
The exogenous economic conditions affect
political ideology, fiscal capacity, and institu-
governmental capital investment decisions. A
tional elements affect the patterns of urban cap-
weak economic environment reduces the
ital investment. Our sample consists of 100
financing resources available for governments
central American cities from 1988 to 2012. The
to invest in capital projects. Ho (2008) found
empirical analysis identifies that city capital
that states slow their capital spending growth
investment is significantly explained by vary-
during economic downturns and increase the
ing sociodemographic factors, revenue capac-
amounts of capital spending significantly dur-
ity, and fiscal institutions. It also compares
ing economic booms. Anecdotal evidence has
different determinants between city capital
shown that in response to economic recessions,
investment by main components (road capital
one of the common cutback strategies adopted
outlay and water utility capital outlay).
by state and local governments is postponing
This study contributes to the field of urban
state and local capital project construction and
infrastructure finance in several important
cutting regular maintenance spending (e.g.,
ways. First, this research focuses on a new
Bartle 1996; Bumgarner, Martinez-Vazquez,
institutional context of major American cities
and Sjoquist 1991; Chen 2016b). However,
and represents one of the first attempts to sys-
focusing on data from North Carolina munici-
tematically investigate municipal decisions on
palities, Rivenbark, Afonso, and Roenigk
capital investment. Second, this study conducts
(2018) suggested that “most municipalities
a robust and extensive (-twenty-five years)
consistently invested in capital assets before,
panel data analysis that addresses limitations
during, and after the Great Recession” at a sim-
in the previous literature. Third, this study
ilar rate (p. 402).
improves our understanding of the economic,
We use the variables of log of real per
political, and institutional factors underlying
capita household median income (Ln Median
municipal capital investment decisions and
Household Income) and unemployment rate

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170
State and Local Government Review 51(3)
(Unemployment %) to account for the variation
median voter, which are a function of the med-
in city economic conditions. Prior research
ian voter’s income, tax price, and taste for pub-
identified higher levels of median household
lic goods and services. Local public goods and
income, and lower levels of unemployment rate
services are generally financed through the
indicate robust economic environment and
property tax system. Following Bates and San-
therefore increase the financing resources
terre (2015), the median voter’s tax price is
available for more capital spending (Arimah
measured as median house value divided by the
2005; Pagano 2002; Fisher and Wassmer
total market value of all assessed properties in
2015; Holtz-Eakin 1991; Temple 1994). This
that city. We expect that a higher tax price
positive effect occurs because a higher income
reduces citizen demands for capital projects.
level increases citizen demands for infrastruc-
“Taste” for local public goods and services is
ture services.
typically proxied by a vector of population char-
acteristics thought to be associated with demand
Fiscal Capacity
for public services such as age, race, educational
attainment, school attendance, and homeowner-
Fiscal capacity of a government is crucial in
ship (e.g., Borcherding and Deacon 1972; Berg-
explaining state and local decisions on capital
strom and Goodman 1973; Rubinfeld and
investment. Pagano (2002) conducted a trend
Shapiro 1989). Following previous literature
analysis using the American city-level data
on state and local capital investment, eight vari-
between 1993 and 2000. He indicated that rapid
ables are employed in this study to control for
growth in capital spending is mainly associated
city variation in sociodemographic conditions
with the growth in city own-source revenues.
(e.g., Bates and Santerre 2015; Wang and Wu
Arimah’s (2005) research from a cross-
2018; Fisher and Wassmer 2015). They include
sectional sample of 113 cities in developing
population density (Ln Pop Density), annual
countries in 1993 revealed that a robust own-
population
growth
(Pop
Growth
%),
source revenue capacity is positively associated
percentage of senior population (Elderly Pop
with city infrastructure spending. In addition to
%), percentage of white population (White Pop
own-source revenue capacity, other studies
%), percentage of population with...