The Impact of Capital Spending on Municipal Operating Budgets

Abstract

What is the impact of capital spending for buildings, equipment, and other facilities on future operating expenditures of municipal governments? Because capital spending decisions are made independent of operating decisions in many larger municipalities, managers make long‐term capital commitments without fully understanding the repercussions for operations. This implies the need for research that examines more closely the linkages between these budget cycles. This article develops a theory of the relationship between capital and operating expenditures, then uses data from the fortyeight largest U.S. cities to estimate both the magnitude of capital's impact and the time it takes for operating budgets to adjust. The study finds that five of six commonly provided municipal services were affected to varying degrees by past years' capital expenditures. Especially notable is the finding that the operating budgets of labor‐intensive services, such as police and fire protection, are most sensitive to capital spending. For public managers, the findings point to the need for closer coordination between the capital and operating budget cycles, especially in those cases where capital outlays have clear, unambiguous positive implications for future operations.

The Effect of Financial Performance on Capital Expenditure and Economic Growth of Districts / Cities in North Maluku Province

“…The capital expenditure budget, especially infrastructure, is highly dependent on input from engineers, architects and planners. Capital expenditures generally come from grants and capital expenditure budgets for several budget years (Bland and Nunn, 1992).…”

Capital Management Practices in U. S. Counties

“…Most empirical studies have focused on one specific area. For example, studies have looked at the existence of or characteristics related to the Capital Improvement Plan (CIP) and capital budget (Doss, 1987;Forrester, 1993;Lynch, Lynch, & Omdal, 1997), or the effects of capital spending on operating budgets (Bland & Nunn, 1992). Other studies have highlighted examples of innovations or challenges in different aspects of capital management (Calia, 2001;MacManus, 1996;Millar, 1988;Rubin, Moore, & Lee, 1999;U.S.…”

Reengineering capital budgeting

“…White (1980: 42) notes that the capital budgeting field lacks "organized traditions of inquiry" and "conceptual boundaries." With some exceptions (Adams, 1988;Bland & Nunn, 1992;Forrester, 1993;Pagano & Moore, 1985), most of it emphasizes methods and "how to" approaches (e.g., project evaluation, internal rate of return, net present value, etc.) rather than identifying organizational and political dynamics that influence fiscal management (Millar, 1988;Miller, 1992;Robinson, 1994).…”