With few exceptions (and none come to mind) written, formal fiscal policies should guide the management of a jurisdiction’s financial resources. These should be adopted by the governing body to provide consistency in the management of finances and to ensure that employees understand the importance of following the policies. The purpose of adopting policies formally should not be viewed as a means of binding future councils or commissions; policies can be changed, but change should be well reasoned, and adopted policies are more likely to be changed from reasoned conside- ration than on a whim.
In the area of capital budgeting, two main areas of policy are important:
process and debt management. Policies that guide the capital budget pro- cess ensure that the actions taken in the heat of political battle, or in pursuit of a minor goal, do not work at cross purposes to the strategic or master plan. Before policy processes are established, however, the jurisdiction should define what will be considered capital and what will be considered an operating expense. Most local governments established a floor value that an item or project must cost in order to be funded in the capital budget. In a small municipal government that may be $2,000. For very large cities and states it is often in the $100,000 range. Establishing this guideline will pre- vent the capital budget from becoming a means of funding what is really an operating expense.
The process used to identify, prioritize, and select projects for inclusion in the CIP and capital budget should be adopted. Often, officials will solicit suggestions from department and agency officials, but having a scheduled meeting or workshop, where members of the public are given a chance to present their ideas and preferences, should be included in the calendar.
A committee that includes agency and elected officials, the city manager or other executive officer, and members of the public, should be established to screen and review proposed projects. Information such as the purpose and estimated cost of projects may be all that is needed at this stage.
Evaluation of projects that are approved for the CIP should be evaluated in a consistent manner. If cost benefit analysis is used in some cases, it should probably be used in all cases unless officials can explain why it was inappropriate. In some cases, projects must be built to meet state and federal guidelines. Even in such cases cost efficiency analysis may be useful if there are several options to achieve the desired purpose. The important issue here is to be consistent. One project should not be subjected to less or greater scrutiny unless there is a compelling reason.
As discussed previously, the selection of projects from the CIP to be included in the capital budget is a function of available resources.
Since most large capital items are funded with bonded debt, formal debt policies should be adopted. The debt policies for the city of Dallas contained in Table 3.4 help the city achieve a number of goals. Policy number one, already mentioned in this chapter, should be the first item in any juris- diction’s adopted policies. Next, there are a couple of policies that limit the amount of debt the city may issue. GO debt is limited to 4 percent of the city’s assessed valuation, and total debt plus overlapping debt, which is the Table 3.4 Debt Policy — City of Dallas, TX
1. Any capital projects financed through the issuance of bonds shall be financed for a period not to exceed the expected useful life of the project.
2. The Net General Obligation (GO) Debt of Dallas will not exceed 4% of the true market valuation of the taxable property of Dallas.
3. Total direct plus overlapping debt shall be managed so as not to exceed 8% of market valuation of taxable property of Dallas. All debt which causes total direct plus overlapping debt to exceed 6% of market valuation shall be carefully planned and coordinated with all overlapping jurisdictions.
4. Interest, operating, and/or maintenance expenses will be capitalized only for facilities of enterprise activities and will be strictly limited to those expenses incurred prior to actual operation of the facilities.
5. Average (weighted) General Obligation bond maturities shall be kept at or below 10 years.
6. Annual General Obligation debt service (contribution), including certificates of obligation debt for risk management funding, shall not exceed 20% of the total locally generated, non-enterprise, operating revenue.
7. Per Capita General Obligation Debt, including Certificates of Obligation, equipment acquisition notes and General Obligation Bonds, will be managed not to exceed 10% of the latest authoritative computation of Dallas’ per capita annual personal income.
8. Debt may be used to finance betterments intended to extend service life of original permanent capital improvements under the following conditions:
a. the original improvement is at or near the end of its expected service life.
b. the betterment extends the life of the original improvement by at least one-third of the original service life.
c. the life of the financing is less than the life of the betterment d. the betterment is financed through either COs or GOs.
9. A letter certifying that the use of interest earnings does not adversely impact the completion of Council-authorized projects will be submitted with the City Manager’s proposed budget each year.
10. Certificates of Obligation should be used only to fund tax-supported projects previously approved by the voters; or for risk management funding as authorized by the City Council; or non-tax, revenue-supported projects approved by the City Council.
(Continued)
Capital Budgeting and Planning g 63
debt of other taxing jurisdictions, cannot exceed 8 percent of market value.
This policy takes into consideration the operations of entities such as the Dallas Independent School District, several other special purpose govern- ments, and Dallas County.
Debt policy number five limits the total amount of debt service to 20 percent of own-source, non-enterprise revenue, which is primarily the general fund; policy number seven uses a computation of the city’s per capita annual personal income. These policies are designed to limit the burden placed on these two measures (one governmental and one drawn from the population) of capacity to service debt.
Other policies contained in this list provide guidelines for the use of debt by enterprise funds; the use of non-voter approved general obligation debt;
and guidelines for maintaining an acceptable average maturity for all city debt. Non-voter approved purposes are limited to risk management projects and those that produce an identifiable stream of revenue. Finally, the city limits the use of tax increment financing by establishing a ceiling for the proportion of the tax base that can be included within a TIF district.
Among the items considered by the Government Finance Officers Association to award its Distinguished Budget Presentation Awards Program Table 3.4 Continued
11. Certificates of Obligation Debt, including that for risk management funding supported by an ad valorem tax pledge, should not exceed 15% of total authorized and issued General Obligation (GO) Debt. All COs issued in lieu of revenue bonds should not exceed 10% of outstanding GO Debt.
12. Certificates of Obligation will be limited to projects consistent with Financial Management Performance Criteria for debt issuance.
13. Certificates of Obligation for an enterprise system will be limited to only those projects which can demonstrate the capability to support the certificate debt, either through its own revenues or another pledged source other than ad valorem taxes.
14. Certificates of Obligation authorization will remain in effect for no more than five years from the date of approval by the City Council.
15. Certificates of Obligation authorized for risk management funding shall be issued for a term not to exceed 20 years.
16. Tax Increment Financing zones should be established where revenues will recover the public cost of debt with adequate safety margin.
17. No more than 10% of the property (i.e. parcels) in a Tax Increment Financing zone, excluding property dedicated for public use, may be used for residential purposes. ‘‘Residential purposes’’ includes property occupied by a house which has less than five living units.
18. No more than 5% of the City’s tax base will be in Tax Increment Financing zones.
are the presentation of information on capital projects, a description of the planning process used to select those projects, and the policies used to manage bonded debt (see Powdar 1999). As a matter of policy, state local governments should require that the budget document meet these and other GFOA Distinguished Budget Presentation Award criteria. Establishing a process for the identification and selection of capital projects that allows for citizen input, and that clearly conveys information about the projects to be built, is critical in meeting the public sector goals of transparency and accountability.
References and Additional Resources
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Blakely, Edward J. and Mary Gail Snyder. 1999. Fortress America:
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Bland, Robert L. and Wes Clarke. 1999. ‘‘Budgeting for Capital Improve- ments,’’ in Meyers, Roy, ed., Handbook of Government Budgeting.
San Francisco: Jossey-Bass Publishers.
Bland, Robert L. and Samuel Nunn. 1992. The Impact of Capital Spending on Municipal Operating Budgets. Public Budgeting and Finance 12(2): 32–47.
Buchanan, James. 1965. ‘‘An Economic Theory of Clubs.’’ Economica 32(125): 1–14.
Clarke, Wes and Jennifer Evans. 1999. Impact Development Fees and the Acquisition of Infrastructure.Journal of Urban Affairs23(3): 281–288.
Doig, Jameson. 1995. ‘‘Politics and the Engineering Mind: O.H. Ammann and the Hidden Story of the George Washington Bridge.’’ Chapter in Perry, David C., ed., Building the Public City: The Politics, Governance, and Finance of Pubic Infrastructure. Thousand Oaks, CA: Sage Publications.
Fortune, Peter. 1995. ‘‘Debt Capacity, Tax Exemption, and the Municipal Cost of Capital: A Reassessment of the New View.’’ Working Paper Series of the Federal Reserve Bank of Boston. Boston: Federal Reserve Bank.
Gramlich, Edward M. 1990a. ‘‘How Should Public Infrastructure Be Financed?’’ From Munnell, Alicia H., ed., Is There a Shortfall in Public Capital Investment?Boston: Federal Reserve Bank of Boston.
Gramlich, Edward M. 1990b. A Guide to Benefit-Cost Analysis. Prospect Heights, IL: Waveland Press.
Hackbart, Merl and James R. Ramsey. 1993. ‘‘Debt Management and Debt Capacity.’’ Chapter in Lamb, Robert, James Leigland, and Stephen Rappaport, eds.,The Handbook of Municipal Bonds and Public Finance. New York: New York Institute of Finance.
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Hatry, Harry, Annie P. Millar, and James H. Evans. 1984. Guide to Setting Priorities for Capital Investment. Washington, DC: The Urban Institute Press.
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Paetsch, James R. and Roger K. Dahlstrom. 1990. ‘‘Tax Increment Financing:
What It Is and How It Works.’’ From Binham, Richard D., Edward W. Hill and Sammis B. White, eds., Financing Economic Development:
An Institutional Response. Newbury Park, California: Sage Publications.
Powdar, Juliet Carol. 1999. Budget Awards Program: Illustrations and Examples of Program Criteria. Chicago: GFOA.
Rosenbloom, David H., James D. Carroll, and Jonathan D. Carroll. 2000.
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Snyder, Thomas P., and Michael A. Stegner. 1989. Paying for Growth:
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Urban Land Institute.
Steiss, Alan W. 1998. New Financing Instruments for State and Local Capital Facilities.Public Budgeting & Finance 18(3): 24–41
Temel, Judy Wesalo. 2001.The Fundamentals of Municipal Bonds, 5thed.
New York: John Wiley & Sons.
Thomassen, Henry. 1990. ‘‘Capital Budgeting for a State.’’Public Budgeting &
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Vogt, A. John. 2004. Capital Budgeting and Finance: A Guide for Local Governments. Washington, DC: ICMA, and Chapel Hill: The Institute of Government, University of North Carolina.
Chapter 4
Financial Management of Economic Development