Local Government Capital Spending During and After Recessions: A Cause for Concern?

Abstract

This article combines literature on cutback management with the results of a survey of county commissioners. Specifically, it focuses on the use of capital spending reductions in county government to cope with fiscal stress and the potential long-term impact of such reductions in response to the limited amount of research on this form of local government. In light of the literature and survey results, it recommends that county governments change their behavior and avoid cuts to their capital budgets due to the long-term costs of delayed maintenance and the opportunity costs incurred by stifling economic development. It also presents policy choices available to many counties that enable them to maintain capital investments, including public–private partnerships and earmarked local option sales taxes. The study concludes with a call for quantitative research on the long-term effects of capital reductions during economic downturns.

Keywords:

• local government
• cutback management
• capital spending
• economic development
• local sales taxes

Notes

1. ¹Preventive maintenance considerably reduces costs over the life of the capital (Dornan, 2002).

2. ²Some researchers estimate that the United States has been facing a looming infrastructure crisis for three decades and has been underinvesting in infrastructure since the 1960s (Huq et al., 1986). Choate and Walter (1981) concluded that the infrastructure in this country is deteriorating faster than it is being replaced and noted the large costs associated with this ongoing trend.

3. ³A few studies suggest that in some instances the nation’s infrastructure is apparently in better condition than it was 20 years ago (Campbell & Hubbard, 2009; Edwards, 2013).

4. ⁴This is also dependent on the size of the local government in question.

5. ⁵It is by no means impossible; it can be accomplished through heavy reliance on debt or through annual reliance on fund balances. However, both of these strategies are unsustainable in the long run.

6. ⁶These are typically fund balances, also known as rainy day funds.

7. ⁷For more information on cutback management and its origins, see Scorsone and Plerhoples (2010).

8. ⁸This may be because these reductions are not viewed as short-term changes.

9. ⁹Although the decision to consumption smooth may be attractive and lead local governments to believe that debt financing of capital is their best option, Trussel and Patrick (2012) find that fiscal distress can best be reduced by either raising taxes or decreasing debt, suggesting that debt increases fiscal distress. Pagano (2002) finds that municipalities do choose pay-as-you-go financing in boom years.

10. ¹⁰For example, in one analysis the author analyzes longer term effects and finds that there is change in priorities as anticipated and that there is not simply a return to pre-crisis spending patterns, but the author does not examine capital spending (Hoggart, 1991).

11. ¹¹In fact, in one study looking at changes in capital spending not specifically during recessions, the authors identify four key consequences, including changes in priorities (Kwon, 2006). This is in keeping with other research (Bartle, 1996; Dougherty & Klase, 2009).

12. ¹²Syndemic is defined as “two or more epidemics, with biological determinants and social conditions interacting synergistically, that contribute to an excess burden of disease in a population” (Freudenberg et al., 2006, p. 424).

13. ¹³The survey was sent to only the most senior commissioner within each county.

14. ¹⁴One week prior to the survey distribution, an e-mail was sent to the county commissioners alerting them they would be receiving a request to participate in a survey. A follow-up e-mail was sent a month after the survey release once again requesting participation.

15. ¹⁵The survey’s scope is broader than just capital, and a discussion of the other results and a broader discussion of the survey tool and its implementation are in Afonso (2013a).

16. ¹⁶For further discussion of these findings, see Afonso (2013a).

17. ¹⁷It is not only recession-era reductions, however, that are creating this infrastructure crisis and stifling economic development. For example, 60% of the county commissioners in California and Georgia stated that property tax and assessment restrictions have also made their communities less likely to invest in strategic infrastructure improvements. Clearly, capital is underfunded and county commissioners opt out of infrastructure development for a variety of reasons.

18. ¹⁸The positive effects of public spending in times of fiscal downturn are especially strong where the public service being provided has a direct relationship with private sector business and industry. Examples of these services are roads, bridges, and other forms of basic infrastructure (Fisher, 1997; Marlowe, 2009). In fact, highways are the most fundamental public sector investment in terms of economic development (Barro & Sala-i-Martin, 1995).

19. ¹⁹The neoclassicist tradition includes, among others, theories based on public choice and new institutional economics.

20. ²⁰Beyond just economic development and consequences of structural distress, the management of capital has been found to have a positive relationship with bond ratings as well (Ebdon, 2004).

21. ²¹Simonsen, Robbins, and Kittredge (2001) point to three strategies regarding debt that practitioners suggest. First, long-term debt should be used only to finance capital projects. Second, it is the responsibility of the debt managers to get taxpayers the best deal in terms of interest payments, and so forth. Third, the life of the capital project should dictate the bond maturity.

22. ²²Evidence suggests that citizens are equally satisfied with their level of public services in a consolidated form of government (Lowery & Lyons, 1989).

23. ²³Other evidence finds mixed reviews for public–private partnerships for infrastructure projects (Hodge & Greve, 2007).

24. ²⁴Surprisingly, this is a larger percentage than those reporting a nonearmarked LOST. This may be because voters are more inclined to approve a new tax if they know how the revenue is being spent (Bilodeau, 1994).

25. ²⁵More than 44% of respondents say that SPLOST revenue is intended as a substitute for general revenue.

26. ²⁶These monies are typically earmarked.

27. ²⁷However, the author does not necessarily advocate these benefit principle taxes because they may lead to fragmentation and increased segregation of have and have-nots.