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Capital Infrastructure Programs and Financing in Local Government

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Agustin Leon-Moreta and Silvia Saenz-Montenegro
June 14, 2020

Public investment in infrastructure will be one way in which states and communities will be able to lessen the dramatic impacts of the COVID-19 pandemic. Researchers and practitioners have called for infrastructure investments to stimulate the weakened local economies. This article discusses local and intergovernmental mechanisms that affect the capacity of governments to collect sources of funding for those capital projects. We focus particularly on new infrastructure projects because, via new infrastructure, local governments can make a substantial difference in the local economies. Multiple benefits result from infrastructure investment, such as increased employment and economic wellbeing more broadly.

Capital improvement programs are one of the most powerful tools that local governments have for developing and supporting their economies. Capital improvement programs not only support the locality’s infrastructure. These programs also expand local employment and economic activity. Capital programs have local and regional benefits that should be considered when local governments develop policies and programs for economic development. At the same time, despite those benefits, capital improvement programs are often extremely costly to fund. For this reason, we need to consider some of the major factors that affect the ability of local governments to carry out capital improvement plans.

One factor of influence is the fundamental scope of the responsibilities of local governments. Some municipalities are in charge of a broad range of service responsibilities. In contrast, other municipalities are in charge of limited service responsibilities. Differences in the local government’s scope of responsibilities determine its capital program involvement. Some cities, New York for example, have a very extensive range of responsibilities. But small or newly formed municipalities tend to have fewer responsibilities. If a local government has limited responsibilities, other public agencies are alternatively relied on to support local infrastructure.

The pro-development tendency of the community is another important influence. Some local governments have an impulse or drive to stimulate the local economy because of economic or perhaps political considerations. A local economy that needs economic development may be driven to use capital projects as a way to support economic growth. Politically, some municipalities have constituents and leaders that are more pro-business than other communities. Other municipalities have a more “housekeeping” stance, however, by which they pursue capital projects only if strictly necessary.

Of course, a crucial source of funding for infrastructure is the intergovernmental grants that federal and state governments allocate to local government programs. However, grants are not all alike. Some grants are highly restrictive in the specificity of how resources may be spent. For example, the federal government provides certain grants restricted to transportation infrastructure. In contrast, most states provide general funding to their local governments that can be employed for a variety of purposes, including capital projects. A small fraction of intergovernmental aid is general support, however, and it comes primarily from the state government. Nevertheless, both restricted and general grants support a wide range of capital programs of local governments.

Note that the capital improvement programs of local governments are not isolated from the broader local economy. A thriving, growing local economy will necessarily require investments in infrastructure to support further economic development. By contrast, a declining economy does not require the same degree of capital improvements and could even result in a stoppage of capital improvement programs. Some declining cities, for example, have even discontinued their capital programs. The lesson here is that local governments respond to the capital infrastructure needs of the local economy. To understand the capital programs of local government, we need to understand the fundamental drivers of economic growth in communities.

One crucial funding mechanism is general obligation bonds. General obligation bonds offer tax benefits to investors and lower interest rates to governments. Despite these benefits, these bonds are not always feasible to use because of legal barriers. For this reason, local governments alternatively rely on revenue bonds, leasing, impact fees and other financing instruments. In principle, local governments should evaluate both the financial costs and the institutional barriers when considering mechanisms to implement capital infrastructure programs. Local governments may additionally cooperate with other governments or with the private sector to arrange funding mechanisms for their capital programs. Although identifying funding mechanisms can be a time-consuming process, the effection selection of financing mechanism (or a set of mechanisms) has multiple benefits. In particular, communities will be able to support essential infrastructure while reducing the costs of funding those programs, both presently and in the future.

In brief, capital improvement programs are essential tools for local governments to provide infrastructure assets needed in communities. In addition to identifying financing mechanisms, capital improvement programs should be an opportunity for local governments to rank them by priority. In particular, local governments can benefit or shape broader outcomes of economic development and employment within their jurisdictions. For these reasons, capital improvement programs are one of the most important—if not the most important—tools that governments have for promoting growth and prosperity in and for their communities.


Authors:

Agustin Leon-Moreta is Assistant Professor at the University of New Mexico School of Public Administration. He received a Ph.D. in Public Administration and Policy from the Askew School at Florida State University. His research has appeared in Public Administration Review, the American Review of Public Administration, Urban Studies, State and Local Government Review, and Public Administration Quarterly.

Silvia Saenz-Montenegro has over fifteen years of working experience in the private sector. In May 2017, Silvia received a Master’s degree in Organization, Information and Learning Sciences from the University of New Mexico. She is interested in evaluating how to use distance learning in the workplace effectively. Her research interests additionally include barriers in distance training and distance education.

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The American Society for Public Administration is the largest and most prominent professional association for public administration. It is dedicated to advancing the art, science, teaching and practice of public and non-profit administration.

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