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2/7/05 . Capital budget basics (borrowing to be covered in-depth in Week 8) Factors affecting market supply and demand – review Consumer behavior – utility maximization and marginal utility. Firm behavior – profit maximization Thinking of municipalities as economic actors. The Capital Budget.
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2/7/05 • Capital budget basics (borrowing to be covered in-depth in Week 8) • Factors affecting market supply and demand – review • Consumer behavior – utility maximization and marginal utility. • Firm behavior – profit maximization • Thinking of municipalities as economic actors
The Capital Budget • In general: • Capital spending is for projects with a long life and a value of greater $35K • Capital budget commitments are made annually but they often finance ongoing multi-year projects (which is why a lot of capital funds are “rolled over” from year to year) • Debt service (principal and interest on debt outstanding) appears as an item in the operating budget – big projects paid off over time
In New York City • This year (FY 2005) there will be about $9B in capital commitments by agencies and about $7B of that will come from the city’s own capital budget • Largest per capita debt of all U.S. municipalities • Why so much on a per capita basis?
Office of Management and Budget allocates capital dollars based on priorities of agencies and the city’s 59 community boards, and in consultation with the Mayor’s senior staff • Council members lobby, often via agencies, sometimes directly with Mayor, to get projects in their districts
The capital budget, with the rest of the city’s 4-year financial plan, must be reviewed by the Financial Control Board at least quarterly, to make sure that the city has money on hand to pay its creditors • The financial Control Board was created during the city’s fiscal crisis in 1975 and is set to expire in 2008.
Capital Commitment Plan • The mechanism by which NYC keeps track of money allocated and spent for capital projects– issued 3 times a year by OMB • $13B will be authorized in FY 2005 • Some of it is for items requested this year and to be purchased this year (vehicles, computers) • Some is for ongoing projects • Some is expected to “roll over” – that is the reason for the difference between authorized and actual commitments
Agencies have “targets” – OMB likes them to spend a fixed percentage of the dollars authorized to them. These targets are specified in the capital commitment plan • An actual commitment appears in the budget when a contract for the construction or purchase of an asset is registered with the City Comptroller • Some agencies – like the Department of Design and Construction – manage capital projects on behalf of other smaller agencies.
City as aggregator of economic activity • Agglomeration economies (gains in efficiency that come from having firms and workers in close proximity) • Innovation and exchange of ideas • Productivity (output per person) • “Cities exist because of the social advantages of closeness”
The City as Economic Actor • Municipalities compete for utility-maximizing consumers and profit-maximizing firms. • The city’s job is to • Produce an environment which is valued by residents (helps them maximize their utility) • Produce an environment that is valued by businesses (helps them maximize profit) • To do this, the city needs to provide for residents and businesses amenities and environments that in their value approximate what they are paying in taxes
Tiebout’s theory of local public expenditures • Problem in public finance -- it is very difficult to know what consumers’ true preferences are for goods that are collectively consumed (incentive to understate preferences and “free ride”) • But at the local level government’s revenue/ expenditure pattern can adapt to consumers’ preferences • “The consumer-voter may be viewed as picking that community which best satisfies his preference pattern for public goods…the consumer-voter moves to the community whose local government best satisfies his set of preferences. The greater the number of communities and the greater the variance among them, the closer the consumer will come to fully realizing his preference position.”
Because of residential and capital mobility, economists tend to believe that redistributive activities should NOT take place at the local level. “Mobile upper income households and businesses will simply leave the city and in the process undermine city agglomeration economies…poverty services should be financed at least at the level of the metropolitan area and more ideally by state and national governments” (Inman, “Financing Cities”)
