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NYS Comptroller

THOMAS P. DiNAPOLI

The Academy for New York State's Local Officials

Capital Planning and Budgeting: A Tutorial for Local Government Officials

Module 2 - The Capital Budget

Financing: Local Sources

Appropriations

The first option a local government should examine when considering capital project financing is funding of all or some of the project by appropriations from the annual budget, which is a large component of what is sometimes called pay-as-you-go financing. The most common sources of this funding are taxes and user fees.

Each year's budget may contain provisions for the partial or total funding for designated assets. For example, many larger municipalities provide funding for a certain number of new police cars in each year's budget, to be paid for out of current appropriations.

Advantages of pay-as-you-go financing are that there are no interest costs or debt issuance fees. It can improve overall financial condition by increasing flexibility in future budgeting and preserves the ability to borrow for other needs. It can also expedite small or recurring projects.

For those capital items that are replaced regularly, pay-as-you-go practices can provide an equitable and cost-effective financing option. Because residents are receiving the benefit of new equipment every year, the annual payments match the benefits received.

The major disadvantage of using current appropriations is a potential tax increase. Besides being politically unpopular, increasing taxes may also inhibit economic development. Opportunity costs can occur if resources that could be used for other purposes are tied up in funding capital projects. Pay-as-you-go also forces current taxpayers to bear the full brunt of financing projects or acquisitions that will benefit future users.

  Next: More on Local Sources of Financing