A Capital Budgeting Methodology for a Small Town
Elmendorf, Richard G., Isley, Phyllis, Government Finance Review
A problem faced by many local governments is to provide a stable level of services to a growing population without continually accelerating tax increases. The normal practice to accommodate growth is to wait until capital expenditures are required and then either raise taxes or float a bond issue to pay for them. This "incremental" spending approach generally results in abrupt increases in taxes, causing voter resentment and making it difficult for local governments to function effectively.
Good planning for growth can balance revenues and expenditures over long periods and reduce costs to taxpayers, as well. This article describes the financial planning methodology developed for the town of St. Albans, Vermont, a methodology allowing the elected town officials to replace old equipment, maintain services desired by voters and still present a budget calling for only moderate increase in taxes. The voters accepted the plan, it has been implemented, and the process has been gaining increasing support for its businesslike approach to government finance.
The town of St. Albans, Vermont, like many small communities, is trying to provide government services and to support controlled and orderly growth while minimizing tax increases. It is a small town of about 4,000 permanent and 1,200 seasonal residents, located 30 miles north of Burlington on Lake Champlain. The town's proximity to Burlington has subjected it to rapid growth in recent years: During the 1980s it had a population growth of about 15 percent, twice that of the state. While desiring to accommodate controlled and managed growth, the residents did not want to lose their quality of life, which is based on a mixture of farming, light industry, recreational business and residence.
St. Albans is governed by a select board of five members. As one of several measures designed to promote controlled and orderly growth and development, the select board adopted a town plan with zoning bylaws and subdivision regulations TABULAR DATA OMITTED in September 1987. They also formed a capital budget planning committee (CBPC).
Among its first actions, the CBPC took an inventory of capital assets and prepared a schedule of asset purchases for the period 1989-1994 that was designed to meet the goals of the town plan and maintain the existing level of services. The capital spending plan incorporated replacements and improvements needed to comply with changes in building codes for accessibility and safety, as well as for expected population growth. Exhibit 1 lists the timing and cost of projected capital expenditures over the five-year planning period, separated into school-related and nonschool items.
Voter resistance to tax increases was perceived by the CBPC and the select board as a critical problem, and they considered it imperative that any proposed financing plan minimize the tax rate in order to be acceptable. To assist in developing a financing plan that could meet this challenge, they retained a consulting firm that specializes in economic analysis and financial management. The consultants advised that if the town 1) followed a consistent plan for financing asset purchases and 2) made annual investments into a sinking fund for asset replacement, the total cost to taxpayers could be minimized and the tax burden stabilized.
A methodology was devised which would evaluate alternative financing plans and their impact on the tax rate and the tax bills of property owners. The analysis looks at debt service costs associated with alternative financing arrangements, as well as the cost of providing for a sinking fund for asset replacement. The sinking fund is designed to provide for maintenance of the current investment in assets without future borrowing or increased taxation.
Four alternative scenarios were used to illustrate the potential impact of alternative methods for financing capital expenditures on the tax burden of the average homeowner. …