J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 25 (4), 617-643
WINTER 2013
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL
GOVERNMENTS: EMPIRICAL EVIDENCE FROM GEORGIA
Il Hwan Chung*
ABSTRACT. Adoption of a separate capital budget in local governments
receives little attention in the literature. It is important to look at various
capital budgeting practices in local governments since a separate capital
budget as different budget format and structure affects budgetary decisions,
thus leading to different levels of investment in public infrastructure. This
paper examines factors that facilitate or impede adoption of a separate
capital budget by using time series data. Results show that local
governments are more likely to adopt a separate capital budget in order to
reflect local demands such as growth rate in capital spending.
INTRODUCTION
Capital budgeting is widely perceived as a “good government” tool
for managing financial issues by allocating resources, managing debt,
encouraging economic development, and overcoming fiscal crises
(Doss, 1987; Forrester, 1993; Johnson, 1955; Vogt, 2004). The
underlying notion of the benefits for capital budgeting is to add value
through information (Gordon, 1998). With better information, local
governments can make better decisions in allocating scarce
resources, investing in projects with high priority needs and planning
for the future. Specifically, under the balanced budget requirement
and bond rating mechanisms, capital budgeting practice allows local
governments to balance their operating budgets and manage the
level of debt (Bland & Clarke, 1999).
Among several capital budgeting practices such as multi-year
capital planning and project monitoring and reporting, this paper
focuses on using a separate capital budgeting practices from
operating budget.1 The benefits of a separate capital budget have
------------------------* Il Hwan Chung, Ph.D., is an Assistant Professor, School of Public Affairs,
Baruch College, CUNY. His research interest is in public budgeting and local
public finance.
Copyright © 2013 by PrAcademics Press
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been discussed in several aspects. First, the use of a separate capital
budget can promote efficiency in the decision-making process
(Mikesell, 2003). For example, in a unified budget, the investments in
capital projects look relatively expensive due to lumpy cost changes,
thus generating a bias in allocating resources (Moak & Hillhouse,
1975).
Second,
separate
consideration
can
enhance
intergenerational equity; since the benefits of capital projects have
continuing effects over generations, the costs can be equally
distributed through debt-financed methods (Mikesell, 2003).
Whether or not to adopt a separate capital budget was mainly
discussed at the federal level because many state and local
governments have implemented a separate capital budget, but the
federal government did not implement a separate capital budget
(Bowsher, 1997; Bunch, 1996). However, it is important to look at
capital budgeting practice in local governments since a separate
capital budget reflects budget rules with different budget format,
structure and process from operating budget. Previous studies
indicate that different budget rules affect budgetary decisions, thus
leading to different levels of output (MacManus, 1984; Grizzle, 1986).
In this sense, the structure and process of a capital budget could
define how decision makers view and react to problems (Rubin, 1988;
Doss, 1987). For example, public investments in infrastructure can
be effected by a separate capital budget format and structure
(Poterba 1995; Ho 2008). Empirically, Poterba (1995) showed that
state governments with a separate capital budget are more likely to
invest in public infrastructure. Crain and Oakley (1995) found that
budget institutions such as a separate capital budget, play a role in
preventing capital projects from being removed by budgetary
pressures. Since a separate capital budget may affect public capital
investment decisions, it is important to understand variations in the
use of a separate capital budget across local governments.
The purpose of this paper is to identify the underlying motives of
county governments when adopting a capital budget. Identifying
these questions could have policy implications for local governments.
Assuming that there are benefits of a dual budget system such as a
separate capital budget, then this study could identify some factors
that constrain the use of a separate capital budget in local
governments. In addition, by utilizing time series data, this paper
expands on previous literatures analyzing determinants of adoption of
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
619
a separate capital budget with cross-sectional data (e.g. Lynch et al.,
1997; Sekwat, 1996). Third, this paper will shed light on the
underlying dynamics of local governments’ behavior regarding the
adoption of a separate capital budget and, thus, facilitate more
discussion of empirical work on the process of capital budgeting,
which had relatively received less attention from scholars than other
issues such as debt financing methods (Pagano, 1984; Mullins &
Pagano, 2005).
The empirical context of the paper is county governments in
Georgia. Institutional settings in the state of Georgia provide an
opportunity to examine the adoption of a separate capital budget.
Capital budgeting policies for budget process, format and structure
could be based either on formal rules, such as state statute or local
charter requirements, or on resolutions by local board members
(Marlowe, Rivenbark & Vogt, 2009; Srithongrung, 2010). In Georgia
statutes, Chapter 81 in the Official Code of Georgia Annotated
(O.C.G.A.) regulates the county governments’ budget development
and implementation about capital projects. Specifically, it requires
local governments to adopt and operate under a project-length
balanced budget for each capital project. Since there are no strict
requirements for local governments to adopt a separate capital
budget, each county government in Georgia has much autonomy to
adopt and implement a separate capital budgeting process. For
example, some county governments such as Athens-Clarke county
adopt a separate capital budget since section 7-403 in local charter
requires that the preparation and scope of annual budget should
include capital improvement plan while other county governments
such as Harbersham county are adopting it by resolution or action of
the local governing board.
The paper is structured as follows: First, it provides an overview of
the relevant literature. Second, it presents a conceptual framework
with testable hypotheses and discusses empirical methods,
measures, and data sources. The third section both describes current
practices of capital budgeting in Georgia and analyzes what factors
are associated with the adoption of a separate capital budget. Finally,
the paper presents implications from the empirical analysis for the
current literature on capital budgeting.
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LITERATURE REVIEW
Since the focus of this paper is adoption of a separate capital
budgeting process, this section centers on the literature exploring
factors related a separate capital budget. Little empirical studies
explored a topic of adoption of a separate capital budget in local
governments (Doss, 1987; Ekstrom, 1989; Forrester, 1993). One
strand of research surveyed capital budgeting practices with
descriptive analysis (Doss, 1987; Ekstrom, 1989; Forrester, 1993).
Doss (1987) identified the capital budgeting practices of the cities
through his national survey that more than the half of the cities had a
separate capital budget. He found that the existence of a separate
capital budget is positively related with city size and council-manager
cities, but is little correlated with population change. Ekstrom (1989)
investigated the budgetary practices of county governments in the
State of New York. He found that 41.8% of the counties used a
separate capital budget, and its existence is related with the
preparer’s educational experience. Forrester (1993) explored capital
budgeting practices in city governments with a population of 75,000
or more. He found that 81.1% of the cities utilized a capital budget,
and 71% of them utilized a separate capital budget. In short, previous
studies show the increasing trend in using a separate capital budget
among state and local governments since its early adoption. They
found that its usage is highly correlated with population size and
forms of government.
Drawing attention to various capital budgeting practices, some
studies systematically examine factors that affect the adoption of a
separate capital budget (e.g., Lynch et al., 1997; Sekwat, 1996).
Lynch et al. (1997) proposed that urbanization, a capital
improvement plan (CIP), risk calculations, federal grant size, and
state grant size effect the local governments’ decision to adopt a
separate capital budget in the State of Louisiana. Using logistic
regression, they analyzed the relationships between city size,
urbanization, degree of expertise, forms of government, and adoption
of a separate capital budget. They found that the use of risk and
uncertainty analysis, the existence of CIP, and the size of state grants
affect the decision to adopt a separate capital budget. Sekwat (1996)
investigated the determinants of adoption of capital budget in a
framework with three dimensions: political factors, such as state
government mandates or form of government; demographic factors,
such as population; and financial assistance, such as state or federal
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
621
grants. However, Lynch et al. (1997) and Sekwat (1996) had
limitations in making inferences about decision-making processes
with cross-sectional analysis. The causal relationship between local
governments’ behaviors with a separate capital budget and other
factors can be better explained from a time-series analysis.
THEORETICAL FRAMEWORK
Studies about policy innovation and adoption have been
extensively studied in a variety of fields (e.g., Berry & Berry, 1990;
Zhao, 2005). Two major arguments have been proposed and
empirically tested: (1) Internal and External Determinants Models that
explain factors of policy adoption are economic, political, and social
traits of a local government,2 and (2) Policy Diffusion Models that
posit the adoption of policy by neighboring governments can facilitate
its adoption.
Each model has advantages for explaining policy adoption and its
diffusion, but overlooking each other can lead to misspecification of
the proper models. Berry and Berry (1990) proposed that two models
can be reconciled on the basis of Mohr’s Organization Innovation
Theory in 1969. Mohr (1969) offered a theoretical lens for integrating
the internal determinants and policy diffusion models. He categorized
three determinants of policy adoption: resources, constraints, and
motivation. Based on these categories, he argued that an
organization is more likely to innovate when the obstacles to
innovation are less strong, motivation to innovation is high, and
resources for overcoming obstacles are more available. This paper
addresses several hypotheses based on Mohr’s model.
Motivation
The adoption of a separate capital budget is often triggered by
the need to reduce the fiscal uncertainty caused by changes in the
socio-economic environment. In this context, Sipprell (1949)
explained the early adoption of a separate capital budget in the City
of Buffalo, during the 1930s. As demands emerged from all groups
for millions of dollars in capital improvements after the end of the
Second World War, financial officers and the Municipal Research
Bureau began to study a program that would provide all the
necessary capital requirements and, at the same time, preserve the
city’s financial integrity through a capital budget. Thus, the increasing
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need for capital spending would require a formal means of handling
capital expenditures in order to reduce uncertainty (Doss, 1987). For
example, population growth could be positively linked to the degree of
the public need for additional capital facilities or their maintenance.
Thus, a higher public demand for capital spending would lead to the
adoption of a separate budget. In a similar context, actual changes in
the level of capital spending will affect a county government’s
decision to adopt a separate capital budget. An increase in the level
of capital spending could call for efficient resource allocation
methods, leading to a mandate for a separate capital budget.
Additionally, county governments are more likely to adopt a
separate capital budget when there are increasing income and
education level in the government. For example, population with the
higher level of education or income could exert an influence to
adoption of the innovation such as capital budgeting process. Thus,
change in education level, higher level of education or income level
could take account for the adoption of a separate capital budget.
The Policy Diffusion Model provides evidence of how an
organization adopts the new policy. Rogers (1983) argued that an
innovation of policies is “communicated through certain channels
over time among the members of a social system” (Rogers, 1983,
p.5). Neighboring interaction assume the policy innovation is
influenced by geographically proximate or demographically similar
organizations (Berry & Berry, 1990; Case, Rosen, & Hines, 1993).
Besley and Case (1995) explain in their model of yardstick
competition that constituents evaluate the fiscal performance of their
home jurisdiction based on the performance of neighboring districts.
In this logic, the adoption of a separate capital budget in local
governments can be affected by neighboring counties with a capital
budget.3
Hypothesis 1a: County governments with growing populations/income
level will be more likely to adopt a separate capital budget.
Hypothesis 1b: County governments with growing capital expenditure
will be more likely to adopt a separate capital budget.
Hypothesis 1c: County governments with growing population with
higher education/income will be more likely to adopt a separate
capital budget.
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
623
Hypothesis 1d: Local governments neighboring on governments that
have adopted a separate capital budget are more likely to have a
separate capital budget.
Resources
In Mohr’s notion of policy adoption determinants, the fiscal
capacity of local governments can play roles as resources. He
presumed that the adoption of innovative reforms requires the
availability of enough resources, such as facilities or competent staff,
to assist this policy. Thus, without such resources, a separate capital
budget may not be adopted, implemented, or managed.
In a study which explores the use of performance budgeting
practices, Massey and Smith (1994) pointed out that most small local
governments lack professionalism and staff analysts to construct
competent budgeting formats. They explain that budget reforms are
less prevalent among cities with populations under 10,000. In the
same token, Berry (1994) explained this in terms of adopting
strategic planning policies in state governments.
Other factors affecting fiscal capacity, such as per capita income,
could be major components determining the usage of a separate
capital budget. As per capital income changes, county governments’
financial conditions will affect their resources or capability to manage
a capital budget, which in turn makes a decision about policy choice.
Hypothesis 2a: County governments with more competence in their
budget office will be more likely to adopt a separate capital
budget
Hypothesis 2b: County governments with larger per capita income will
be more likely to adopt a separate capital budget.
Constraints
Benton (2002) addressed two conflicting ideas about whether or
not policy consequences differ between reformed and unreformed
government structures. One side of the scholarship argues that a
reformed government structure leads to the provision of better public
service and professional administration, while unreformed
government structures offer less professional administration and a
lower quality of public service. The opposition claims that government
structure does not matter for the policy outcomes of county
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governments. Empirical research on how forms of county
governments effect policy options shows mixed results. Morgan and
Kickham (1999) argued that the modernization of the county form
does not have significant effects on revenue and expenditure policy.
However, a great volume of research found that the structure of
government is related with the practice of budgeting (Doss, 1987;
Duncombe et al., 1992).
How the reformed structures of government affect the adoption of
a separate capital budget can be interpreted in terms of (1) structural
differences effecting policy decisions and (2) professional
management. First, regarding the impact of structural differences,
Marando and Reeves (1993) argued variations of structure in county
government, such as citizen participation, the delivery of local service,
and who makes policy decisions, have a significant influence on
county governance. In addition, Rubin (2005) explained that, as a
result of structural differences and divided government, forms of
government such as strong mayoral or council-manager systems
make a difference in budget processes.
Second, when it comes to professional management, Halachmi et
al. (1997) view the adoption of a separate capital budget as a form of
a strategic management; thus, a more professionalized governance
structure will be more likely to adopt a separate capital budget. Doss
(1987) also proposes that city governments with council-manager
forms might have more complicated fiscal systems than mayoral
cities.
Hypothesis 3: A county government with a structure emphasizing
professional management will be more likely to have a separate
capital budget.
Interaction with Motivation and Constraints
Since forms of governments have an influence on adopting new
policy or programs (Doss, 1987), it would be possible that
governments with different forms would respond differently to
external factors. For example, Rubin (1992) explains that the most
reformed jurisdictions were likely to adopt budget reforms more
quickly in order to adapt to particular environmental threats such as
recessions and declining revenue. Based on Berry and Berry’s (1990)
argument that the motivation to innovate could interact with the
strength of obstacles, interaction effects were added to the model. In
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
625
this regard, this paper proposes hypotheses explaining the interaction
effects between forms of governments and growth in capital spending
and population as motivational factors in adopting a separate capital
budget.
Hypothesis 4: A county government with a structure emphasizing
professional management will be more likely to have a separate
capital budget when there are growing population and capital
spending.
DATA AND METHODS
The unit of analysis in this study is 159 county governments in
the State of Georgia. The data stems from four different types of
sources: the Government Management Indicator Surveys, Georgia
County Guide, Municipal Year Book by ICMA, and Report of Local
Government Finances. The information about dependent variables is
drawn from the Government Management Indicator Surveys (GOMI).
This survey is conducted by the Georgia Department of Community
Affairs every year to all county governments in Georgia about
management functions.4 The dependent variable is measured as a
dichotomous one, examining whether or not county governments
adopted a separate capital budget from 2000 to 2009.5 In the GOMI
survey, a separate capital budget was defined as “the capital budget
is prepared by some governments to account for the acquisition of
equipment and construction of facilities over a period of time,
separate from the annual operating budget.” In addition, the
practices about capital improvement plan had been asked.
The socioeconomic data is the Georgia County Guide, which
includes annual demographic and economic data for individual
Georgia counties. Forms of government are drawn from municipal
year book published by ICMA Handbook. The forms of government in
the State of Georgia are recorded as commissioner, council-elected
executive or council-manager form. In order to measure the capability
of financial planners in local governments, the existence of a full-time
financial director in local counties is included as one of the categories
for competence of the staff from GOMI. In addition, the percentage of
neighboring counties that adopted a separate capital budget in the
previous year is added to the model. The following table lists the
detailed account of variables used in this analysis.
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TABLE 1
Measures of Variables
Variable
Definition
Data Source
Government
Dummy variable, coded 1 if the county
Management
Capital Budget government adopted a separate capital
Indicator Surveys
budget
(GOMI)
Government
Dummy variable, coded 1 if a county
Management
Financial
government has a full-time financial
Indicator Surveys
Director
director, zero otherwise
(GOMI)
Georgia County
Population
Total population in a county
Guide
Government
The percentage of neighboring counties
Management
Neighboring
that adopted
Indicator
Counties
a separate capital budget
Surveys(GOMI)
Government
Dummy variable, coded 1 if the county
Capital
Management
government adopted capital
Improvement
Indicator
improvement plan
Plan
Surveys(GOMI)
Georgia County
Per Capita
Per capita personal income
Guide
Income
Change in Total
Five years growth rate of total personal Georgia County
Personal
income (%)
Guide
Income
Forms of
Commission form=1 Council elected
ICMA
Government
executive or Council-manager =2
Report of Local
Capital
The amount of capital spending in a
Government
Spending
county government
Finances
Report of Local
Capital
Three year moving average in growth
Government
Spending
rate of capital spending (%)
Finances
Growth
The share of population with high school
Georgia County
Education
graduates and higher degree (%) in
Guide
Level
2000
Change in the share of population with
Change in
Georgia County
high school graduates and higher
Education
Guide
degree (%) between 1990 and 2000
Level
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
627
The next section presents a variety of descriptive analysis for
capital budgeting practices and provides more systematic analysis
based on regression models. Since dependent variable is a
dichotomous variable explaining whether a county governments has a
separate capital budget, logit models are employed. Specifically, logit
models are estimated with four different estimation procedures due
to panel data structure: cross sectional model, population average
models, random effects and fixed effects.6 Specifically, panel logit
models with fixed effects and random effects are advantageous since
it can control for unobserved variables.
RESULTS
Table 2 indicates the number of county governments that
adopted a separate capital budget from 2000 to 2009. The total
percentage of the county governments that adopted a capital budget
TABLE 2
County Governments Adopting a Capital Budget
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Number of Local
Governments without a
Separate Capital
Budget
88 (55.7%)
89 (56.7%)
91 (57.2%)
80 (50.3%)
95 (60.9%)
88 (57.5%)
95 (60.1%)
92 (58.2%)
90 (56.6%)
88 (55.3%)
Number of Local
Governments with a
Separate Capital
Budget
70 (44.3%)
68 (43.3%)
68 (42.8%)
79 (49.7%)
61 (39.1%)
65 (42.5%)
63 (39.9%)
66 (41.8%)
69 (43.4%)
71 (44.7%)
Totala
158
157
159
159
156
153
158
158
159
159
Note: There are some county governments, which did not respond to
the survey among 159 county governments in Georgia. This led to
different number of total county governments.
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is relatively consistent across time. Since adoption of new policies or
programs over time typically follows an S-curve (Rogers, 1983), the
statistics in Table 2 could imply that the adoption of a separate
capital budget might be at the maturity stage.
However, a careful examination of the adoption of separate
capital budgets reveals that there are still changes in budget format
across the county governments over a period of time. Table 3
indicates this aspect of policy adoption from 2001 to 2009. Each
value was created on the basis of a comparison between the previous
year and the current year, concerning whether or not county
governments stay with a non-separate capital budget, stay with a
separate capital budget, adopt a separate capital budget, or drop a
capital budget. The analysis indicates that the adoption of a separate
capital budget at the level of local governments is still occurring.
TABLE 3
County Governments Adopting a Capital Budget
2001
County
Governments
Stay with a
Separate
Capital
Budget
50
County
Governments
Stay with nonSeparate
Capital Budget
69
County
Governments
Dropped a
Separate
Capital
Budget
20
County
Governmen
ts Adopted
Total
a Separate
Capital
Budget
17
156
2002
57
79
11
10
157
2003
60
72
8
19
159
2004
50
67
28
11
156
2005
53
79
8
11
151
2006
55
79
10
8
152
2007
61
89
2
5
157
2008
63
86
3
6
158
2009
67
86
2
4
159
Note: Categories for governments adopting a separate capita budget is
based on comparison of financial management practice between t-1
year and t year.
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
629
Interestingly, it is worth noting that there are “backsliding” events
when it comes to the adoption of a separate capital budget. Lee
argues that these “backsliding” is attributable to the fact that local
governments adopt reforms only because they are popular for
symbolic reasons rather than because they are intended to solve
some current problems (Lee & Burns, 2000; Rubin, 1990; Rubin &
Stein, 1992). Thus, in later section of analysis this paper examines
whether the adoption of a separate capital budget is simply a
rhetorical move rather than a systematic reaction in response to local
demands.
Understanding local governments’ behavior in switching back and
forth could provide an overview of how local governments use
complicated capital budgeting practices. An interview with an
assistant county manager indicates two possible cases.7 First, many
county governments in Georgia are located in rural areas where
public demand for capital projects is very low. Thus, capital budgeting
is needed on an ad-hoc basis only when new capital projects are
implemented. Second, when policies for capital budgeting are based
on the decisions of local board members as management practices,
capital budgeting practices are at risk of being dropped due to
changes in board membership or leadership.
Another way to explore the capital budgeting practices across
governments is to divide into three types of groups and compare each
type of organizations: county governments always adopt a separate
capital budget, county governments never adopt a separate capital
budget and county governments sometimes adopt a separate capital
budget. Table 4 presents ANOVA analysis of three groups based on
capital budgeting practice over time. This reveals that county
governments that always adopt capital budget are more likely to have
larger population and education level, and capital spending while
county governments that never adopt capital budget is relatively rural
area. For example, the average population of those counties is
14,498 and per capita income is about $ 21,000. Interesting point
here is that county governments which sometimes adopt a separate
capital budget have bigger growth rate in capital spending and
change in education level than county governments with a capital
budget.
Previous studies on a capital budget have compared the practice
of capital budgeting with capital improvement program since the two
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TABLE 4
Results of ANOVA Analysisa
Group 1
Group 2
Group 3 P-Value
Never
SomeAlways CB
CB
times CB
14,498
35,314 177,144 0.0001
Population
Education levelb
Change in Education
Levelb
Spendingc
67.6%
70.1%
76.6%
0.0001
10.8 %
10.78%
8.0%
0.0001
$1,241
$4,101
$22,400
0.0001
Capital
Growth Rate in Capital
Spendingc
Per Capita Income
0.60%
0.67%
0.38%
0.056
$21,848
$23,875
$28,945
0.0001
Forms of Governmentd
0.18%
0.32%
0.73%
0.0001
Notes: a Group 1 refers to county governments never have a separate capital
budget, Group 2 includes county governments sometimes have a
separate capital budget, and Group 3 refers to county governments
always have a separate capital budget.
b The education level refers to the share of population with high
school diploma or higher degree. Change in education level is the
difference of this population between 1990 and 2000.
c Capital spending is rescaled to 1,000 dollars. The growth rate in
capital spending refers to annual growth rate during past 3 years.
d Forms of government refer to the share of county governments
with council-manager or elected executive form.
management practices are closely connected. When explaining
comprehensive capital budgeting practice, Vogt (2004) categorizes
three types of organization for the use of capital budgeting. The first
and second groups of governments, which are usually small or
medium-sized municipal or county governments, have neither a
separate capital budget nor capital improvement program. The third
group uses the comprehensive capital budgeting practice, which
includes the capital improvement program and capital budget
together. Tables 5 and 6 provide contingency tables about the
existence of a separate capital budget and capital improvement plan
in 2000 and 2009, respectively. Interestingly, the share of county
governments with a separate capital budget does not change much
from 2000 to 2009, but the number of county governments with both
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
631
TABLE 5
County Governments Adopting a Capital Budget
and Capital Improvement Plan (2000)
Capital
Improvement Plan
Capital
Budget
No
Yes
No
87
28
Yes
1
42
Total
88
70
Total
115
43
158
TABLE 6
County Governments Adopting a Capital Budget
and Capital Improvement Plan (2009)
Capital
Improvement Plan
Capital
Budget
No
Yes
Total
No
85
6
91
Yes
3
65
68
Total
88
71
159
capital improvement plan and capital budget increased from only 42
counties to 65 counties. This implies that more county governments
are using the comprehensive capital budgeting practice that Vogt
(2004) suggested.
Figure 1 presents the geographic trends of county governments
adopting a capital budget and capital improvement plan. The left and
right side of the diagram show the status of county governments
adopting a capital budget and capital improvement plan in 2000 and
2009, respectively. Three categories of groups represent 1) county
governments without capital budget and capital improvement plans,
2) county governments with either capital budgeting or a capital
improvement plan, and 3) county governments with a capital budget
and capital improvement plan. This figure lends the evidence to
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FIGURE 1
Capital Budgeting Practice in Georgia County Government
growing role of comprehensive capital budgeting practice in local
governments. It also points out that the adoption of comprehensive
capital budgeting practices occurred around major cities in Georgia,
such as Atlanta, Savannah, Augusta, and Columbus.
Logistic Regressions
As the further analysis this section investigates what affects the
adoption of a separate capital budget among county governments. To
capture the causal relationship for local governments’ behavior, the
logistic regressions with several empirical specifications were
conducted in Table 7. The first model is based on pooled cross
sectional model. The second model estimates population averaged
panel logistic regression with using panel data structure. Third and
fourth model show the results of panel analysis with random effects
and fixed effects, respectively. Note that logit model with fixed effects
is able to control time-invariant factors to affect the adoption, but
some variables such as forms of government and education level
were dropped in the model due to little variation over time.8
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
633
TABLE 7
Results of Logistic Regressiona
Model (1)
Model (2)
Model (3)
Model (4)
**
*
**
0.2
0.191
0.311
0.236
Capital Spendingb
(0.1)
(0.101)
(0.143)
(0.152)
0.038
0.081
0.074
0.084
Populationc
(0.034)
(0.063)
(0.068)
(0.27)
0.1**
0.061
0.101
-0. 082
c
Per Capita Income
(0.039)
(0.05)
(0.069)
(0. 052)
0.286
0.0970
0.239
-0.324
Financial Director
(0.234)
(0.269)
(0.382)
(0.401)
0.402**
0.523*
0.666
Government Form
(0.215)
(0.308)
(0.446)
-0.42
0.0260
-0.0248
0.171
Neighboringd
(0.328)
(0.440)
(0.646)
(0.685)
Change in total
0.0035
0.0111
0.00969
-0.00517
personal income
(0.0103)
(0.0111)
(0.0157)
(0.0163)
Change in education
-0.00356
0.00562
-0.00126
level
(0.0325)
(0.0481)
(0.0660)
0.038**
0.0562*
0.0667
Education level
(0.018)
(0.0301)
(0.0430)
Capital Spending
0.158**
0.212**
0.136
0.11*
e
Growth Rate
(0.065)
(0.0686)
(0.0992)
(0.0850)
Capital Improvement
1.110***
1.550***
1.198***
1.89***
f
Plan
(0.22)
(0.211)
(0.303)
(0.239)
Pooled
Population- Random
Fixed
Panel Models
Cross
Average
Effects
Effects
sectional
Observations (N)
740
740
740
543
Notes:
Logit models were employed to compare different panel models
since probit model in the panel analysis does not provide fixed
effects estimate.
b Capital spending is the lagged variable at t-1 year and is taken as
the logarithm.
c Population is rescaled to 10,000 and personal income is rescaled
to 1,000.
d Neighbor is the lagged variable as the share of neighboring
counties adopted a separate capital budget at t-1 year.
e Capital spending growth rate is 3 year moving average for growth
rate in capital spending.
f Capital improvement plan is the lagged variable whether the county
used a CIP previous year.
*** p<0.01; ** p<0.05; * p<0.10.
a
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The existence of capital improvement plan at previous year is
consistently significant and positive regardless of the model
specifications as shown in previous studies. Capital spending at
previous year and the growth in capital spending turn out to have a
positive impact and are statistically significant in all three models
except fixed effects estimates. This reflects that county governments
are more likely to adopt a separate capital budget in order to adapt to
changing environment and meet the increasing demands for capital
projects. Meanwhile, the county governments with the large share of
neighboring counties that adopted a capital budget are less likely to
have a capital budget, but the impact is statistically insignificant.
Population and per capita income have a positive impact on the
likelihood of adopting a capital budget, but the coefficient of
population is statistically significant only in the first model. In addition,
the existence of an independent financial director, representing the
competence and professionalism of financial management in a local
government, has a positive impact on adoption, but it is statistically
insignificant. Regarding the forms of government, the county
governments with manager or elected executive are more likely to
adopt a separate capital budget compared to county governments
with commissioner form, but the coefficients are significant only in
model 1 and 2.
To interpret the meaning of coefficients from the model in terms
of probability, the marginal effect and discrete change of independent
variables on the probability of adopting a capital budget are shown in
Table 8. Specifically, dy/dx shows the marginal change at the mean
of independent variables, while ∆y/∆x is the discrete change in the
predicted probabilities for a given change in an independent variable.
For example, the table suggests that for a county government that is
average in all characteristics, the existence of a capital improvement
plan for the previous year increases the probability of adoption by
0.44. In a similar vein, as capital spending and its growth rate
changes from its minimum to its maximum, the probability of the
adoption increases by 0.41 and 0.37, respectively.
As discussed in previous section on theoretical framework,
interaction effects between constraints and motivations are possible
in the case of adopting a separate capital budget. Table 9 shows the
interaction effects between forms of government and growth in
capital spending and change in total personal income.
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
635
TABLE 8
Marginal Change and Discrete Change in the Logit Regressiona
Variables
Capital Spendingc
Populationd
Per Capita Incomed
Financial Director
Government Form
Neighboringe
Change in total personal income
Change in education level
Education level
Capital Spending Growth Rate
Capital Improvement Plane
dy/dx
Mean of X
0.049**
14.3
0.00958
55493.2
**
0. 0249
23189.4
0.071
0.41
0.099*
0.36
-0.104
0.48
0.00088
28.47
-0.00088
10.34
0.0095**
70.71
*
0.028
0.56
0.438***
0.32
∆y/∆xb
0.41
0.55
0.67
0.07
0.10
-0.46
0.10
-0.02
0.33
0.37
0.44
Notes: a The estimates are based on the result from model (1) in Table 7.
b ∆y/∆x is the discrete change in the predicted probabilities as x
changes from its minimum to its maximum.
c The logarithm of capital spending is used in the model.
d Marginal change (dy/dx) for population and per capital income is
rescaled to 10,000 and 1,000, respectively.
e Neighbor and Capital Improvement Plan are the lagged variable.
*** p<0.01; ** p<0.05; * p<0.10.
TABLE 9
Interaction Effects in Logit Modelsa
Model
1
2
3
4
Interaction (government forms
and capital spending growth)
0.026
(0.22)
0.013 -0.187 -0.225
(0.21) (0.269) (0.280)
Interaction (government forms
and change in personal
income)
0.00044
(0.017)
0.038 0.017 0.087
(0.024) (0.029) (0.049)
Pooled Cross Population- Random
Fixed
sectional
Average Effects Effects
N
740
740
740
316
Notes: a Each model includes the same variables employed in Table 7 such
as capital spending, population, per capita income, financial director,
government form, neighboring counties, change in total personal income,
change education level, education level, capital spending growth, and
capital improvement plan.
Panel Models
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The results of logit models in Table 9 do not provide a clear
picture about interaction effects, since the coefficients on interacting
variables in linear models are different from the marginal effects of a
change in interaction term in non-linear models (Ai & Norton, 2003).
Figures 2 and 3 present an interaction effect between forms of
government and capital spending growth. As illustrated in Ai & Norton
(2003), the magnitude and statistical significance of the interaction
effect depend on different observations in non-linear models. For
example, for group of county governments with a predicted value of
adopting a separate capital budget less than 0.8, the interaction
effect is positive. It implies that county governments with councilmanager or elected executive forms are more likely to adopt a
separate capital budget as the capital spending increases. However,
Figure 3, which explains the z-statistics on each observation, shows
that the interaction is not statistically significant.
FIGURE 2
Interaction Effect between Capital Spending and Forms of
Government (Coefficients of Interaction terms)a
Interaction Effect (percentage points)
Interaction Effects after Logit
.01
.005
0
-.005
0
.2
.4
.6
Predicted Probability that y = 1
Correct interaction effect
.8
Incorrect marginal effect
1
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
637
It is noted that incorrect marginal effect is based on the
conventional method to calculate interaction effects in linear models.
For example, interaction effect in linear models should be equal to
cross partial derivative of x1 and x2 with respect to y. However, this
method does not apply to interpretation of interaction coefficients in
non-linear models. Based on logit function, correct interaction effect
is presented in the figure. Ai & Norton (2003) provides more detailed
explanation for this correction procedure.
FIGURE 3
Interaction Effect between Capital Spending and Forms of
Government (Standards Error of Interaction Terms)
z-statistics of Interaction Effects after Logit
10
z-statistic
5
0
-5
0
.2
.4
.6
Predicted Probability that y = 1
.8
1
DISCUSSION
This paper, by expanding the scope of analysis to a time series
perspective, sheds light on local governments’ behaviors in adopting
and implementing a separate capital budget. With panel data on
changes in the capital budgeting process of local governments, this
research can fill a gap left by previous research efforts. In this regard,
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CHUNG
this paper found that the number of county governments in Georgia
using both capital improvement plan and a separate capital budget
as a comprehensive capital budgeting process increased from 26.6%
in 2000 to 40.9% in 2009. Interestingly, some county governments
use a capital budgeting process on an ad-hoc basis. This could be
attributed to the fact that 1) they have little need for capital projects,
thus the capital budgeting process is employed only when there are
capital projects; and 2) when financial management practices are
based on local board members rather than local charters or state
statutes, the usage of a capital budget process could depend on
changes in personnel in local government.
Furthermore, by ascertaining the reasons for variation in the
implementation of separate capital budgets, this research can clarify
the logic, underlying what resources facilitate and what obstacles
impede their adoption, in county governments. This paper finds the
evidence about size of population, forms of governments, and the
level of education is strongly positive relation with the probability of
adopting a separate capital budget, which previous studies pointed
out. In addition, the adoption of a separate capital budget is positively
related with capital spending in previous years and growth rate in
capital spending. These findings reflect that local governments adopt
a separate capital budget in order to adapt to changing environments
and deal with problems rather than merely symbolic behavior.
This research makes contribution to the literature to understand a
variety of capital budgeting practice in local governments. Future
studies need to look at the process view of adopting a separate
capital budget because extent of using capital budget could vary
among local governments (Smith & Cheng, 2006). Also, using a case
study and understanding how political actors and relation influence
the adoption process would provide substantial evidence that
explains the differences of budget format and process across local
governments.
NOTES
1. A separate capital budget here means that “the capital budget is
prepared by some governments to account for the acquisition of
equipment and construction of facilities over a period of time,
separate from the annual operating budget” from the survey
conducted by Georgia Department of Community Affairs. Thus, it
ADOPTION OF A SEPARATE CAPITAL BUDGET IN LOCAL GOVER
639
refers to not only a separate capital budget document but also a
separate capital budgeting process. This term will be used
interchangeably in this paper.
2. Internal determinants models explain that any political,
sociological and economic indicators of a locality could affect
government innovation or adoption of new policy and programs
such as population and personal income.
3. Another type of social channels is national interaction referring to
the national communication networks among county
governments. For example, the Government Finance Officers
Association (GFOA) and a bond rating agency (e.g. Standards &
Poor’s) recommends practices on capital budgeting. Since this
paper focuses on local governments within one state, it is hard to
distinguish the different impacts of professional organizations on
county governments. If this study covers longer period of time
series, it would be helpful to identify impact of professional
organizations over time.
4. Eight areas that GOMI include are management functions,
services provided, financial management practices, planning and
development procedures, public facilities, economic development
activities, public safety, and E government.
5. Alternative method is to employ multi-nominal analysis such as
using four categories as dependent variables: whether or not
county governments stay with a non-separate capital budget, stay
with a separate capital budget, adopt a separate capital budget,
or drop a capital budget. However, it could be an inappropriate
way to recode the dependent variable in multi-nominal as the
transition between two policy options, since the Irrelevance of
Independence Assumption might not hold in that model.
6. Unlike pooled logit model, population averaged model provides
more efficient estimators of the parameters of the pooled model
due to adjustment for error correlation (Cameron & Trivedi, 2005).
Fixed and Random effects control for the individual specific
effects (αi) while they make different assumptions on αi such as
time-invariant or purely random components.
7. The interview with an assistant manager/financial director was
conducted after contacting financial directors in county
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governments that switched the capital budgeting process over the
last ten years.
8. In short panels when T is small, joint estimation of fixed effects
parameters and other parameters in panel logit model could lead
to inconsistent estimation of all parameters due to incidental
parameter problems (Cameron & Trivedi, 2005).
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