There has been an unprecedented evolution of capital budgeting processes in all government entities across the world. Amid the effects of global economic and financial crises, the importance of capital budgeting has increased many folds. This is in recognition of multiple roles that governments play in ensuring transparent and prudent use of funds across the board. As elucidated by Lee et al. (2008), the government plays a critical role in ensuring that its entities serve as reference points for fiscal and economic policies. Particularly, government agencies and entities have the responsibility of increasing the net worth of the government. As such, the entities act as the instruments for enhancing increased economic activity and ultimately, economic development. Entities should therefore strive to achieve a desirable balance between both capital and current expenses to achieve their goals. This paper seeks to explore the concept of capital budgeting in reference to a specific government agency.
Determination of Debt Capacity
Debt capacity in the field of finance refers to the evaluation of the amount of debt held by a company, agency, or organization and their respective abilities to repay. Failure to repay makes them unviable and threatens the attainment of some financial obligations (Sullivan & Sheffrin, 2003). For New York City, a restriction to the debt limit that the city can direct towards the capital project is present like in all other government agencies. This capital budget is distinct from the normal budget or the annual budget of the City. The City initiated a debt limit and capacity since numerous capital projects get financing from the sale of bonds, which in essence constitute approximately 25% of all expenditure that the city incurs. The bonds invite an annual interest that enhances the generation of debt entity. The city spent 9.5$ billion in capital projects in the fiscal year 2009 to construct houses, parks and improve infrastructure to mention just a few (Burstein, 2010). In capital budgeting terms, the federal government accrues the debt entity if the capital projects become beneficial to the future population. For instance, the Nashville capital project of building a convention center will ultimately invite a government entity since it sourced finances from bonds in addition to revenues collected during the project. To that end, the major determinants of debt capacity include the number of people living in the city, their incomes and revenues as well as the assessed value of a property they hold (Sullivan & Sheffrin, 2003). To get a debt per capita figure for New York, the planners divide the total debt by the population.
In case of an increasingly high debt obligation accruing the city, the fiscal and financial planners may opt to reorganize or refund some of the debt obligations. New York City can arrange with the financiers in this case being the federal and state governments to alter the initial terms of the agreement. According to Lee et al. (2008), debt reorganization involves improved terms with the government entity especially regarding the continued increase in the debt obligations accruing the city. The reorganization of debt can result in forgiveness, rescheduling, conversion, or even assumption in the case of multiple creditors and debtors. However, New York City can have a combination of the above types of debt of reorganization in the event that it wishes to reorganize its debts. Lee et al. (2008) expound that adoption of a debt reorganization strategy such as debt rescheduling may affect the company’s ability to solicit other forms of financing especially relating to emergent financial instruments that the financiers of the debt may impose. Besides, it may have a significant effect on other aspects of budget expenditures implying that the city may lack the required financial resources to fund upcoming capital projects. In addition, debt refunding or reorganization may have a substantial influence on other activities of the government owing to huge debt obligations accruing the state. For instance, New York City runs a high budget in terms of unsurpassed debt obligations that may hinder the realization of emerging investment opportunities. As aforementioned, government agencies and entities enhance effective systems of capital budgeting to make improved returns for the government. This implies that a high debt obligation by a state or an entity may reduce the economic development not only for the state but also for the government.
A government entity can use various sources of funding to support its debt obligations. At the outset, Burstein (2010) says that the city can opt to increase its capital commitments and subsequently increase the sale of bonds accruing such projects. Although capital commitments appear in the budget for the specific year it starts, it remains as such until the completion of the project. The bonds therefore can offset the existing budgetary and fiscal imbalances that may be apparent in the financial statement of the city. Besides, the city can extend its borrowing to include new debtors although it ought to opt for the alternative without contradicting the financial regulations that do not allow entities to exceed their debt limit (Burstein, 2010). Nonetheless, the organization can raise its debt limits to increase its borrowing potential.
Burstein, P. (2010). Finance: Risk rating systems. Edison, New Jersey: Aldine Transaction.
Lee, R., Johnson, R. & Joyce, P. (2008). Public budgeting systems. Sudbury, MA: Jones and Bartlett.
Sullivan, A. & Sheffrin, M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall.