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Capital Spending in Iowa

October 4, 2016

Much of the growth and progress that United States achieved over the last century was made possible due to its strong and reliable public infrastructure. Public investments in assets, which included highways, roads, bridges, public schools and higher education institutions, water and sewer systems, ports, railways, airports etc., allowed the free market economy to thrive, creating wealth, opportunities, prosperity and improving quality of life of residents. Slowly, it is now becoming more apparent that public infrastructure is aging and there is a growing need for major investments to rehabilitate existing and create new assets. One of the key aspects of public infrastructure is not just the capacity it provides to local governments to facilitate the provision of essential services to residents but also the critical role it plays in assisting private farm and non-farm businesses to carry out their production and distribution activities. This translates into forward and backward economic linkages that, through a cascading effect, positively contribute to the national, state and local economies. In addition to these direct benefits, expenditures made toward periodic maintenance, rehabilitation and replacement of existing public assets help the economy by way of supporting large number of jobs.

Capital Expenditures of Local Governments

At the local level, capital expenditures are usually funded through federal and state grants, borrowings from the capital market using municipal bonds, property tax levies, sales and local option sales tax and sometimes by cash. A closer introspection of the financing mechanism for capital projects reveals that approximately 90 percent of U.S. total capital spending takes place at the state and local level. Besides using funds from their operating budget (mostly for larger local government entities), most local governments rely on state and federal funding of projects by way of direct transfers, loans and grants. It is therefore logical to infer that during hard economic times, as federal and state revenues decline, it ultimately impacts the local governments’ ability to undertake capital improvements. However, during periods of economic boom, besides relying on intergovernmental revenues sources, local governments also use local tax revenues, surplus fund balances and various types of debt instruments to finance capital improvement projects. However, depending on the state, there could be statewide revenue and spending limitations mandated by the state that could inhibit the capacity of local governments to finance capital improvements. That could sometimes add to the cost of capital investments at the local level and hence act as a deterrent. Given the historical context on the state of capital assets and the prevailing economic conditions, it is an opportune time to study the scale of capital expenditures at the local level and the factors that influence such investments. Given the recent economic slowdown and the subsequent recovery over the past 7-8 years, that will act as the backdrop for undertaking the proposed study.

The State of Iowa

Iowa is the leading producer of corn, soybeans and eggs and also boasts of diversified industry sectors that contribute to the state and local economy. With its strategic location, it is also the pathway that connects several large metropolitan areas in the nation and thus facilitates regional, national and global economic activity. According to the Iowa Economic Development Authority, Iowa is “home to a diverse and robust industry mix, Iowa offers a strong economy and numerous business opportunities in a variety of industry segments — including targeted sectors of advanced manufacturing, biosciences and insurance and financial services. Nine industry segments contribute $127.7 billion real gross domestic product (GDP) to Iowa’s economy, with the service industry employing more than one-third of the state’s workforce and manufacturing contributing the largest share (20.8 percent) of total output.” Iowa also presents an interesting case study to the recession’s lingering effects on rural areas. Many rural areas, including those in Iowa, have yet to regain the pre-recession employment levels that likely impact decisions on capital improvements.

The information is timely and will likely expand the discussion on the need for capital spending to keep the public infrastructure from deteriorating and making communities sustainable into the future.

Link below provides per capita capital spending for all 945 cities in Iowa. The table includes 4 select years that span a 10 year period, from 2005-2014.

https://drive.google.com/file/d/0B1fUweg82Z6qak1SUkFkZGR5ZDg/view?usp=sharing

Questions, comments suggestions can be directed at Biswa Das, email: bdas@iastate.edu

Acknowledgements: Amelia Schoeneman for assisting with the data related work.

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