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Economic and administrative aspects of capital budgeting in municipalities

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Economic and administrative aspects of capital budgeting in municipalities

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Content ECONOMIC AND ADMINISTRATIVE ASPECTS OP CAPITAL BUDGETING IN MUNICIPALITIES by David Edwin Shirley A Dissertation Presented to the FACULTY OP THE GRADUATE SCHOOL UNIVERSITY OP SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OP PHILOSOPHY (Economics) June 1955 UMI Number: DP23260 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. UMT Dissertation Publishing UMI DP23260 Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code west ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 4 8 1 0 6 -1 3 4 6 Ph. D £c- '55 SSSf This dissertation, w ritte n by David -E. Shirley......... under the direction of.hxs.Guidance Committee, and approved by a ll its members, has been p re sented to and accepted by the F a cu lty o f the Graduate School, in p a rtia l fu lfillm e n t o f re quirements fo r the degree of D O C T O R O F P H I L O S O P H Y Date. IfSsr uidqnce Com m ittee Chairman fce| O ^ i ^ D e ' a n.. TABLE OP CONTENTS ; CHAPTER PAGE ! I. INTRODUCTION....................... 1 j I The problem 2 I i j | The statement of the problem ...... 2 i | The significance of the problem.. 3 I The purposes of the study....... 8 ' ! Definition of terms............... 9 ' j Capital outlay..................... . . 9 Capital budget ..... .............. 10 Municipality ............. 11 Literature in the field........... 12 Organization of the dissertation ........ 15 II. ECONOMIC ASPECTS OP CAPITAL BUDGETING .... 19 Economic theory of public expenditures . . 20 Development prior to marginalism .... 20 The Cameralists..................... . 20 The English Classical School ........ 24 Nineteenth Century German thought ... 28 The marginal theory of public expenditures ....................... 30 Summary......................... 36 iv CHAPTER PAGE Principles of budgeting .................. 37 The concept of the budget........ 38 Budgetary principles .................. 40 Principles of budgeting and economic theory................. 43 Economics of capital expenditures ........ 47 Capital expenditures of private enterprise.................... 48 Capital expenditures of government ... 53 Budgeting capital expenditures .......... 63 Development of the capital budget .... 65 Conclusions ..................... 72 III. FINANCING MUNICIPAL GOVERNMENTS ............ 74 The problems of financing municipal governments ........ ............ 75 The growth of municipal expenditures . . 76 Population increases ................ 76 Increases in the price level.. 77 Expansion of municipal services .... 78 Problems of municipal revenue .......... 79 Limits of municipal taxable capacity ... 79 The concept of taxable capacity ........ 80 Legal limits of municipal taxable capacity................. 8l CHAPTER PAGE j Political limits of municipal taxable » capacity 88 j Administrative limits of municipal taxable capacity 93 I I Economic limits of municipal taxable j capacity 97 j , Municipal revenues and the business cycle . 104 \ i Income elasticity of taxes ....... 105 1 The income elasticity of the property j tax................................. 108 The income elasticity of the sales tax . 114 ! Other municipal revenue sources ........ 115 Conclusions ........ ..... 117 IV. ALTERNATIVE FINANCING OF CAPITAL OUTLAYS . . 120 Financing through the use of debt........ 127 General obligation bond financing ........ 129 Limitations on the use of general obligation bonds .................... 130 Legal debt limitations ........ 131 Political debt limitations .......... 133 Economic debt limitations ............ 135 Limited obligation bond financing ........ 138 The use of revenue bonds.............. 138 vi CHAPTER PAGE The use of special assessment bonds . . . 140 Lease-purchase financing .................. 141 Conclusions .............................. 144 ; V. BUDGETING CAPITAL EXPENDITURES ............ 147 Physical needs and variable timing of j i municipal capital outlays 150 j j Capital outlays for utilities 150 j I Capital outlays for streets and i i ! highways 154 ; Other municipal capital outlays ........ 157 Maintenance and repair expenditures and variable timing ..................... 160 Capital expenditures from the point of view of municipal officials............ l6l City planners and capital expenditure decisions........................... 163 Operating departments and capital expenditure decisions ................ 165 City managers and capital expenditure decisions........................... 166 Elected officials and capital expenditure decisions ................ 168 The role of the capital budget.......... 170 CHAPTER PAGE Administration of a capital budget . . . 172 t Conclusions ............. 176 j VI. CAPITAL EXPENDITURES AND BUDGETING IN THE | CITY OF LOS ANGELES................. 179 ! The economy of Los Angeles.......... 180 \ Population growth and size .......... 180: Employment" and economic stability .... 1 8 3| The city's revenues................. 1 8 7! i 1 Property tax revenues.............. 189 ! Sales and gross receipts tax revenues . . 192 Revenues from other locally controlled I sources.......................... 192 Revenues received from other governments...................... 193 Municipal revenues and fluctuations in income . ......................... 194 Capital outlays and debt of the City of Los Angeles . ................. 197 Expenditures for capital outlay ........ 198 The use of debt to finance capital outlay.......................... 202 Capital budgeting in the City of Los Angeles............................ 205 viii CHAPTER PAGE Early capital budgeting efforts .......... 207 Postwar capital budgeting efforts .... 209 Conclusions ........................ 215 VII. CAPITAL EXPENDITURES AND BUDGETING IN THE CITY OF SAN DIEGO................. 217 The economy of San Diego ............ 218 j ! Population trends ................... 218 ; Employment and economic stability .... 221 Revenues of the City of San Diego. 226 Property tax revenues .................... 228 , Sales and use tax revenues..... 231 ! Other locally controlled revenues .... 233 ! I Revenues from other governments .......... 235 Municipal revenues and fluctuations in income....................... 235 Capital outlay and debt of the City of San Diego......................... . 239 Expenditures for capital outlay .......... 239 Use of deficit financing....... 243 Capital budgeting in San Diego ............ 245 Long-range planning . .................... 246 Introduction of a capital budget .... 248 Conclusions....................... 252 . * ix CHAPTER PAGE VIII. CAPITAL EXPENDITURES AND BUDGETING IN THE CITY AND COUNTY OF SAN FRANCISCO.... 255 Economic base of San Francisco...... 256 Population growth and trends ............ 256 Employment and economic stability .... 260 Municipal revenues ........................ 264 Property tax revenues .................... 266 Sales and gross receipts tax revenues . . 270 Revenues from other locally controlled sources.......................... 271 Subventions........................ 272 Municipal revenues and fluctuations in income........................ 272 Capital outlay and debt of the City and County of San Francisco............ 275 Expenditures for capital outlay .......... 276 The use of debt.................... 279 Capital budgeting .......................... 284 Early efforts to provide a capital improvement program .................... 285 Introduction of a capital budget .... 287 Conclusions......................... .. . 292 IX. CAPITAL EXPENDITURES—AND-BUDGETING-®—THE ------ X i CHAPTER PAGE i ! CITY OP LONG BEACH..................... 294 ! The economy of the City of Long Beach . . . 295 j Population growth and trends ...... 295 i | Employment and economic stability in I Long Beach.......................... 298 i I ■ Municipal revenues ........ 301 j Property tax revenues . . . .......... 304 | Other locally controlled revenues .... 309 Revenues received from other governments........................ 310 | Natural gas and oil revenues.... 312 Response of municipal revenues to business fluctuations ................ 315 Capital outlays and debt of the City of Long Beach........................... 316 Expenditures for capital outlay ........ 316 The use of debt................. 319 Capital budgeting in the City of Long Beach........... 321 The Post-Victory Expansion Committee . . 322 The Committee for Public Improvements . . 324 The lack of a capital budget... 327 Conclusions............................. 330 CHAPTER PAGE ; X. CONCLUSIONS............................... 332 Primary conclusions ...................... 332 The compatibility of the economic and administrative approach .............. 333 External factors limiting capital ! expenditure policy 334 ; j Financial factors and capital expendl- I ture policy 335 j l Physical factors and capital I i ? expenditure policy .............. . 337 ; j Administrative conclusions .............. 338 Prerequisites for successful capital budgeting....................... 339 The need for legally requiring prepara tion of a capital budget...... 339 The need for legal definition of the Council's obligations in capital budgeting . .............. ..... 340 Capital budgeting and the principles of current budgeting....... .. 342 The need for strong public support . . 342 Administrative responsibilities in capital budgeting .................... 343 xii , |CHAPTER PAGE | ! i ' Responsibilities of the department ! j i ! h e a d .............................. 344 I Responsibilities of the planning i . . i i department 344 | ' i Responsibilities of the finance ! | department 345 I | Responsibilities of the chief | administrative officer ............ 346 i i Economic conclusions ................. 347 j Economic goals and the capital budget . . 347 ; i j Counter-cyclical fiscal policy and the , i capital budget ........................ 348 i The timing of municipal capital expenditures ...................... 348 Grants-In-aid and the capital budget . 351 The future of capital budgeting............ 354 BIBLIOGRAPHY ......................... ...... 356 LIST OP TABLES TABLE PAGE I. Federal, State, and Local Per Capita Tax Collections In California ........ 103 II. Revenues of City Governments by Source in 1950 106 | 1 III. Municipal Capital Outlays of 145 Cities: j 1926-1937 149 j IV. Capital Outlay for Streets and Highways by 1 the Fourteen Largest Cities In the United States: 1929-1949 .............. 155 V. Population of Los Angeles City and County: 1900-1950 l8l VI. Employment in Los Angeles County: 1920- 1950 ................................. 184 VII. Wage and Salary Workers in Manufacturing, Los Angeles Metropolitan A r e a ........ 186 VIII. Revenue by Source, City of Los Angeles: 1952-53 . 188 IX. Revenue by Adjusted Source, City of Los Angeles: 1952-53 ...................... 195 TABLE X. Population of the City of San Diego and of San Diego County: 1880-1952 ........ XI. Percentage Distribution of Employed Persons in San Diego County .......... XII. Income by Source, San Diego County: 1954 • XIII. Revenue by Source, City of San Diego: 1952-53 ............................. XIV. Property Tax, City of San Diego: 1929-39 . XV. Retail Sales and Use Tax Receipts, City of San Diego: 1946-1952 ........ XVI. Revenue by Adjusted Source, City of San Diego: 1952-53 .................... XVII. Property Tax, City of San Diego: 1945-1953 ........................... XVIII. Population of San Francisco and the Bay Area: 1900-1960 ............... XIX. Mage and Salary Workers in Manufacturing . San Francisco-Oakland Metropolitan Area ............................. . XX. Percentage Distribution of Employment of Population by Major Industrial Classification ....................... xiv PAGE 219 223 225 227 229 232 236 238 , 238 261 263 XV TABLE PAGE | XXI. Percentage of Revenue by Source, City and County of San Francisco: 1952-53 .... 265 1 | XXII. Property Tax Revenue and Delinquency, ' City and County of San Francisco: 1929-1936 268 XXIII. Revenue by Adjusted Source, City and County of San Francisco: 1952-53 .... 273 XXIV. Outstanding Long Terra Debt, City and County of San Francisco: 19^6-1953 . . . 283 XXV. Capital Improvement Proposals and ! Appropriations, City and County of San Francisco: 1 9 ^ 9 - 1 9 5 2 .......................................... 2 9 1 XXVI. Population of the City of Long Beach and of Los Angeles County: 1900-1950 . . 297 XXVII. Percentage Distribution of Employment in the City of Long Beach and County of Los Angeles............... 300 XXVIII. General Revenue by Source, City of Long Beach: 1952-53 ........................ 302 XXIX. Revenue of Operating Fund, City of Long Beach: 195^-55 ........................ 303 XXX. Public Improvement Fund, City of Long Beach: 195^-55 ............... 305 'TABLE : xxx i. i I XXXII. I I i | : XXXIII. PAGE : Tideland Oil Fund, City of Long Beach: 195^-55 306 | Property Taxes in the City of Long j Beach: 1939-53 308 ! Revenue of Operating Funds by Adjusted Service, City of Long Beach: 195^-55 • • 311 LIST OF FIGURES FIGURE 1. Assessed Values Related to Individual Incomes of Previous Years in Los Angeles County, 1930-1951 ............................. . 2. Assessed Values Related to Individual Incomes of Previous Years in San Diego County, 1940-1951................... - 3. Residential, Water Supply and Sewage Disposal Construction Expenditures in the United States, 1920-1952 . . . 4. Non-Utility and Total Capital Outlays of City of Los Angeles, 1921-1951 ................ 5. Non-Utility and Total Capital Outlays of the City of San Diego, 1925-1952 .............. 6. Non-Utility and Total Capital Outlays of the City and County of San Francisco, 1923-1952 7. Non-Utility and Total Capital Outlay of the City of Long Beach, 1923-1953 ............ PAGE 110 111 153 201 240 277 318 CHAPTER I INTRODUCTION In the past twenty years, economists in the field of j i jpublic finance have tended to neglect the financing of local [governments. Their attention has been concentrated on the | problems, implications, and effects of the fiscal activities of the federal government. The large expenditures of the I central government during the depression of the 1930‘s, World War II, and the postwar defense period have certainly i ! given rise to fiscal problems which merit the careful attend tion of economic experts. However, local governments also have fiscal problems which deserve careful consideration. Many of the financial difficulties of local govern ments are held in abatement during economic prosperity by the revenues counties, cities, and special districts are able to realize under favorable conditions. These problems come to the foreground during an economic recession, but they are then only a small part of a national economic crisis. That crisis is the central issue, and local govern ments are considered only in so far as they may help to alleviate a national problem. The reverse procedure has been followed in this study; the financial problems of I local governments are studied from a purely local point of view. ! 1 i I Attention has been centered on the capital expend!- ! I tures of local governments because they are, from the local Ipoint of view, the most neglected aspect of public finance, i | land because they are, from the point of view of the nation's (economy, the most significant aspect of local finance. The jfocus of attention has been further narrowed by limiting i I (this study to the capital expenditures of only one type of j j •local government, namely municipalities.^ j ; i i I. THE PROBLEM I i 'The Statement of the Problem j Any enterprise, public or private, large or small, must be continuously thinking and planning in terms of the future if it is to be efficiently operated. For many years, municipal governments have been forced to think and plan at least one year into the future because of the annuality of their budgets. Improved techniques of budget development and execution have gradually made this annual planning more i i ■'"Much of the material presented is equally appli cable to other types of local government. However, the wide divergence in the legal powers and duties of counties and special districts in the United States invalidates generali zation, and makes specific application an almost endless task. effective. I | Unfortunately, the thinking and planning for munici- J i I pal governments which extends beyond a single year has not j i 'been implemented with equal effectiveness. Large expendi- I t 1 itures for durable goods, Identified as capital outlays, have been made largely on an opportunistic basis* If any funds i j jare still available after provision has been made for the jensulng year's operational needs, some durable goods may be purchased. In effect, capital outlays have been placed in jthe position of residual items in the year by year expendi- ! jture plans which an annual budget necessitates. ! J 1 As a result of this residual position, most of the , i 1 jeapital outlays are made by a municipality only after lengthy delays, and are generally an effort to eliminate critical inadequacies which have already developed. This is a pro cess in which the government exhausts Itself extinguishing fires and has no resources left for a fire prevention pro gram. It is an inefficient and wasteful process. The Significance of the Problem The inability of municipal governments to follow a l rational and economic program of capital outlay is a part of the fcuch larger problem of the adequacy of the financial structure of these local jurisdictions in our federal sys tem. Without adequate financial resources, local governments 4 will find their limited autonomy even further weakened. i i It is a sound governmental and financial principle that a government providing funds for other govern- , ments must control their expenditure if those funds i are to be most effectively employed. The history of j unconditional grants in this and other countries is i anything but reassuring. If the Federal government collects certain taxes to provide grants, it will ! necessarily control the levy of those taxes. The recipient governments are freed from the task of ! j raising the revenue involved and do obtain larger ; financial resources for their services. While | their independence is not completely lost, they ! i inevitably become more or less subservient to the government putting up the money. This is a neces sary price that must be paid for federal aid.2 ' : I During the latter part of the 1930*s, much effort ' i was directed to the development of a system of intergovern mental assistance which would preclude this "necessary price," but no such system was discovered. Nevertheless, when rising costs recently caused financial embarrassment for many local governments, they all too frequently turned to aid from other governments as the panacea. This action was typical of the opportunistic approach which has been made to solve the problems of local finance. Very few efforts have been made to determine a long run solution, and it is a long run problem. As our economy becomes more highly specialized and mechanized, manpower is o Alfred G. Buehler. "Federal Grants-In-Aid Versus Separate Revenue Sources," Proceedings of the National Tax Association. 1949 (Sacramento: National Tax Association, 1950), p. M3- i 5 . i I becoming the relatively scarce resource, and so it is also > i I becoming the economy*s most expensive resource. Local gov-! I ! ernments* chief function is the provision of services directly to the citizenry, and very few of these services j !lend themselves to extensive mechanization. The develop ment of a mechanical Juvenile delinquency officer or a mechanical social worker is not a part of the present sci entific horizon. As a result of the growing relative ;scarcity of manpower, its consequent higher price, and the j extent of local governments* personal service responsibili-; ties, the cost of local government is certain to increase.^ These additional costs must be met in some way. i Subventions can be used for this purpose, and despite ! * their weaknesses, they are clearly preferable to the com plete collapse of local government. However, if local autonomy and decentralization are to be preserved, inter n - governmental aids should be minimized. Other alternatives, particularly the elimination of existing weaknesses and inefficiencies in local government, should be explored first. The present methods by which most municipalities are ^Growing urbanization will also increase the cost of local government since evidently no economies of scale arise in the operation of a municipality. ^For an excellent statement of the necessity for local autonomy in a democratic society, see Herman Finer, "The Case for Local Self-Government," Public Administration Review. 3 : 51- 58, Winter, 19^ 3 . 6 iplanning, financing, and controlling capital expenditures are one such weakness. The full significance of capital expenditures is i apparent only when they are viewed in their proper perspec-j i ; ; tive. As a percentage of the total expenditures of munici- f palities in any given year, capital expenditures may he so j small as to appear to he of minor significance. This very j j smallness is often the key to future financial difficulties: A capital expenditure is essentially the same, i whether made by a government, a business, or a consumer; if! the budgetmaker for any activity recognizes a need for I ; 'financial stringency, he will first reduce his maintenance and replacement of capital assets. At least a portion of , such expenditures are always postponable without immediate ill effects. However, it is postponable only in terms of the more immediate budgetary periods; recurring postpone ments will destroy the operating efficiency of the activity. Inadequate maintenance and replacement this year add to next year's burdens. Future fiscal difficulties may well be predicted for any spending unit on a basis of inadequate current maintenance and modernization of capital facilities. In the past, and presently, the true financial con dition of most municipal governments has been obscured by the lack of accurate capital asset records. Capital expen ditures are fully recorded when made, but the assets : 7 j !resulting from these expenditures are frequently not . i ; j recorded, and even when recorded, their values are seldom j | adjusted to a current basis. Both the operating statements! land balance sheets of a general fund include only current ! i 1 i income and current expense; the existence, present condi- ! :tion, and estimated date of replacement of the fund's capital assets are Ignored. It is only when physical con ditions make replacement or expansion of capital facilitiesj I ! I imperative that sufficient funds are begged or borrowed to | ! !meet the emergency. j i I Narrowly construed, this study is of significance in !the development of a more rational, more economical pattern i ; i :of municipal capital expenditures. Broadly construed, how-! ever, it is of significance to our whole governmental struc ture. The assumptions on which this broad construction must rest are: (1) a maximum of local autonomy is desir able in a democratic society; (2) autonomy for local gov ernment will be assured only if locally controlled finances are sufficient to supply the services citizens demand of these governments; and (3) piecemeal aid given by federal and state governments in the past has not provided an ade- ! quate solution. It is the firm conviction of the author that a satisfactory solution will be forthcoming only if the problem is approached from the self-centered, open economy point of view of local governments. The basic purpose of this study is to discover what is involved in the establishment of a more rational pro gramming of municipal capital expenditures from the point of view of a municipality. To achieve this purpose, the following must be studied: the financial characteristics and capacities of municipal governments; their capital facility needs; and the political and administrative environment in which such expenditures are planned and the i plans executed. j Incidental to the major goal of this study, there are two supplemental purposes. The first of these is the fur- I ther development of the concept of performance budgeting. As defined by the Hoover Commission, performance budgeting requires a functional allocation of funds to supplement, if not replace, the traditional object allocation.^ in other words, public budgets should be evaluated in terms of things to be done, not in terms of the objects necessary to accom plish unidentified ends. One of the major problems of this suggested change in public budgeting is to enable citizens, legislators, and administrators to understand the costs of the services and ^Commission on the Organization of the Executive Branch of Government, Budgeting and Accounting (Washington, D.C.: Government Printing office, P • 2o. 9 'functions to be performed so that the total of governmental, resources can be more Intelligently allocated. If the ;present practice of charging the full cost of a capital expenditure in the year constructed is continued, the per- ' formanee approach to budgeting will present only half- ! truths, and the informational aspect of performance budget-; ling will still leave much to be desired. A more rational j approach to capital expenditures should make it possible to ! ;demonstrate the true cost of governmental functions so that[ resources can be more carefully allocated. , A second supplemental purpose might best be regarded i I merely as an effort to satisfy the author's curiosity con- i !cernlng the parallelism in the thought of economists and ( that of public administrators on the subject of public expenditures. As indicated in the title of this study, both viewpoints will be considered. II. DEFINITION OF TERMS Although this study does not require the use of unusual terminology, its limited scope may best be explained by concise definition of three terms. Capital Outlay A capital outlay is an expenditure for the purchase of a durable good whose cost is large relative to the 10 purchaser's annual income. This definition is obviously a relative one; an identical purchase may or may not be a 1 |capital expenditure depending upon the income of the pur chaser. For example, the purchase of a $25,000 fire truck j i would be a capital outlay for a city of five thousand per- ; i sons, but it would not be so classified if purchased by Newj York City. ! i Clearly, this is an administrative definition; it differs from that generally employed by economists in two 1 ;respects. First, the administrative definition includes | |expenditures for the purchase of land which would not be I i iincluded under the economic definition of capital goods as : g "all material goods produced by man used in production." A second difference is that the administrator arbitrarily excludes expenditures for durable goods if their cost is low or their useful life less than a fiscal year. Capital Budget A capital budget is a financial plan limited to capital outlays. To be identified as a capital budget, the plan must include all the jurisdiction's anticipated capital outlays and the proposed means of financing them. Also, the time span of this plan must be more than a single fiscal 6 John F. Due, Intermediate Economic Analysis (Chicago: Richard D. Irwin, inc., 19^7), P« 3&* 11 ! 7 ' : year, six years having been found desirable.1 ! I i Municipality j ; In our federal system of government, municipalities | | ! ! are created by the states; they are established as legal ; | corporations, endowed with subordinate governmental powers | Q | sufficient to administer local public affairs. There is j no uniform law under which municipal corporations are j I 1 j created; they are created under the laws of the forty-eight i states. Naturally, there are some variations in the powers i ; i conveyed to these subordinate units of government by the states, and also some variation in the organizational structure under which these powers may be exercised. I For purposes of this study, the essential features of a municipality are: (l) it is a governmental, corporate entity; (2) it has the power to levy and collect taxes; and (3) it has the responsibility for administering the public affairs of a community. However, it must be noted that the material for the study draws heavily from cities in the State of California which provides for both horae-rule and 7 'The International City Managers1 Association, Municipal Finance Administration (Fourth edition: Chicago: The International City Managers' Association, 1949), P-356. Q ^Chester C. Maxey, An Outline of Municipal Govern ment (Garden City, New York: Doubleday, Page and Company, T§5¥), p. 14. ; general law cities, and where most cities own and operate I I at least one major utility. III. LITERATURE IN THE FIELD In one sense, the literature in this field is exten-; i !sive, and in another, it is negligible. This situation has| i | jevolved because many persons have found that capital expen-j j "* i ditures of municipal governments are of minor importance toi i the field of their immediate Interest. In other words, thej i i i subject of this study is one which cuts across the accepted' lines of our academic and practical disciplines; it has i received passing notice from authorities in several fields, Q but has seldom been studied as a distinct problem. Economists interested in the field of public finance have stressed the importance of governmental capital expen ditures, but their interest has centered almost wholly on the federal government and the national economy. For exam ple, in an otherwise excellent set of readings recently ^It is necessary to qualify this statement since some of the work done by the National Resources Planning Committee and its successor, the National Resources Plan ning Board, was devoted wholly to this subject. Sees J. M. Clark, The Economics of Planning Public Works (Washington: Government Printing oTFice, 1^35), pp., and National Resources Planning Board, Long Range Programming of Munlci- pal Public Works (Washington: Government Printing Office. 19*1), f£~pp. 13 t published, Fiscal Policies and the American Economy, not a i ' 10 |single reference was made to state or local fiscal policy, j Even in the rare publications in which economists have ! i examined state and local finance, the emphasis has been on | the part these expenditures play, actually or potentially, ! I n the nation's total economy.^ Studies, such as that I |Harold M. Groves directed for the City of Milwaukee after 12 World War IX, are truly' an innovation. [ Authorities in the field of public administration ! I i ihave also found that capital expenditures of governments ; i have significance In one of their major fields of interest, ; jbudgeting. Buck, Stourm, and other leaders in the field of i \ jbudgeting have all found it necessary to consider capital I expenditures as a distinct topic since these expenditures are not well adapted to the suggested annual budget.1^ 10Kenyon E. Poole, editor, Fiscal Policies and the American Economy (New Yorks Prentiee-Hail, Inc., 15E5T), 467 pp. ■^See: Alvin H. Hansen and Harvey S. Perloff, State and Local Finance in the National Economy (New York: W. W. Horton and Company, 1^44), 31b pp. A City of Milwaukee, Report of the Commission on the Economic Study of Milwaukee (Milwaukee7 City of Milwaukee. T 9W ,"237 p£ 7 --------------- ■^A. e. Buck, Public Budgeting (New York: Harper and Brothers, 1929), 237 P|x; Renfe Stourm7 The Budget (trans lated from the seventh edition by Thaddeus Piazinski; New York: D. Appleton and Company, 1917), 619 pp. However, the more pressing need for reforms in current bud getary techniques and procedures has forced those interested in budgeting to focus their attention on current, rather i ; ,than long range, budgets. Consequently, capital expend!- i tores have not received the attention they merit from the ; i budgeteers. j I In the closely allied field of urban or city plan- j ning, there has been surprisingly little regard for the ! effective financing of elaborately prepared city plans. Ofj the more than five hundred pages in the most recent edition! of a classic in the planning field, Lewis's Planning the Modern City, twenty pages were devoted to the subject of municipal finance generally, and only three to the finan- i 14 cing of capital expenditures. Political scientists have shown an increasing inter est in government finance since the experiences of the 1930's. The financial weakness of most local governments in those years resulted in extensive use of grants-in-aid and other forms of assistance from the central government. It became apparent that decision-making powers could not be easily separated from control of the public purse, and political scientists saw a serious threat to the nation's l4 ■^Harold McLeon Lewis, Planning the Modern City (New York: John Wiley and Sons, Inc., 1949), 50b pp. J political traditions in the growing centralization of jfinancial power.^ However, political scientists devoted i I themselves largely to the problems of improving the tech niques for separating decision-making from financial con- I trol, assuming the weakness of local revenues. i I Thus, the material used in this study is scattered | through the literature of four fields: economics, public | administration, urban planning, and political science. The jconclusions of this work have been based on this scattered I iliterature, the case material on four California cities, |and the opinions expressed by numerous municipal officials j 1 interviewed. i IV. ORGANIZATION OP THE DISSERTATION Although not indicated by any formal division, this study consists of three major sections. The first of these is devoted to setting forth the problem, first with refer ence to the broader, theoretical aspects of budgeting and then in the more restricted realm of municipal finance. This section Includes Chapters II, III, IV, and V. 15jane P. Clark, The Rise of a New Federalism (New York: Columbia University Press, 1^3^ ) > 3^7 pp. ^Typical of the efforts in this direction is Daniel N. Chester, Central and Local Government (London: Macmillan and Company, Ltd., 195I.), 422 pp. Chapter II Is a review of the development of i economic and administrative thought on the subject of public expenditures generally, and on capital expenditures , specifically. The remaining three chapters in this section; i | are devoted to the financial structure of municipal govern ments as found in California. The first of these considers j s ■ I 'the current revenue structure of municipalities, and the ; j j jmanner in which this structure reacts to fluctuations in the I j private economy. Chapter IV is an analysis of the alterna- | , j tive means of financing capital expenditures; these are: j [ i ; pay-as-you-go, borrowing, and lease-purchase agreement. The } i f ! final chapter of this section reviews the physical nature of typical municipal capital outlays and the municipal view point regarding these expenditures as a prelude to the dis cussion of the capital budget as an implementing device. The second major division of the study consists of case studies of four California cities: Los Angeles, San Diego, San Francisco, and Long Beach. These four cities have all had an extremely large population increase since 19^0; this growth plus the wartime shortages of capital goods created a pressing need for capital expansion in all four. Otherwise, each city represents a unique study. Los Angeles and San Diego have both been trying to improve their methods of planning and financing capital expenditures since before World War II. In both cases, the i 1 7 iinitiative and responsibility for this undertaking was | assumed by the chief administrative officer. San Diego has been relatively successful; Los Angeles has experienced i I repeated failures. I The consolidated City and County of San Francisco ; established their first formal approach to an orderly pro gram of capital improvements in 19^9* Unlike the two I Southern California cities, the responsibility for the preparation of San Francisco's program was assigned to the !Planning Department. The results, measured in terms of i appropriations actually passed by the Board of Supervisors, |have not been encouraging. i The City of Long Beach does not have any formal capital budgeting procedure, even though it has large capital expenditure reserves derived from its unique ineorae from natural resources. Long Beach was studied in order to discover the non-monetary obstacles which stand in the way of the establishment of an effective capital budgeting procedure. A chapter is devoted to each of the four cities, but the organization within each chapter is identical. Follow ing a brief review of the economic base of the city and its > current revenue structure, the historical record of capital expenditures and debt is scrutinized. Finally, any efforts which the city has previously made to rationalize its I capital expenditure needs with its financial capacity are studied. 1 The final section consists of a single concluding 1 j chapter, Chapter X. It is an effort to evaluate, from the !local point of view, the possibility of establishing a ;rational and orderly program of municipal capital expendi- ■tures. Also considered is the extent to which a program |that is rational from the municipality's point of view is equally so from the national point of view. CHAPTER IX ECONOMIC ASPECTS OP CAPITAL BUDGETING The raising and spending of public revenues has been1 the subject of lengthy discussions by economists for as ! many years as economics has been recognized as a distinct academic discipline. The same cannot be said with regard 1 I to the distribution of these revenues among alternative | | public expenditures, which Mabel Walker Identified as "the i t X I crux of the financial situation." This latter subject has! i been left largely to public budget makers who have empiri- 1 cally developed, not a theory of budgeting, but numerous criteria of good budgetary procedure. In this chapter, the development of these two approaches to public expenditure policy are summarized as an introduction to the economic role of capital expenditures and the budgeting of these expenditures by municipal governments. ^abel L. Walker, Municipal Expenditures (Baltimore: The Johns Hopkins Press, 193b), p. IE. I. ECONOMIC THEORY OP PUBLIC EXPENDITURES Development Prior to Marginalism Prior to the development of marginalism, the allo cation of governmental revenues among alternative uses was shown little consideration by economists. In this era, the German Cameralists were alone in their study of public expenditure policy. Later, when marginalism provided all economists with a generalized frame of reference within which alternative governmental expenditures could be ana lyzed, others turned their attention to the problem. The Cameralists. — In the Seventeenth and Eight eenth Centuries, the Cameralists were the immediate advisors to the various absolute monarchs of the many inde pendent Germanic states. In this capacity, they naturally had a keen interest in public expenditures. Gradually a body of doctrine was evolved which was "an amalgam of economic theory, financial policy, the science of govern- ,,o ment, and a modicum of technology. Similar to Mercantilism in its acceptance of the primacy of the state, but differing from Mercantilism in its coverage of politi cal and administrative problems, this doctrine became known ^Othmar Spann, The History of Economics (New York; W. W. Norton and Company, Inc., I S ^ O ) , P* 39* 21 |as Cameralism. Its major emphasis was concisely stated by 1 Small. | i i | To the cameralist the central problem of science was the problem of the state. To them the object of all social theory was to show how the welfare of the state ; might be secured. They saw in the welfare of the ! state the source of all other welfare. Their key to i the welfare of the state was revenue to supply the i needs of the state. Their whole social theory radiated from the task of furnishing the state with | ready means.3 | The most complete and comprehensive exposition of i jthe Cameralists* doctrine appears in Staatswirtschaft j |written by J. H. G. von Justi in 17?5« In this work, von j | i iJusti discussed the merits of the various sources of revenue | : !for the state, and also the expenditure policy which the A state should follow. It is the expenditure policy which is of immediate concern, even though von Justi is most fre quently cited for his six "fundamental rules" of a sound tax policy. von Justi began his consideration of expenditure policies by laying down two general principles: (l) out lays must be made with a view to the general circumstances and revenues of the state, and ( 2) funds available to the state should be used for no other purpose than the greatest ^Albion W. Small, The Cameralists (Chicago: Univer sity of Chicago Press, 1909), P» Viii. 4Ibid., pp. 285-480. good of the ruler and his subjects. Using these two general principles as a frame of reference, von Justi derived twenty-one more explicit rules of a wise expendi ture policy.-* Rule One— No outlay must be undertaken without the most thorough previous consideration, and estimate of the involved cost, and of the income likely to accrue from the same to the state. Rule Two— The outlay should never exceed the income. Rule Three— For all outlays the 'readiest means' must be already in hand, and in no case should a start be made with a debt. Rule Eight— Outlays must be arranged in the order of their usefulness for the common good of ruler and subjects. Rule Nine— The necessities of the state must take precedence of all other demands, and necessities must be reckoned in the following grades, viz.: (l) those on which the stability of the republic depends; (2) those which are of qualified necessity, i.e., from omission of which the community would suffer great harm, such as loss of industries through failure of proper promotion; (3) those which might be omitted without positive injury, but without which the maximum happiness of the state can not be reached. Even expenses of the first grade should not be covered so extravagantly that outlays of the other grades would be impossible. Rule Ten— Only when all necessary expenses are provided for can the means of the state be appro priated to conveniencies. ^Not all twenty-one rules are given since many of them are significant only in light of the central impor tance which the author assigned to the state. 23 Rule Eleven— After all outlay is provided for which is required for the needs and convenlencies of the state, attention may be given to comfort, dignity, and ornamentation. Rule Twelve— The aim should be to put the finances of the country in such condition that not merely the necessities and conveniencies, but also the i comfort and elegancies may be secured. Rule Twenty— Everything must be supplied at the proper time, with foresight and advantage, and by cash payments; and when it is profitable stocks of goods needed by the state should be kept.® I t It is noteworthy that von Justi did, particularly ini Rules Eight through Twelve, attempt to establish criteria i for the allocation of state funds among various expenditure; alternatives. Rule Nine suggests that expenditures should ; be classified and have priorities assigned to them, a val uable contribution even though the basis for classification is unsatisfactory. More importantly, this rule also sug gests that each expenditure should be reviewed in light of the other needs of the state, a concept which reappeared in public finance literature almost a century later as one of 7 the major contributions of the marginalist approach. Despite their merit, the contributions of the German Cameralists were largely lost to the English speaking world. The Cameralists had written in a framework of f Z Adapted from Small, op. clt., pp. 389-391* 7Infra, p. 3 0. | political philosophy and in an institutional setting which j t j included the primacy of the state, absolute monarchy, and i I i I a semi-feudal economic organization, all principles againstl which the English speaking world of the Eighteenth Century | I was reacting. As a result, the works of the Cameralists | ! did not appear to be relevant to the English student of i j I public finance, and so were not given the attention that j i they merited. I i i l i The English Classical School. ~ The aneestry of the| i j | Classical School is generally traced to the appearance of | • i j Adam Smith's Wealth of Nations in 1776. The last major j I section, Book V, of this renowned work was devoted to pub- j I lie finance, and the viewpoint expressed there dominated the thought of the Classical School. Basically, Smith viewed all public expenditures as unproductive, and thought of them as a drain on the economy. He felt that most gov ernmental expenditures result in the production of services which are consumed at the moment of their production; such ! expenditures do not contribute to the growth of tangible national wealth and so Smith regarded them as unproductive. Furthermore, he reasoned that the funds for such expendi tures are drawn by taxation from those who would have employed them in some type of physical production, thus contributing to national wealth. In brief, Smith saw 25 governmental taxation and expenditure as a transfer of resources from productive private employment to unproduc tive governmental use. It is important to note that Smith did recognize some public expenditures as necessary. In addition to con doning the necessary expenditures for national defense, maintaining Justice and the dignity of the sovereign, he also approved governmental expenditures for: . . . the erection and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to an individual or small number of individuals, and whieh it therefore cannot be expected that any individual or small number of individuals should erect or maintain.” Each of these Individual types of expenditures was dis cussed at some length in The Wealth of Nations, but each is discussed independently so that no consideration was given to the development of a basis on which a limited amount of revenue should be allocated among the approved types of expenditures. In his concluding remarks concerning governmental expenditures, Smith did observe: The general revenue of the society, over and above defraying the expense of defending the society, and Q Adam Smith, The Wealth of Nations (Edwin Carman, editor; New York: Random House, Inci, 1937J, P» 68l. ! of supporting the dignity of the chief magistrate, must make up for the deficiency of many particular branches of revenue. 9 | Clearly, Smith did recognize that the continued and orderly existence of the society must be given primary considera- i tion in the allocation of governmental expenditures. This I i one guidepost was Adam Smith's sole contribution to the | development of a theory of public expenditure. On the broader problem of the proper total amount of governmental i expenditures, his analysis of productive and unproductive j ; uses of resources, as well as his whole attack on Mercantilism, supported the conclusion that governmental i expenditures should be minimized. This conclusion became j ; i i the foundation on which later writers of the Classical t ' School built. Ricardo devoted almost one half of his Principles of Political Economy and Taxation to a rigorous analysis of the incidence of several types of taxation within his own theory of distribution. However, he made no mention of public expenditures. It is apparent, nevertheless, from his discussion of the effects of taxation that he regarded public expenditures as generally unproductive, and that the limited sphere of governmental activity demarked by Smith 9Ibid., p. 768. 27 I I Q I was satisfactory to him. v ! John Stuart Mill’s writings reflect the same general approach to the question of public expenditures, even 1 i though his utilitarian philosophy impelled him to remark inj the closing pages of his Principles of Political Economy: | In the particular circumstances of a given age or ! j nation, there is scarcely anything really important ! i to the general interest, which it may not be desire- j able, or even necessary, that the government should j ! take upon itself.H I More typical of the general attitude towards govern-j i I mental expenditures in the England of this era is a state- j j ; ment found in Sir Henry Parnell’s tract, On Financial Reform, published in 18 3 0. | 1 If right principles were referred to they would j suggest that taxation is the price we pay for government; and that every particle of expense that is incurred beyond what necessity absolutely requires for the preservation of social order and for protec tion against foreign attack is waste and an unjust and oppressive imposition on the publie.12 The extreme devotion to the principles of laissez-faire and •^This point of view is especially evident in Ricardo’s criticism of a pamphlet discussing the effects of governmental expenditures written by William Blake in 1 8 3 2. Ricardo's notes on this pamphlet are published in The Works of David Ricardo (Piero Sraffa, editor; Cambridge: The Syndics of the Cambridge University Press, 1 9 5 1 )> Vol. IV, pp. 3 2 3 - 3 5 6 . John Stuart Mill, Principles of Political Economy (London: Longmans, Green and Company, T H 8 3 J , p. 5 9 0 . 12As quoted by Henry C. Adams, The Science of Finance (New York: Henry Holt and Company, 1 9 0 5), P« 50* 28 I I j the firm belief that public expenditures were generally < i ■ "unproductive” obviated the need for a theory of public , i j expenditures in the minds of the English classical econo mists. \ Nineteenth Century German Thought. — The domination; ! i , of individualism and laissez-faire extended across the i jChannel to France, but the impact of these doctrines on i i j German thought was far short of dominant. There, the seeds; t . of an Idealistic philosophy planted by Rousseau and Kant, I I were bearing fruit in the strongly nationalistic writings ; j i !of Prichte and Hegel. Typical of these writings is Hegel’s' | j 'view of the state, well summarized by Gettell: i j | In contrast to the revolutionary doctrine of the artificial origin of the state by contract, Hegel held that the state was a natural organism, repre senting a phase of the historical ’world process.’ In contrast to the collection of separate indi viduals each with his natural rights and his share of the general will or sovereignty, Hegel viewed the state as the real person, its will as the mani festation of perfect rationality,— the synthesis of universal and individual freedom. Only as a member of the state had the individual reality; a perfect life consisted in living with the universal will. Hegel was imbued with the ideals of the Greek past and was influenced by its theory that the citizen existed for the sake of the state.^3 Since most German scholars were trained by academi cians of similar philosophic views, it is not surprising ■^Raymond G. Gettell, History of Political Thought (New York: The Century Company, 1924), pp. 318-3 1 9. 29 that many German economists felt Smith and his followers i had an incorrect and inadequate theory of public finance. Carl Dietzel, writing in the middle of the Nineteenth Century, felt that Smith’s error stemmed from his incorrect analysis of the productivity of governmental expenditures, I rather than from strictly philosophic misconceptions. Dietzel regarded the state as the 1 1 immaterial capital” of the nation; without government and the orderly institutional setting it provides, all production would be destroyed in a! i chaotic struggle for power. Thus government, just as much as any other form of capital, is productive and the cost of government is one of the necessary costs of production. Most German writers did not attempt to identify any economic or logical error in the doctrines of the English Classical School, but merely assigned the state a more dominant role in society on a basis of their own philo sophic orientation. For example, Adolph Wagner developed an approach to public finance which is identified as socio political, a viewpoint which followed naturally from Wagner's conviction that the state has both social and political duties to discharge. Wagner considered at length the manner in which a well designed revenue structure would serve to discharge both these state duties; he also i^Suora. pp. 25-2 6. 3° considered numerous expenditures in light of the dual responsibilities of the state; he did not, however, develop a theory of expenditures. Similarly, German economists {generally placed much greater emphasis on public finance than did their English contemporaries, but prior to the development of marginalism, they too did little to advance the theory of public expenditures beyond the level achieved |by von Justi a century earlier. j The failure of economists to develop a theory of public expenditures in these years is explained by Henry C. Adams: ! ! The situation seems to be that the older English writers did not need a theory of expenditures -because the theory of government which they held implied a fixed limit to governmental function; while the earlier German economists could not work out a satisfactory theory respecting the public use of money because their theory of government pre sented too strong a presumption in favour of the state. 3-5 The Marginal Theory of Public Expenditures In 1887, Emil Sax's work, Grundlegung der theoretischen Staatswirthschaft. was published; in it, Sax applied the new marginal utility theory of value to the area of public finance. Von Wieser spoke of this as one of the ^Adams, o£. cit.. p. 5 3* 31 "richest applications" of the marginal theory,1^ and sum marized it as follows: We said that every intending purchaser who goes on the market calculates to himself, or ought to calculate, the money equivalent of the goods he wishes to buy, I.e. the sum of money whose value to him will equal the value of the goods so that it is not economically permissible for him to go beyond it. Wow a similar money-equivalent must be calcu lated for the value which the services of the state have to the individual citizen. More than this money equivalent it cannot, economically speaking, be the duty of any citizen to pay in taxation, but, on the other hand, it is the duty of everyone to pay taxes up to this amount in order to meet the costs of the public service.^7 Although Sax limited himself to a consideration of the proper balance between public and private spending, it was only a minor task to project the same marginal analysis to the allocation of public funds among the various functions of government. Onee it had been demonstrated that the point of demarcation between public and private expenditure should be that at which it is a matter of economic indifference whether an additional outlay shall be made by the state or by individuals, it is neces sary to go but a step further to say that a given amount of revenue should be distributed among the various governmental functions so equitably, that it would be a matter of indifference where an additional dollar would be spent.1° Friedrich von Wieser, Natural Value (William Smart, editor; New York: Gr. E. Stechert and Company, 1930), p. xxxiv. 17Ibid., p. 336. | Q Walker, o£. cit.. p. 33. 32 English speaking authorities in public finance were slow to make this simple extension, however. Bastable, whose classic work in public finance first appeared in 1892, did i l not utilize the marginal approach, although he did mention ; that the problem of allocating public funds is somewhat simplified by dealing with incremental changes in the bud- j get from year to year, rather than by dealing with total expenditures each year.^9 Henry C. Adams also failed to j make mention of the marginal approach to public expend!- ' j tures in his work which was so widely used by American on students in this field. Another classic, The Elements of j Public Finance, by Winthrop M. Daniels was published in 1904, but the author dismissed the marginal approach with a derogatory footnote. But how to determine where the margin between private and state outgo is to be drawn, or how, admitting that this task is accomplished, to persuade Tom, Dick, and Harry that the respective bounds of state functions and private actions have been properly meted out— on these points our Austrian friends do not greatly enlighten us.21 19C. F. Bastable. Public Finance (New York: The Macmillan Company, 1917;# 786 pp. 20Adams was in agreement with the German sociologic approach to public expenditures, but he failed to utilize or to criticize the marginalism of the Austrians. Adams, op. clt., 573 PP. 21Winthrop M. Daniels, The Elements of Public Finance (New York: Henry Holt and Company, T504),p. 29. All the above scholars were convinced that the prob lem of public expenditures could be dealt with in a mean ingful fashion only if these expenditures were properly classified. Unfortunately, they devoted their attention exclusively to the development of systems of classifica tion, and to discussions of each classification as an ! I entity. They failed to realize that marginalism offered a : I method of integrating the distinct parts of their systems j into a rational total expenditure program. ! ! I Despite the early neglect by the specialists in j public finance, the principles of marginalism were being i adopted by other economists, and applied to the whole scope: of the subject.22 In 1901, J. S* Nicholson published his Principles of Political Economy which contained an excel lent discussion of marginalism as applied to public expen ditures. His discussion merits rather lengthy quotation. The natural analogue, it may be said, to minimum dis utility in taxation is maximum utility in expendi ture. And although the application of the concep tion is rather formal than material, it may be of service as a regulative idea and as a destroyer of fallacies, especially when expressed with reference to total and marginal utilities. There is no more popular fallacy than to suppose that because some 2 This failure may be in part explained by the fact that those concerned primarily with public finance had a rather practical approach to the subject of expenditures, as illustrated by the footnote quoted from Daniels. 34 kinds of public expenditures are classed as neces sary, therefore they must always rank before those which are only classed as optional. In the con crete, for example, it is argued that the expendi tures on the array and navy should only be limited by considerations of efficiency as determined by the military authorities without any regard to other pos sible modes of expending the money. And similarly through the whole range of public expenditures it is popularly supposed that each case ought to be decided on its own merits, regardless of other conflicting claims. But just as in taxation— as Mr. Gladstone never wearied In reiterating— every remission or exemption in one place means imposition or addition in another, so also in expenditure what Is given to one object Is taken from another. Accordingly, the system of expenditure ought always to be viewed as a whole and an adjudication made on conflicting claims, and he is the best master of finance who best understands the relations of the parts to the whole. And although the utilitarian calculus cannot be applied very far, the distinction between total and final utility may often indicate the necessity of check ing extravagance in one direction and beginning a necessary expenditure in another. A minimum amount of defense or protection may have assigned to it an infinity of utility, but the utility rapidly dimin ishes, and necessity passes into luxury or display. A point is reached where the statesman must decide whether other public objects have not greater claims, e.g. village asylums for pauper lunatics in place of separate cubicles for soldiers. The ideal of public expenditure on the utilitarian principle would be attained when the public utility of the marginal expenditure in each case is equal. The ideal is no doubt unattainable, but It is not unthinkable, and the pursuit of it may lead to impor tant practical results. Without a beacon of this kind, expenditure may be continued in certain direc tions long after It Is justified by changing condi tions, and the most necessary reforms may be met with 35 a non passumus of passive inertia.23 j Nicholson's elaboration of the principle of marginal utility as applied to public expenditures, and his recogni-, tion of its limitations in this field is still acceptable to most present-day writers. For example, a recent text in; the field of public finance closed the subject of marginal | utility in public expenditures as follows: j | Its [marginal utility] practical value, which can be substantial, however, is in forcing the student, \ the voter, and the public official to compare alter- j natives and to look at the 'margin' rather than the total or the average, that is, to think about a little bit more or less— here, in spending, or ! there, in taxes.24 Economists have had little new to offer toward a | | theory of public expenditure since the extension of margin-' al utility analysis. Dalton2^ and Guest2^ both tried to identify more accurately the common standard which govern ment should aim to maximize in Its expenditure program. Neither was able to determine anything more tangible than 2^J. Shield Nicholson, Principles of Political Economy (New York: The Macmillan Company,“T901), Vol. Ill, PP. 379-o0. oil ^William J. Schultz and C. Lowell Harriss, American Public Finance (New York: Prentice-Hall, Inc.. 1949), p."2tr: 2^Hugh Dalton, Principles of Public Finance (New York: Alfred A. Knopf, 1923J, 208 pp. 2^Harold W. Guest, Public Expenditure (New York: G. P. Putnam's Sons, 1927), 217 PP. 36 | the fact that this standard depends ultimately on the \ i j social and political philosophy of the people in a repre- ' sentative democracy. Recent efforts by the "new welfare" I i ! | economists to define an optimum level of public expendi- 1 i j tures have utilized a more carefully defined marginal I I I ; ; utility analysis, but they have not been able to overcome I | the limitations recognized by Nicholson fifty years j 7 ^ earlier.' j j Summary j ! Over the years, economists have developed a theory j i i I of public expenditures, but it is a theory which yields i only general, not specific, results. Specific results ' I would necessitate an accurate, ordinal measurement of the marginal "social advantage" to be derived from an addi tional dollar of expenditure in each area of government activity. Critics and proponents of the theory both point out that such a measurement is not possible. Nevertheless, in its general answers, economic theory has demonstrated: (l) that every expenditure is an alternative; (2) that the most meaningful comparison of alternatives can be made by using Incremental analysis at the margin; and (3) that if these comparisons are to be meaningful, there must be a 27A. P. Lemer, The Economics of Control (New York: The Macmillan Company, 1944j, pp. $i6^T8. 37 jcommon goal or standard against whieh to measure their ! 1 effectiveness. II. PRINCIPLES OF BUDGETING I Throughout the years In which economists were slowly ,evolving their generalized theory of public expenditures, i v !government officials were necessarily making actual expen diture decisions. As these decisions were made year after year, there gradually evolved a body of standards and tech niques which facilitated a more rational selection of l jalternative expenditures. The foundation on which these I oft ;principles were built was that of a governmental budget. pR The growth of public budgeting was intimately tied to the ascendency of representative democracy, the estab lishment of legislative control over the executive. The modern phase of legislative supremacy is generally traced from 1215 A.D., the year of the Magna Carta, while that of budgeting is most frequently traced to the English Revolu tion of 16 8 8. However, it was not until 1780 that the English Parliament made any real use of the budget. In that year, under the impetus of Burke*s reform movement, Parliament for the first time assumed the right to debate and eliminated what it considered to be abuses or extrava gances of the civil administration. In France, the legis lative body won the right to control the public purse In the French Revolution of 1789, but the right to control expenditures was not exercised until 1 8 1 7. Legislative control of public funds was extended throughout the nine teenth century, until the United States was the only major nation of the Western World which did not allocate and control public funds by means of an executive budget. 38 i The Concept of the Budget | Although the techniques of budgeting had been evolv-j !ing for several centuries, it was not until late in the i I I 'nineteenth century that European scholars began setting i |forth rules or principles of good budgeting procedure in ! I concise style.^ jn Germany such rules became a very ! natural part of the "Gewissensehaaft" to which German economists had—long given their attention;80 in France, iconcise principles of budgeting were introduced by Beaulieu land L&on Say, both of whom held university chairs in poli- ; ; I itical science. The belated attention which the subject I ' I !received in the English speaking world was at the hands of i j i economists specializing in the field of public finance, such as C. F. Bastable, H. C. Adams, and Charles J. Bullock. However, in both United States and England, the subject of i 2%ith regard to the United States, Charles J. Bullock commented in 1895: "The term budget is one that is little used in the United States in the diseussion of our national finances." In his own discussion of the subject, Bullock cited eight German authorities, two French, and only one Englishman, Bastable. Chas. J. Bullock, The Finances of the United States from 1775 to 1789. with Especial Reference to the Budget (Bulletin of the University of Wisconsin, Economics, Political Science and History Series, Vol. 1, No. 2: Madison, Wisconsin: University of Wisconsin Press, 1895), pp. 117-273* 8°The advice given the absolute monarchs by the Cameralists several centuries earlier was very similar. Supra, pp. 20-24. 39 j governmental budgeting was soon relinquished to leaders in ‘ the field of public administration, for example W. P. Willoughby and Frederick Cleveland in the United States. i i Stemming from such scattered sourees, there is I little wonder that some confusion of budgeting terminology has resulted. Frederick Cleveland observed in 1915s 1 The word 'budget' is a term used in so many different ways that no one can write on any aspect of budgets or budget practice without risk of controversy about , the facts until he has taken the trouble to tell what he considers the budget to be.31 This "trouble" must still be taken today. Most of the con- | fusion stems from the failure of speakers and writers to employ descriptive adjectives. In some instances, the word budget is used to refer only to the proposed budget docu ment as submitted by the executive branch of government; in others, it refers to the budget as enacted by the legisla ture. The term is also utilized to include a part or all of the budgeting process: preparation, enactment, execu tion, and independent post-audit. Confusion can be avoided only by concise definition, and liberal use of descriptive adjectives. As employed in this work, the budget "is a document containing a preliminary approved plan of public ^Frederick A. Cleveland, "Evolution of the Budget Idea in the United States,” The Annals. 62:15* November, 1915. | revenues and expenditures.”^2 The ”preliminary” approval i 1 j : referred to is that of the chief executive office or his i i irepresentative. The term "budgeting” will be utilized to t ! | signify only the first step of the budgeting process, the i i preparation of the proposed budget by the executive branch I i ! of government. Budgetary Principles j The lack of uniformity in the terminology has led to I some discrepancy in what should be included as principles i | in the field of budgeting. One of the earliest available : i statements of budgetary principles is that of Leon Say who:! ... in 1884-85 designated the following four quali- ; ties as the essential qualities of a budget: 1. The budget must have unity; 2. The budget must be annual; 3. The budget must be made in advance; 4. The budget must represent an accounting personality.33 Say's second point was included to insure legislative con trol over the executive and reflects the political consi derations under which the whole budgeting process was developed; his third point was essential to the proper execution of the budget. Thus, only points one and four 32RenS Stourm, The Budget (translated from the seventh edition by Thaddeus Plaginski; New York: D. Appleton and Company, 19171 p. 4. 33Ibid.. p. 145. 4l are principles of budgeting under our narrower definition of that term.^ A few years later, Stourra, after he had commented that a list of the desirable qualities of a budget, “would be almost interminable,” stated that all the really essential qualities would be included if only two principles were adhered to: comprehensiveness and relia bility. 35 However, Stourm’s interpretation of the term "comprehensiveness” was sufficiently broad to include several distinct points which Bastable and others made explicitly. The latter listed six essentials of budgeting: "economy, timeliness, intelligibility, completeness, unity, and accuracy."^ The addition of the criterion of "economy” in which Bastable had reference to the fact that governmental expenditures should be carefully reviewed and "kept to a minimum” is a reflection of his training in economics rather than in political science.37 This list of budget criteria, reflecting political conditions and personal training, as well as differences in terminology, could be almost endless. In accord with the 3^And assuming the existence of a representative democracy in which there is no threat to legislative con trol of the purse strings. 35stourm, loc. cit. ^Bastable, oj>. cit.. p. 7^6. Loc. cit. narrow definition of the term budget here employed, and the- assumed political conditions, the following appear to be the most generally accepted criteria of budgeting: compre hensiveness, unity, balance, annuality, and clarity.3® ; The criteria of comprehensiveness is satisfied if I all government revenues and expenditures are subject to budgetary control and enter into the formal budgetary pro cess. Unity requires that all revenues and expenditures be considered as a unit, with no expenditures or sources of I revenue being set apart for independent consideration. The; principle of balance necessitates not only the ultimate equality of income and expenditure, but that an awareness of this equality be a part of all thinking throughout the budgeting process. Annuality has reference to the require ment that the budget be compiled each year, even though some of the expenditure commitments cannot be altered this frequently. Clarity, which has given rise to the recent movement for the performance budget, requires that the budget information be compiled and presented in a manner which is meaningful to legislators and the general public. 3 9 E. Buck, The Budget in Governments of Today (New York: The Macmillan Company, 1934), pp. 11^6^1 ^Although the performance type budget has only recently been given the recognition it deserves, the con cept is not new. Writing in 1918, Fitzpatrick stated: 43 Only if all of the above criteria are fulfilled i idoes the budget process adequately play its intended role. i In a representative democracy, this role should combine i j political judgment and the technical contribution of the 1 iexpert in order to evolve a financial plan which is a true ; representation of the body politic. i j ■ Principles of Budgeting and Economic Theory ! The principles of budgeting and the economic theory |of public expenditures have been developed under quite different circumstances. Economists, largely academicians, |developed a general theory of choice and then applied that I ;theory to the field of public finance. They concluded that !only a very general theory would be possible since the common goal of greatest social advantage did not provide a precise standard against which the effectiveness of mar ginal alternative expenditures might be measured. On the other hand, budgetary principles have been evolved from a quite different approach which is well described by Banfield: "Moreover, in order that the legislature may really make the budget acts an expression of public policy, they must formulate them in terms of governmental function and not in terms of governmental structure. Funds must be voted upon primarily for education, not for the Bureau of Education.” Edward A. Fitzpatrick, Budget Making in a Democracy (New York: The Macmillan Company, 19lB),p. 297* In any ease, the real question is not whether it is j possible to be "scientific' in choosing between a ; hospital and a school. The choice will be made any way. The real question, therefore, is whether it is to be made with more or less rationality. * 0 i The budgetary principles resulting from this pragmatic < 1 approach are: comprehensiveness, unity, balance, annuality, and clarity. Despite the differences in origin and in terminol- , ogy, there is a definite accord between the economic theory : of public expenditures and the principles of budgeting. j ; Comprehensiveness, unity, and balance are principles which,! if successfully practiced, force the legislative policy makers to view each expenditure possibility as an alterna- I tive. In the interest of clarity, performance budgeting has recently been popularized; the functional presentation which it entails means that government expenditures can be more directly related to social advantage than Is possible lii under the traditional object type of presentation. A Annuality is a poor substitute for the continuous adjust ment which is an essential Ingredient of economic theory. However, given the political environment, continuous ^°Edward C. Banfield, "Congress and the Budget: A Planner*s Criticism," The American Political Science Review, ^3;1124, December, 1949. jil This, of course, is only one of the advantages inherent in a true performance type budget. 45 ' 42 adjustment is clearly impossible. Manifestly, there is no conflict between the economic theory of public expendi tures and the pragmatically developed principles and tech- I Iniques of public budgeting; on the contrary, the latter serve to bring the practical application of the economists' ;general theory of choice closer to realization. | However, there is a significant difference in the i j scope of these two approaches to the problem of public i expenditures. Budgeteers have centered their attention i I almost entirely on the mechanics of the budgeting pro c e s s . John M. Pfiffner explained: American attention to the budget process has centered almost entirely on mechanics, with good reason, because for the first hundred and fifty years national provisions for financial control were chaotic. The financial condition of the country, combined with relatively low taxes, could ^2In the interest of greater flexibility, budgetary authorities generally recommend lump-sum legislative appro priations, with quarterly or monthly allotments controlled by the executive branch of government. This allows more frequent adjustment, without weakening legislative control of the purse strings. For a good discussion of the manner in which budgetary mechanics at the national level create fiscal policy inflexibilities see Arthur Smithies, “Federal Budgeting and Fiscal Policy,H A Survey of Contemporary Economics (Howard S. Ellis, edTtor; Philadelphia: The Biakiston Company, 1948), pp. 174-209. ^3*rhis point of view is evident throughout more recent public administration literature. For an example of its application 4n the financial field, see Edward C. Banefield, "Congress and the Budget: A Planner's Criti cism, 1 1 loc. cit. % r' " ----- 46 i , j absorb a great deal of lax management. In time, j however, the pressures of war and social welfare, 1 combined with an aroused civic spirit, focused ! attention upon methods of economizing on expendi- ; tures.44 As a result, the more fundamental issues of the f i economic effect of various expenditure policies and the ' ! ‘ | proper balance between public and private spending are not i considered in budgeting literature. These more fundamental issues, considered at length by economists, have been j regarded by budgeteers as policy issues with which they should not be concerned. This strict dichotomy between I I ; j policy and administration has served a notable purpose in ! distinguishing the professional public servant from the I ' professional politician in our society. However, in view of the size and complexity of government today, there is reason to believe that such a strict dichotomy is no longer 'advisable. Today, no legislator can hope to be familiar with all the functions which government is performing; he must rely on the expert, the operating administrator, for much of the information which will form the basis of his 44 John M. Pfiffner, and R. Vance Presthus, Public Administration (Third edition; New York: The Ronald Press Company, 1953), p. 387. ^Hugo Wall, MChanging Concepts of Managerial Leadership. Public Management. 36:50-53> March, 1954. 47 ! ultimate policy decisions. An executive budget is a con- l 'else reflection of the administrator’s point of view ; regarding the operation of government in the next fiscal j i yearj as such, it will have a definite influence on policy 1 decisions; it will be the premise of many policy discus sions in the legislature. In recognition of this inevi- : table interaction of policy and administration, the prin- | ciples of budgeting must be expanded beyond the mere mechanics of the budgeting process. I III. ECONOMICS OF CAPITAL EXPENDITURES | It is difficult to imagine a society supporting it self entirely by the efforts of men and the free gifts of nature. Certainly since the beginning of recorded history man has depended for his support on, not two, but three factors of production: labor, land, and capital. Conse quently, economists^ have always employed this tripartite division in their analysis of production and distribution. In this analysis, labor is defined as, ’ ’any exertion of mind or body undergone partly or wholly with a view to some good other than the pleasures derived directly from the u f . work"; land Includes, ’ ’ all free gifts of nature, such as ^Alfred Marshall, Principles of Economics (eighth edition; New York: The Macmillan Company, 1948), p. 6 5. 48 'mines, fisheries, etc., which yield income";1 *7 and capital ; i , j consists of, "all things other than land which yield i income."1 * 8 i I i This very broad definition of capital is of limited j usefulness for the development of a more detailed analysis,: iparticularly one that admits of a time dimension; for this j 'purpose, capital must be further classified into circulat- i ! j ling capital and fixed capital. The former has reference to I i |capital whose income producing capabilities are fully i i exploited in a single use, such as a ton of iron ore which j I will be totally consumed in the production of a ton of pig ; j iron. Fixed capital has reference to items which will |yield income over time, such as the blast furnace which will be used in the production of pig iron for a period of twenty or thirty years. It is expenditures which are made to acquire this second type of capital, fixed capital, which are classified as capital expenditures, and which are the major focus of this work. Capital Expenditures of Private Enterprise Capital expenditures by business for expansion and replacement represent about 14 per cent of the economy’s i ^7Ibid., p. 7 8. 48 ' ^Marshall, loc. cit. 49 j total expenditures, so that solely in terms of volume they ;are significant to the operation of the economic system.^ ; i However, the true significance of this type of expenditure i i i can not he measured merely in terms of volume, hut their instability and the contrihution of this instahility to general economic fluctuations must also he recognized. j ! Stability of the economy depends ultimately on the i < i I compatibility of the plans of savers and those of investors, i i and the economy's ability to adjust to these plans. Inves-, tors are guided by the profit motive; the decision to ;invest, to purchase additional capital goods, is determined, l !on the basis of the expected profitability of the proposed investment. On the other hand, the decision of income receivers to save is the result of weighing many factors, of which, the expected rate of return is only one. Plans to save and plans to Invest are made on differ ent bases, and there is no assurance that these two sets of plans will be compatible. If they are not, and savers attempt to withdraw more from the income stream than investors plan to return to It, the income stream will contract. The contraction will continue until at some new j ^In 1951, gross private domestic investment in new construction was $22.4 billion and in producers' durable equipment $24.9 billion. U. S. Department of Commerce, Survey of Current Business. 32:21, September, 1952. 50 lower level of Income the plans of savers and investors arel i compatible. Were it possible to achieve this adjustment entirely by price and cost adjustments, the level of real j output and employment would remain constant even though j I money Income fell. The inflexibilities of both prices and j costs in the economy make a purely monetary adjustment impossible. Instead, a major portion of a reduction in incomes is accomplished by a reduction in output and ! employment; experience has shown that this reduction is j most serious in the capital goods industries. .. . i Although no attempt is made to present a complete I analysis of the fluctuations in capital expenditures, two aspects of these fluctuations must be noted. Both are relatively important from the point of view of cycle causa-! tion, but their significance in the present context is that both are inherent in a market economy. In other words, these two factors cannot be eliminated without eliminating the market economy itself. One of these stems from the physical nature of capital goods; they are durable and so yield their full return only over long periods of time. Will a particular item of capital equipment be needed next year, or five years hence? Future sales and production conditions cannot be known, but must be estimated on the basis of present 51 conditions and those of the more immediate past. If a j business executive is pessimistic, his expectations regard- j ing the future will reflect this pessimism and he will be i hesitant to undertake the long term commitment which a i capital expenditure entails. Given the complex interrela- i tions of a highly specialized economy, one attitude is apt ! i to permeate the whole business community, and the communityj ! will be either wholly pessimistic or wholly optimistic.^ ; Given, also, the freedom of individual decision which is ' : | ;inherent in a market economy, the result will be a bunching I of capital expenditures: large capital outlays being made ! | . | iby a significant portion of the business community all at .the same time. ( ' The durability of capital goods also plays an impor- > V ' tant role in creating a replacement cycle. Frequently the replacement of a capital good can be postponed; the exist ing equipment can be made to serve with only slight addi tional current operational and maintenance costs. During an era in which businessmen are pessimistic concerning future operations, such slight additions to current costs 5°This tendency for the business, community to think as a unit is by no means wholly psychological. The close Interrelationships also insure that actual business activity for the entire community tends to move together and to give tangible reason for a unity of expectations. 52 I are a welcome alternative to the long term commitments and | large cash outlays which the purchase of replacements : would involve. Replacements sire delayed until more opti mistic expectations prevail, and a replacement cycle j develops which tends to reinforce the fluctuations in the purchases of new capital goods for expansion. The second inherent dlsstabilizing force associated with capital expenditures was well summarized by Slichter; i The instability of expenditures which depend on j profit prospects is the result of a conjunction of circumstances; but the crucial one, however, is the fact that the demand for goods is not ready-made but depends in a large measure upon the success of businessmen in discovering new ways of making money by changing products or processes or by enlarging operations. . . . But if managers experience dif ficulty in discovering new ways of making money, there is a shrinkage in the demand for capital goods and for the labor used in making and install ing them.51 As Slichter later pointed out, to deny this type of fluc tuation would be to assume that research and technology are discovering improvements at a constant rate and that each of these discoveries has profit expectations not radically above or below the existing profit level. Such an assump tion is certainly unwarranted; in fact, even if discoveries could be made at a constant rate, it is probable that they Sumner H. Slichter, "The Economics of Public Works," American Economic Review Supplement, 29?175“76, March, 1934* j would enter production and the market in bunches rather | than in a constant stream.^2 These few points regarding the capital outlays of ! private business are sufficient to demonstrate two main i | conclusions. First, the amount of these expenditures is a I significant portion of total spending in an industrialized economy. Second, the total of these expenditures by pri vate business, depending as it does on profit expectations |and technological developments, is subject to wide fluctua- i ;tions. ! j Capital Expenditures of Government^ Public works have been used for centuries to provide :relief work for the unemployed; it has been suggested that such relief work may have been the origin of the pyramids of Egypt. However, it was not until comparatively recent times that thought was given to the possibility that gov ernment, being unrestrained by the profit motive, might deliberately time its purchases of capital goods to offset the fluctuations in this type of purchasing by private ^2For a comprehensive development of this idea, see Joseph A. Schumpeter, Business Cycles (New York: McGraw- Hill Book Company, Inc” 1939)> Chap. III. 53since government functions to serve the general welfare of its citizenry, not to generate profits, fixed capital must be redefined as capital which yields either income or service over time. 54 business. The minority report of the British Poor Law Com mission of 1905 marked a new stage in the discussion of public works with reference to unemployment. It advocated not relief work of the former sort but rather a scheduling of regular public works and regular governmental purchasing in such a way that a larger amount would be done in times when private business was less active; and a smaller amount when private business was more active, with the idea that this would serve as a regulator and stabilizer of the total economic activity of the nation.54 Despite this recognition in 1905, the concept that j "the natural instability of private investment is to be ! i compensated by inducing an unnatural instability in public 1 i investment" did not attain prominence until the world-wide depression of the 1930's.^ The high rate of unemployment in those years clearly necessitated some form of government al relief, and the expansion of public works' activity was thought to be one of the most economical means of providing this r e l i e f . ^ Public works would employ many persons directly; they would stimulate the capital goods indus tries; they would provide some income or service in future John M. Clark, The Economics of Planning Public Works (Washington: Government Printing Office, 1935), P. 9* ^Richard W. Lindholra, Introduction to Fiscal Policy (New York: Pitnam Publishing Corporation, 1^48), p. 169* 5^Also at this time, there arose a difference of opinion among economists as to what might be properly regarded as a capital expenditure of government. One school of thought, led by Alvin Hansen in the United States, i 55 i : |years; and, if financed through new or otherwise inactive I ;funds, they would hot affect the total private spending of : ithe economy adversely. United States and most of the nations in Europe did j I increase their governmental capital expenditures in an ieffort to recover from the recession of the 1930's. These j efforts met with varying degrees of success: Sweden had |achieved a high level of employment and was worried about ! i iinflation as early as 1935; United States, except for a j ; ! ; mild recovery in the mid-thirties, was unable to achieve a j 57 ' high level of employment until World War II. Neverthe less, even critics of government's program in the United | ! j States admitted that it did provide some stimulus to i economic activity. No matter how validly bitter one may feel in his appraisal of economic policy during the dismal thirties, however, one thing can surely be said in its favor. It provided experimental proof of an economic proposition until then relatively unfamil iar and narrowly accepted. It showed that expand ing money to produce things not for individual purchase, and therefore not looking to individual money ineomes for the purchase price, does add vigor and zest to consumer demand for other products from favored a broad definition, pointing out that current costs for public education are really investment expendi tures; such expenditures are current outlays which will yield additional income over long periods of time. -^Gunnar Myrdal, "Fiscal Policy in the Business Cycle.’ 1 American Economic Review Supplement, 29:185, March, 1939. | the hands of private enterprise. Were it not for ! the shocking perils of endless expansion in govern ment debt and deadening levies of taxes, which I accompany such large scale government expenditures , at present, no one could reasonably doubt the | impressive role of capital goods purchases by gov- ; ernment as a stimulant in all departments. Even though deficit spending in those years never seemed to touch the 'hard core' of unemployment, they assuredly thawed out and rejuvenated its outer segments.5° i , The limited success of the experiment of the f !thirties, a better understanding of the cumulative nature of business fluctuations, and recognition of the tremendous j waste resulting from idle resources and from the unplanned .expansion of public works aimed at activating these Resources, all combined to direct attention to a more care ful study of the role of fiscal policy in the operation of the economy. Various approaches to the problem produced a consensus of opinion that fiscal policy is capable of modi fying the cycle, and that anti-cyclical variation in public expenditures is a desirable part of this policy. 5 9 How ever, there is no such consensus of opinion with regard to the extent to which public capital goods purchases can be eft -'Joseph A. Goodbar and Lorenzo U. Gergeron, A Creative Capitalism (Boston: Boston University Press. T9WJ7 p. m : ---- ^American Economic Association, A Report of the Committee on Public Issues, "The Problem of Economic Insta bility, " American Economic Review, 40:501-38, September, 1950. i 57 j effectively employed as a stabilizer with our present j j economic knowledge and political institutions. ! I i | Those who feel that the anti-cyclical timing of ! I public capital expenditures "is not even a first rate \ j I device for reducing business fluctuations” support their i ! 66 | viewpoint with numerous valid obstacles to such a program. > • I ( J I The first of these obstacles, and one which involves both ! | economic and political aspects, is the proper timing of j ! i : capital expenditures. Fluctuations in economic activity j ' i j are cumulative; the longer economic activity moves in one | I ! j direction, either upward or downward, the stronger the I I motion in that direction, and the greater the force neees- ! : - ! sary to check the movement short of hyper-inflation or I i chaotic depression. Thus, if government capital expendi tures are to be most effective as anti-cyclical devices, they must be initiated or abandoned promptly when economic activity moves above or below acceptable limits. From the purely economic point of view, prompt action introduces a serious complication. Given our ,present comparatively inflexible cost and price structure ,and the economists' limited forecasting ability, can 60 George Bielsehowsky, "Business Fluctuations and Public Works," Quarterly Journal of Economics. 44:318, February, 1930. unemployment resulting from true maladjustments in produc tion be distinguished promptly from unemployment resulting i from a decrease in aggregate demand? If not, and this appears to be the case, prompt action by government will j frequently merely impede the correction of basic maladjust-! raents. From the political point of view, legislative con trol of the public purse and the tradition of annual budgetj- i ing through which this control is maintained make it diffi-i i cult, if not impossible, to initiate changes in public i expenditures without considerable delay. A second obstacle to the use of variations in capi- ! tal expenditures of government as an economic stabilizer is the time structure of these expenditures. Most of the projects submitted to the P.W.A. were large construction projects which employed only a few persons until the jobs were well underway, a period of six months in many cases.^ Obviously, the time structure of these projects did not conform to the urgent need of early 1930’s. Another time structure dilemma is that such large projects are apt to have dangerously long, non-reversible time structures so that the work carries over from one phase of the cycle into Benjamin Higgins, "Problems of Planning Public Works," Postwar Economic Problems (Seymour E. Harris, editor; New York: McGraw-Hill Book Company, Inc., 19^3), pp. 197-98. 59 the next. If this occurs, the latter phases of governmen- i tal work will he a disstabilizing force as government bids j i in a rising market against private business for the j resources necessary to complete projects begun to provide 1 work relief. The objection is also raised that the material j t structure of public works does not conform to the needs of the economy in a recession. Jules Margolis investigated this possibility. For the period from 1920 to 19^0, he j t i assumed that governments, federal, state and local, had ! 1 expanded their public works sufficiently to stabilize the ; 1 economy. Extending the same material structure actually j utilized by government construction in that period, he concluded: . . . the program would have created serious disturb ances in the building materials Industries. Indus tries primarily supplying public works would not expand to meet the demand in increased public con struction, for they would have been assured that, with the approaching recovery, their orders would have been reduced without a compensating increase in private orders. Under such conditions bottle necks would have led to price rises and high profits.*52 I The difficulties of financing governmental capital expenditures to be made during a recession is also raised Jules Margolis, "Public Works and Economic Sta bility." The Journal of Political Economy. 57:302, August. 19* 9. 60 as a serious objection to a planned counter-cyclical expen diture program. For the federal government, assuming the cooperation of the Federal Reserve System, this is not a momentous obstacle.^3 state and local governments, however must rely wholly on their own fiscal resources, and these were proven to be inadequate in the recession of the 1 9 30’s when tax delinquency rates soared and loans had to be floated under adverse conditions. The possibility that state and local governments can accumulate reserves during prosperity in order to finance additional capital expenditures during a recession is rather remote. Elected officials who are in control of the public purse are not apt to levy high taxes to build up ^With regard to the experience of the early 1930's this statement must be modified. At that time, the exis tence of large peacetime deficits in the federal budget was a novel experience, and the newness of the experience, along with the uncertainty caused by the social legislation of the New Deal, created a lack of confidence which inhi bited private investment. Even such harsh critics of the government's recovery program as Harley Lutz admitted that the public works experiment suffered materially" because of the uncertainty that the financing of the program cre ated. In view of the public's repeated exposure to federal deficits during the past twenty years, it is doubtful that a future depression deficit in the federal budget would cause a similar reaction on the part of private business. Harley L. Lutz, Public Finance (third edition; New York: D. Appleton-Century Company, inc., 1936), p. 173. 64 Arthur D. Gayer, Public Works in Prosperity and Depression (New York: National Bureau of Economic Research. 1^35), Chapters VI and XI. 61 reserves which will be left to their political successors to be translated into tangible public improvements. Fur thermore, local governments are primarily direct service agencies: the use and demand for their services are at a peak in prosperity, and 1 1 it does not make sense to tell voters that they should postpone their demands for better facilities until the uncertain day when there will be a depression.Thus it is unlikely that state and local governments will have the financial resources to support any significant expansion of capital expenditures during a j recession. A final group of obstacles to the planned variation of capital expenditures by government is of a political nature. Some of these problems have already been mentioned but two of them are sufficiently important to warrant fur ther elaboration. The first of these problems stems from our traditional division of power in government: control of the purse strings is given to the legislative body while the actual spending of funds is the responsibility of the executive. A successful anti-cyclical public invest ment program necessitates a degree of flexibility in public spending which legislative bodies are incapable of ^5paul J. Strayer, ' ‘Public Expenditure Policy,” American Economic Review. 39:391, March, 19^9* ” 62 I 66 I providing. Therefore, a flexible stabilization program ; i ‘ requires a transfer of decision making power from the i " i !legislature to the administration: such a transfer is . ! ' i |politically unacceptable. ■ ( i ■ The second basic political objection also stems from I |a division of power, but it is the division between govern ments rather than within a single government. As mentioned, I state and local governments are not able to finance a large expansion of capital construction during a recession. The !federal government is not similarly handicapped. However, j • t I state and local governments are jealous of their autonomy, j i land no satisfactory means has yet been discovered of har- ' 67 Imonizing central financing with local decision making. 1 ! j As a result, project negotiations frequently become lengthy policy debates which preclude the possibility of timely action. None of these obstacles, thpse arising from the nation’s limited economic knowledge, its political insti tutions, and its political preferences, lessen the impor tance of ’ ’inducing unnatural instability in public 66 American Economic Association, ’ ’The Problems of Economic Instability," ibid., p. 524. ^For an excellent description and evaluation of England's efforts in this direction, see Daniel N. Chester, Central and Local Government (London: Macmillan and Company, Ltd., 1952), 421 pp. 63 investment.1 1 Taken together, however, they provide the frame of reference within which this instability must be destroyed. IV. BUDGETING CAPITAL EXPENDITURES The lack of funds for replacement and expansion of the outmoded capital facilities which existed in govern mental agencies following World War II convinced many pub lic administrators that existing budgetary practices were inadequate. This inadequacy could be remedied only by the introduction of some means of providing for the replacement and expansion of capital facilities year by year. The submission to the legislative body of a separate document which would include only needed capital expendi tures and the proposed means of financing them appeared to the administrators as the most likely solution. Because of the size of the expenditures involved and the nature of the projects included, the proposals in this document could not be limited to a single year? but must cover a minimum of 68 five years. The resulting long range program of capital 68 °Prank P. Sherwood, ' ‘Capital Improvement Planning: A Report,” (unpublished summary of the findings of a graduate seminar In capital budgeting held by the Univer sity of Southern California, School of Public Administra tion, Summer, 1953)* 64 expenditures is known as a capital budget; the intent of , the public servants who are introducing such long range budgets is well stated by C. A. Harrell: With a capital budget, you do with large non-recurring . items what you do with day-to-day operating expenses j in the annual budget with its quarterly allotments— j namely plan. The idea is simply to study capital projects needed in the next five or six yeggs and then figure out how they will be paid for.°9 Briefly, the steps taken in the preparation of a capital budget are: a careful study of the needs of the community; the classification of the needs on some sort of a priority basis; an estimate of the annual operating expenses of the government; and a careful estimate of the j financial resources of the community and of the government.| On the basis of this information, it is possible for the chief administrative officer to prepare a definite capital expenditure program for legislative review, and to include in each year’s current budget the top priority items with some assurance that funds will be appropriated. Each year, the capital budget is subject to review and revision: new projects are added, completed projects removed; and finan- i cial data adjusted to the current situation. In other words, as customarily employed, the capital budget is purely 69c. A. Harrell, "The Problems of Expenditure and Debt Control at the Local Level," National Tax Association Proceedings, 1950 (Sacramento: National Tax Association, 1951)/p.l65. : a planning device70 and "does not have significance as an j l I ! accounting document since it is subject to enactment from [ : year to year with respect to the part finally approved."71 j I ; ; i j ! I Development of the Capital Budget i i I 1 Governments have traditionally been more lax than ; private business in accounting for capital assets. Govern- | ! | mental budgets, operating statements, and balance sheets ; are designed to include only current accounts, while fixed ! assets and long term debts are shown in independent self- ; * i i balancing statements. 72 Nevertheless, governments have forj j many years distinguished between cash outlays for'current J or ordinary expenses, and cash outlays for capital or I i i extraordinary costs. In some instances, this distinction was required by law. Writing in 1896, Frederick R. Clow | observed: Boston and some other cities make the distinction roughly as a result of restrictions on the borrow ing power. The law in some cases does not allow loans for ordinary or 'current* expenses, and in 7°Since the capital budget is solely a planning device, A. E. Buck and others prefer not to identify it as a budget, but rather as a financial plan. A. E. Buck, Municipal Finance (New York: The Macmillan Company, 1926), , P. 51. 71 Lloyd Morey and Robert P. Hackett, Fundamentals of Governmental Accounting (second edition; New York: John Wiley and Sons, Inc., 1951), p. 66. 72Ibld., pp. 279-93. other cases names certain extraordinary expenses which may be met by loans. A separation in accounts | follows, and a beginning is made in recognizing the i required distinction.73 More frequently, the distinction was made in order to j justify a new bond issue. j I Except in instances of general emergency, . . ., bond issues are expedient only when large immediate burdens would be thrown upon the taxpayers of any one period were important improvements to be paid for currently, and the improvement is to be enjoyed over a long period of time.74 I i This distinction, necessary as it was, did not lead to a ! i capital budget; the emphasis on current accountability and | ! annual budgeting was too great. It remained for the cora- i bined force of the city planning movement and the pressures! of the rapidly expanding urban population in the years fol-J lowing World War I to compel recognition of the value of a capital budget. > By the mid-1920*s, most of the large cities in the United States had developed long range city plans, eorapre- hensive programs of urban development. ^ Unfortunately, ^Frederick R. Clow, "Suggestions for the Study of Municipal Finance." Quarterly Journal of Economics, 10:462.. July, 1896. 74 Lent D. Upson, Practice of Municipal Administra tion (New York: The Century Company, 192b;, p. 1(56. 75The National Conference on City Planning listed 384 cities in the United States which either had planning commissions or were making city planning studies in 67 most of these plans either neglected to consider the means by which the physical developments were to be financed, or ; were limited to projects which were to be financed wholly by borrowing, although San Francisco, Detroit, and Cincinnati were exceptions.^ In 1924, San Francisco prepared a ten year program j i of public improvements, with a sufficiently detailed and j j comprehensive treatment of both income and expenditure to i warrant classification as a capital budget, but due to a I city reorganization this plan was never officially adop- j ted.*^ Three years later, Detroit and Cincinnati had 1922. Proceedings of the l4th Annual Conference on City I Planning (springfieT3> .""Massachusetts: National' Conference bn City Planning, 1922), pp. 281-2 8 9. ^John Nolen, one of the leaders in the early city planning movement, addressed himself to this lack of proper financial planning as follows: MThe explanation of the failure to budget for city planning expenditures is not that the planners were dreaming in the beginning of the movement, or were not practical, or that they did not know that city planning bills had to be paid. It was largely a question of public policy. I recall in one city where I was making a plan and being advised by the municipal author ities not to include in the program any estimate of the cost of execution of the projects. The idea was that the citizens would not approve of projects If they realized what they were ultimately going to cost." National Con ference on City Planning, Planning Problems of Town. City. and Region (Philadelphia: William F. Fell Company, 1929), ~ 2 W T 77 C. E. Rightor, The Preparation of a Long Term Financial Program (New York: Municipal Administration Service, 1927)# P« 68 i ! ; prepared and adopted long range programs which were Indeed capital budgets.7® Other cities were gradually supple- j ; menting their physical planning with financial data when j i the Wall Street panic of 1929 struck. In the depression j 1 ! years which followed, local governments were forced to ! devote all their limited resources to their more immediate i needs, causing a virtual cessation of expenditures for ! planning or acquisition of public improvements.79 i I In 1933> physical planning activity was resumed 1 under the Impetus of prospective grants-in-aid from the ! federal government for the construction of local public | Improvements. The National Planning Board declared, | ; ”stimulation of State, city and regional planning,” to be 80 one of Its four major aims. However, financial planning on the local level was again neglected. In 1934, the same Board reported the existence of 717 official planning boards or commissions throughout the nation, but only seven Q-j official long range financial programs were reported. ^Rightor, loc. clt. 79C. E. Rightor, "Financial Planning,” The Municipal Yearbook, 1934 (Chicago: International City Managers' Association, 1934), P* !• 80 National Planning Board, Final Report, 1933-34 (Washington: Government Printing Office, 1934), p. 1. 8lIbid., p. 8. I Pour years later, the National Resources Committee listed i I ! fifty-one cities which had long range financial plans, hut j in response to a request sent to each of these fifty-one I cities for a copy of their plan, Myron D. Downs received I | only four, one of which had not been revised for ten ! Qp I years. ^ Nevertheless, Isolated advances were being made: in 1938, New York City prepared its first capital budget in accordance with the requirements of its amended charter;^ in the same year, San Diego completed a ten year capital 84 budget; and in 1939 , the National Resources Planning Board established pilot studies of long range planning, both physical and financial, in seven cities scattered i 85 ! across the nation. i I During World War II, material shortages prevented any large expansion of public investment by local govern ments, and the lack of manpower seriously curtailed long 82 Myron D. Downs, "Capital Budgets and Improvement Programs," National Conference on Planning Proceedings. 1938 (Chicago: American Society of Planning Officials, T 938), p. 170. a . E. Buck, "Municipal Budgeting.1 1 The Municipal Yearbook. 1938 (Chicago: International City Managers' Association, 1938), P» 17* 84 Loc. clt. 8s -'National Resources Planning Board, Long Range Programming of Municipal Public Works (Washington: Govern ment Printing Office, 1941), p. vii. 70 ' range planning activities. Planning, however, was given a j 1 renewed stimulus in 1944 when Congress passed Title V of 1 86 ! the War Mobilization and Reconversion Act. This section i ■ of the act was designed to encourage non-federal public i ! agencies to prepare plans for public improvements which ; could be undertaken to ease the expected economic diffi- | culties of the transition from a war to a peacetime situa- I | tion. Under the provisions of the act, the federal govern ment would extend interest-free loans to other public ; agencies for the explicit purpose of preparing a shelf of ; public works plans. During its two year existence, this ! first Advance Planning Program lent $48 million dollars 0*7 for the planning of projects valued at $2.6 billion. Although this federally encouraged planning was directed primarily towards physical planning, some atten tion was given to long range financial planning by the agency, the Bureau of Community Facilities, which adminis tered the act. This agency adopted an administrative ruling that an application under Title V would not be approved, "unless there is complete evidence that local 8658 Stat. 791; U.S.C., App., Sup., 1671. Qy Housing and Home Finance Agency, 4th Annual Report (Washington: Government Printing Office, 1951)* P* 101. 71 :resources are sufficient to pay for the project."®® How ever, the fact that the loans were advanced on an indi vidual project basis, rather than an integrated program basis, made it possible for applicants to prove financial feasibility with very superficial long-run fiscal data.®^ Thus, although long range municipal physical plan ning has received considerable encouragement from the federal government in the past twenty years, the federal emphasis on the anti-cyclical aspects of such planning has not given long range fiscal planning equal encouragement, j Shelves of public works and master plans for cities can be, ■ and are, created without reference to the means of payment, but a capital budget must include both income and expendi ture data. Development in the field of capital budgeting has also been inhibited by those who see the capital budget as an instrument, or as the first step in the development of an instrument, by which budgetary unity may be destroyed. ®®John W. Lehman, "Advance Planning of Public Works, Planning. 1950 (Chieago: American Society of Planning Officials, 1951), p. 115. 80 ^Reference to the second Advance Planning Program is omitted since this program was restricted to defense activities shortly after its inception due to the outbreak of the Korean crisis. Housing and Home Finance Agency, 5th Annual Report (Washington: Government Printing Office, 1952), pp. 9B-101. I 72 I iThey see the capital budget as an independent or extra- i i ordinary budget which can only lead to the loss of effec tive legislative control of expenditures. Many years ago, Stourtn warned of the French experience: The Government desired above all to conceal the increase of public expenditures by dividing their total. This, in reality, is always the purpose underlying the separation of the extraordinary budgets: they are made to delude the country.90 Nevertheless, those who have recognized the capital ! ;budget for what it is, a long range planning device aimed [ i I ^ ' !at an orderly capital expenditure program, have been able ! I i jto secure its adoption in a growing numberof cities. In j !response to a questionnaire prepared under the auspices of I i . !the Municipal Finance Officers’ Association in 1952, 25 per I cent of the cities over 2 5 0 ,0 0 0 persons reported that their 'fiscal operations included a capital budget.91 V. CONCLUSIONS Economists developed a theory of public expenditures in a quite different atmosphere and frame of reference than ^°Stourra, op. cit., p. 2^2. ^The results of the questionnaires are unpublished, but were made available to the author by Samuel M. Roberts, Finance Director of the City of Long Beach, and chairman ( of the Municipal Finance Officers’ Association Committee on Performance Budgeting and Unit Cost Accounting. 73 that in which public administrators evolved their princi ples of budgeting. Nevertheless, the two are compatible; in fact, the principles of budgeting might be regarded as , the means whereby the ideal of a rational economic choice being made among public expenditure alternatives is more nearly realized. In the more restricted field of capital budgeting, a similar relationship between economic theory J and public administration principles exists. I A municipal capital budget is not a panacea; it will' not make it possible for all cities to activate public improvement programs in complete accord with economic , goals. A capital budget should, however, be an instrument ! through which municipalities move nearer these goals. I CHAPTER III I I i FINANCING MUNICIPAL GOVERNMENTS | i t ; j ! The basic issue in the financing of any government j ! I is how that government shall raise sufficient funds to pay for the services which its citizens demand. In the case j I i of municipal governments, local legislators have been j • " I i forced to resolve this problem under particularly difficult! I circumstances. On the one hand, the costs of providing | municipal services have increased; on the other hand, muni-; i I cipal tax bases are severely limited. i The conflict between limited revenues and increased costs has kept municipal finance in a turmoil for many years. In the 1920‘s, municipal borrowing provided a tem porary solution, but the danger and futility of this tech nique was vividly demonstrated by the financial collapse of many loeal governments during the depression of the 1930's. A substantial Increase in subventions from both state and , i federal governments restored some financial order, and the economic prosperity and limited availability of men and supplies during World War II further strengthened municipal : financial structures. 75 The backlog of needed capital improvements and the rising price level in the post-war years, however, brought ■ the old municipal finance problem again to the fore. Acute, crises have been delayed by a number of stopgap measures. In some states, additional taxing powers have been granted ' i to cities, bringing forth the host of problems involved in j i ' j imultiple taxation; other states have increased the number, ; I amount, and types of grants-in-aid; still others have | t : increased their shared tax programs. j i The purpose of this chapter is not to examine any i one or all of these financial expedients, but rather to ! summarize the financial problems of municipal governments, ■ and to demonstrate the limited taxable capacity of these governments and the effect of the limitations on municipal financial practices over the business cycle. It is neces sary to do this in order that the municipality's need and use of a capital budget be fully appreciated. I. THE PROBLEMS OP FINANCING MUNICIPAL GOVERNMENTS Financial problems are universally compounded of two variables: income and expenditures. In recent years, municipalities have been able to raise their Incomes; unfortunately, however, their expenditures have been rising even more rapidly. 76 jThe Growth of Municipal Expenditures I t The expenditures of municipal governments have not !experienced the meteoric rise of those of the Federal gov- I I ! Iernment, but the increases have been substantial. The I ! . !total expenditures of cities with populations in excess of , 1 ! I 2 5 ,0 0 0 were $2,719,5 5 0,0 00 in 19^2, and $5,652,3 7 ^ ,0 0 0 in I i 2 ;1953- The comparability of these figures may be ques tioned since the number of cities in this class increased during that period, but this too is a part of the problem. i ! Population increases. — There has been a population j increase of almost fifty million persons in the United j States in the past thirty-five years; also, there has been ! a significant shift of that population toward urban areas. 1 The decade 19^0-1950 marked the seventh consecutive decade , in which the Bureau of the Census has recorded an increase in urban population in excess of the increase in rural population.^ in the most recent decade, nearly three- fourths of the population growth was attributable to the ^Bureau of the Census, City Finances: 19^2 (Wash ington: Government Printing Office, 1944}, p. 5. 2 Bureau of the Census, Compendium of City Government Finances in 1953 (Washington: Government ‘ Printing Office, 1954), p. 11. ^Bureau of the Census, Census of Population 1950 (Volume II, Part I; Washington: Government Printing Office, 1953), P. 12. 77 increase in the number of persons living in incorporated I places.^ ■ A further complication has been the shift of popula-j | tion within incorporated places. In some cases, this has j I consisted of a move to a suburban city, and in other cases,j :a movement from the central area of a city to a more remote J ! | | section of the same city.^ The combination of a greater i j :population and an increased decentralization of that popu- ; lation have been major contributing factors to the rise in I i municipal expenditures. j Increases in the price level. — Like all other seg-, ments of the economy, municipal governments have been i forced to pay higher prices to secure the goods and services which they consume. For example, wages and salaries of municipal employees, which account for approximately 60 per cent of the average city's total expenditures, doubled between 1940 and 1952. ^Ibld.. p. 2 5. 5f , The population of central cities increased by 1 3 .9 per cent (1940-1950) and that of outlying parts by 3 5 .6 per cent. However, in 30 areas, 21 of which are in the South and Southwest, the central city increased at a more rapid rate than the suburbs." Victor Jones, "Metropolitan and Urbanized Areas," The Municipal Yearbook 1952 (Chicago: The International City Managers' Association, 1952), p. 25. "Municipal Personnel Data," op. cit., p. 130. Expansion of municipal services, — A recent study made by George A. Terhune, Principal Administrative Ana lyst, City of Los Angeles, of the activities of that city ■ revealed "136 new activities were created, 27 existing 1 activities were merged or transferred and 21 were ellmi- i nated during the period since 1925-26., , ^r No single factor can explain a change of this magnitude. Many of the additional activities have resulted from1 technological change. The widespread use of automotive \ 1 transportation, for example, necessitates enormous public ; expenditures for freeway or parkway construction and traf fic control. Other services have been added or expanded because the greater urbanization frequently elevates matters onee of strictly individual concern to the stature of public problems. The disposal of sewage, garbage, and trash are illustrative of activities which move from pri vate to public jurisdiction as population density Increases* These same activities are illustrative of services which become more expensive as the size of the urbanized area Increases. Fundamentally, of course, there has been the demand by the citizens for extended and improved municipal ^George A. Terhune, "An Advance Financial Plan for the City of Los Angeles,” (unpublished), p. 82. 79 services. In some cases, as above, these demands are moti vated by external forces; in others, such as public recre ational facilities and leadership, the demands arise as one phase of our higher level of income and standard of living. Thus, municipal expenditures have risen because cities have been called upon to render more services, at higher input costs, to a larger and more decentralized population. Problems of Municipal Revenue As noted, municipalities have been able to raise their incomes in the past few years, but they still face two basic revenue problems which are developed more fully in the remaining sections of this chapter. The first of these problems is concerned with the concept of the limits of municipal taxable capacity, and the second with the impact of the business cycle on municipal revenues. II. LIMITS OF MUNICIPAL TAXABLE CAPACITY8 The high tax burden imposed jointly by federal, state and local governments in recent years has given rise to considerable speculation by economists concerning the Q This entire discussion assumes a predominantly private enterprise economy operating within the framework of a representative democracy. | maximum "tax burden which the economic system can bear ! without seriously impairing the operation of that system. ! This maximum is referred to as the nation’s taxable capa city. ■ The Concept of Taxable Capacity I The above definition of taxable capacity stems from I ! the economists' point of view. I ; The politician is more likely to interpret taxable I capacity in terms of amounts which can be levied without incurring excessive complaints or taxpayers! resistance. Public officials think of taxable i capacity in terms of what they can persuade the j public to pay without placing an excessive premium on tax evasion. . . . Taxpayers have a definite tendency to consider maximum taxable capacity as ; something a little below last year's taxes.10 Thus, taxable capacity is not a concisely defined term; it has almost as many meanings as there are points of view. Regardless of viewpoint, however, it is clear that taxable capacity is a relative concept. It is not a defi nite amount, or even a definite ratio, which will remain ■ unchanged through all time. Equally clear is the fact that! there is some limit to taxable capacity at every point in time, and governments, in their pursuit of the general ^William H. Anderson, Taxation and the American Economy (New York: Prentice-Hall, Inc., 1951)* P• 5&B• 10James A. Arnold, Jr., "State and Local Taxing Capacity," The Limits of Taxable Capacity (Princeton, New Jersey: Tax Institute,“Tnc., l£*>3)# P« l09« : welfare, must abide by that limit. ! In the case of municipal governments, the limits of j ; taxable capacity are most affected by legal, political, j i I administrative, and economic considerations. Although any i j ! I one of these four may be dominant at a particular time, i they are all operative simultaneously, and are certainly | not mutually exclusive. On the contrary, they are highly j interdependent, and are separated in the material which j i follows only for the purpose of exposition. j i i i I i • i Legal Limits of Municipal Taxable Capacity j | | Of the various types of tax limits, the legal limits! are the only ones which can be expressed with any degree of precision. Legal limits are stated as a part of a consti tution, charter, or statute. In a republican form of gov ernment, these documents can be ehanged by the citizens and so legal limits are ultimately political limits. How ever, once a tax limitation is written into the legal framework, it achieves a status inordinately more secure than that which it may have held as an uncodified political limit. Under the existing system of government In the United States, local governments are legal creatures of the var ious states, which are in turn unified under a federal constitution. The result of this structure Is that local 82 | governments are subject to restrictions imposed by the j j i I federal and state governments, as well as those enacted by I ! ! their own citizens. In many areas, the sum total of legal i i restrictions stemming from three levels of government has j i ! I ! left current local legislators little freedom to vary the j I fiscal structure of their jurisdictions. With the exception of the doctrine of tax immunity for governmental properties, the taxable capacity of local governments is little affected by legal restrictions imposed by the federal government.11 The same cannot be said for those imposed by the states and by the local gov ernments themselves. State constitutions, state statutes, j j local charters, and local statutes are important sources ofj legal restrictions on the taxable capacity of municipali ties. In some Instances, specific taxes are not permitted; in other cases, the local government is permitted to utilize only specified sources of revenue; in still others,; 11This immunity does pose a serious problem for municipalities in which are located large military and defense activities of the federal government. Other feder-, al limitations of significance to local governments are: ■ (1) no person may be deprived of life, liberty, or property! without due process of law; (2) equal protection must be 1 afforded to citizens of all states; and (3) there must not be any discrimination against Interstate commerce. Since the federal government is one of delegated powers, these limitations are all found in the Constitution, or in court interpretation of that document. Anderson, o£. clt.. P. 39. I 83; I :the maximum rate at which various taxes may he levied is specified. 12 ' The State of California has imposed some restric- j ! i tions on its municipalities, but comparatively speaking, they are few. With regard to the property tax, the chief i source of local revenues, the state has defined and elassi-I |fied the tax base. Under the state definition, local gov- Iernments are not permitted to tax intangible property, i 1 j I except solvent credits.1^ Furthermore, these solvent j |credits can be taxed at a maximum rate of one-tenth of one l4 iper cent. ^ The state definition of property has been ! ic Ifurther narrowed by numerous constitutional exemptions. 3 12Citations for the detailed data on the various state limitations can be found in Tax Systems (12th edition; Chicago: Commerce Clearing House, Inc., 1950), pp. 185-20 7. 13 'Generally speaking, therefore, a solvent eredit is a debt, unsecured by land, which is worth its face value and is collectible in the ordinary course of business and by usual business methods." Report of the Senate Interim Com mittee on State and Local Taxation. Part III (Sacramento: California Legislature, 1951), P* 50«TI 14 The constitution provides a maximum rate of four- tenths of one per cent, but the legislature had adopted this lower rate. The actual maximum rate for a municipality is only one-third of the state limit since the receipts must be shared equally with the county and the school district. Revenue Laws of California (compiled by Dixwell L. Pierce; Sacramento: state Board of Education, 1951), Section 2153 and,4692. ■^in California, only constitutional exemptions are legal, and therefore the fifteen classifications of tax 84 • i In 1950, these exemptions equalled 5*^ per cent of the 1 total value of locally assessed real property, and only I i I !slightly less than 5 per cent of all assessed property in I 16 the state. State imposed restrictions also apply to the munici- i ' |pal assessment of property for tax purposes. The Constitu- {tion of the State of California specifies that all property j shall be assessed at "full cash value.’ 11^ j ! Pull cash value, however, has not been construed by ! j the courts to mean 100 per cent of full value and assessed valuations have been held, contrary to the i constitutional requirements above, to be 50 per cent of full value. Thus ’full cash value* as a defini- | tion of assessed value means only 50 per cent of J full value.I® 'With the state courts and the State Board of Equalization ! enforcing a fifty per cent ratio, the individual cities have little choice but to accept this fractional assessment IQ standard as a maximum. 7 exempt property are found in Article XIII of the Constitu- : tion of the State of California. Report of the Senate Interim Committee on State and Local~~Taxatlon. Part III, op. eli.. p. 499. ^Constitution of California. Article XI, Sec. 12. I i f t i • ^Report of the Senate Interim Committee on State and Local^Taxation. f*art III, op. cit .. p. 503. ■^The State Board of Equalization has not ordered a state-wide equalization for almost twenty years. The last time it did so, 1937* It ordered a percentage adjustment of 85 Other state restrictions are applicable only to PQ general law cities and do not affect charter cities. The California Code authorizes sixth class cities to levy and collect a tax on all property, but it establishes a maximum [ irate for general purposes of one dollar per hundred dol- 1 pi lars of assessed valuation. A This maximum rate may be ! 'exceeded if prior approval is given by a majority of the ; i ! | ”. ♦ . city electorate voting at an annual election held j for that purpose. . . .' ,22 Such voter approval is diffi- | cult to secure year after year, and this rigid limitation j has endured by virtue of the numerous exceptions it allows.23 ' • Foremost among the exceptions to the rate maximum is the cost of servicing the outstanding debts of the city.21* By going into debt, a sixth class city may exceed the one all county assessment rolls on a common level of fifty per cent. Malcolm K. Davisson and William K. Schmelzle, Equal ization of Property Tax Assessments in California,” National Tax Journal. 3 : 2 3 1 , September, 1 9 5 0 * 20This discussion is limited to sixth class cities, since with but two exceptions, all cities in California are either sixth class cities or charter cities. 21Deering, California Codes, 1951* Sec. 43068. 22Idetn. 23until 1951* a two-thirds majority of the voting electorate was required. 2l*Deering, loc. cit., Sec. 43068. 86 j dollar limitation without voter approval.25 other major | exemptions from the rate limitations are the cost of pension i > ! fund contributions, support of a museum, expenditures for j of I flood control, library, and parks and recreation. u Only i i the last of these, parks and recreation, necessitates ! I j i jexplicit permission from the electorate to exceed the state j maximum property tax rate. I | Sixth class cities are given further taxing powers j !under the California Code. i | ! i The legislative body may license, for revenue and j regulation, and fix the license tax upon, every kind ‘ of lawful business transacted in the city. Including j shows, exhibitions, and games. ... If the legis- j latlve body levies a sales tax under the authority of this section it may impose a complimentary tax j ' at the same rate upon use or other consumption of j tangible property. . . .27 j Since the courts have been rather liberal in their inter pretation of the power to license for revenue, state legal restrictions on sixth class cities in California are not ^Authorization for a bond issue must be secured from the electorate, but this one vote gives the legisla tive body permission to exceed the dollar maximum by the amount of the servicing charges for the full term of the bond. 2 6 Deering, California Codes. 1951* Secs. 20532, 37558, 43069, and 535T: 27Ibid., Sec. 37101 87 28 unduly restrictive except in the property tax field. j j ! However, the property tax supplied 77 per cent of California |local governments’ tax revenue in 1950 ! Charter cities in California are authorized under jSection 8 of Article XI of the Constitution to make and |enforee laws in respect to municipal affairs, and the powerj ! Q0 ! | to tax has been held to be a municipal affair.-3 In other j : ‘ ! |words, charter cities, except for the state's definition 1 ; I !and classification of property, are subject only to the |legal tax restriction of their own charters and statutes. j Tax restrictions exist in most charter cities. ; In 1947 there were only seven charter cities which placed no limitation on their general purpose tax rates. Of the remaining 47 charter cities at that time, one operated under a unique limitation ! expressed as 105 per cent of the preceding year's tax rate and the other 46 applied limitations ranging from $0.75 to ll.SO.J1 ^Revenues from the property tax have been further restricted by the fact that: "Full cash value, however, has not been construed by the courts to mean 100 per cent of full value and assessed valuations have been held, con trary to the constitutional requirement above (property is to be assessed at full cash value), to be 50 Per cent of full value." Report of the Senate Interim Committee on State and Local Taxation. Fart III, op. cit., p. 50^. 29Annual Report of Financial Transactions of Munici-, palities and' Counties o T T ~California, 1950 (Sacramento: Stale' Controller, 195177 pT35I---- 3°Security Savings Co. v. Hinton, 97 Cal. 214 (1893). ^Report of the Senate Interim Committee on State and Local Taxation. Part HIT op. cit.. p. 509. I Generally exempt from these limitations are the costs of ' i ! interest and redemption of outstanding bonds. In view of I ; the fact that a charter amendment requires a minimum of a | I j majority vote by the electorate, the restrictions on char- | ter cities are almost as inflexible as those the state has imposed on sixth class dities. This very cursory review of legal tax limitations in California is sufficient to lend support to Cantrell’s con- | elusion: "Tax limitation has reduced the property tax to a| J relatively inflexible source of revenue not readily adapt- j | able to changing local conditions."^ I | i I Political Limits of Municipal Taxable Capacity : The political limits of taxable capacity are estab- ! lished by the refusal of the electorate acting through its . legislative representatives to approve tax Increases. ' These limits have no corporate existence, but are merely mental attitudes which are ever changing. Gerhard Colm, in speaking of the limits of public expenditure, noted: There is no possibility of fixing a rigid limit for the expansion of public expenditures. Not scientific calculation but the political struggle defines this ^ Lang L. Cantrell, "Some Basic Modifications of American Property Taxation" (unpublished Doctor’s disserta tion, University of Southern California, Los Angeles, 1953)> p. 408. line of demarcation, defining it every day anew.33 i i The continuous movement of the political limits defies precise identification of them. Nevertheless, the factors which are most significant in creating this motion ; can be identified, and by their presence or absenee indi cate a relatively high or low limit in given circumstances. The voters1 opinion of the city's over-all expendi- ! ture program is likely to be the most significant factor j determining the political limits of municipal taxable capa-J ^ city. The voter is generally unable to identify his tax j , payments with any single municipal activity, and so must J review his taxes against the framework of the entire muni- ! ■ cipal program.3^ Unless he is satisfied with the entire program, its content and the efficiency with which it is being carried out, any proposed increase in taxation will not receive his support. The fact that a voter disagrees with only one of a city's many expenditures may be ^Gerhard Colm, "Theory of Public Expenditures," The Annals. 183:9, January, 1936. 3^Mable Newcomer asserted that one-half the property, tax could be replaced by service charges and general assessments, and so she included only one-half of this tax in her index of the ability of municipal government to sup port various activities. The individual taxpayer is not in a position to make such a separation. Mabel Newcomer, An Index of the Taxpaying Ability of State and Local Govern ments “ (New York: Bureau of Publications, Teachers College, Columbia University, 1935), P» 51 • 90 sufficient to close his mind to a proposed tax increase, even though the proposed increase is to be budgeted for an approved activity. Voter approval of governmental expenditures is a prominent factor in the determination of taxable capacity i • ! in all levels of government. The proximity of local gov- i | ernment to the voter gives it added significance at the | municipal level. The political limits of taxable capacity are also i | affected by the type of tax structure employed and the manner in which that structure is administered. Unless the majority of the voters feel that the tax structure is fair and is being Justly administered, tax increases will not i " - receive popular support. Prediction of the exact fiscal i structure which the popular mind will accept as fair or i equitable is an impossible task. No one is in the position to prove that his con ception of fairness is the right one, since Justice is in the area of man's aspirations rather than in the area of scientific measurement. . . . These ideas of fairness, however, are prone to be confused and to vary among persons and groups. Out of this competition emerges a good deal of general agreement that may be called a social concept of fairness. The social concept of fairness strongly Influences individual opinions of fairness.35 ^^Roy Blough, The Federal Taxing Process (New York: Prentiee-Hall, Inc., 1952), p. 407. « 91 On the basis of the tax legislation of the past j fifty years, it appears that the social concept of fairness! includes a, growing reliance on taxation according to ability to pay. From this it follows that tax legislation , i and administration should be such that persons in unequal circumstances should not be required to bear equal tax I i . ! burdens, and that those in less fortunate circumstances ! should bear a smaller portion of the burden of government. i Local governments, with their heavy reliance on the ! i property tax, have encountered much opposition from this increasingly important ability to pay concept of Justice. | The tax itself is frequently criticized for its failure to i conform to ability; the administration of the tax is criti-< clzed because assessments have not achieved a true equality of treatment even for those owning property of equal value. Clarence Herr concluded: "there appears to be no place for the property tax in a scheme of ability taxation.The failure of the property tax, municipal government’s chief source of revenue, to conform closely to a society's most acceptable criteria of tax justice tends to depress the taxable capacity of local government.37 ^Clarence Herr, "The Property Tax as a Measure of Ability," Viewpoints on Public Finance (Harold M. Groves, editor; New York: Henry Holt and Company, 19^7), P« 51* 3?This failure was generally cited by those favoring the passage of statutory property tax rate limitations. ; 92 As in any political decision, the force of status quo is significant in the determination of the political limits of taxable capacity. In this case, the existing type and level of taxes is the status quo. How well this j force is recognized by professional lobbyists can be seen ! I from Roy Blough's comment on their method of procedure. I Proposals for tax changes are usually held within reasonable limits, on the theory that less is to be gained by drastic proposals, which would be deemed unreasonable by makers of tax policy, than by moder ate proposals, which can be enlarged after each sue- j cessive vietory. Tax proposals thus commonly do not reflect theQultimate tax goals of the taxpayers I who make them.38 j Without the extenuating circumstances of a major crisis, | | any large change in government fiscal policies must be j ! planned well in advance so that it may be submitted for political approval as a series of minor adjustments. The force of status quo is a powerful political limit, even though it does change over time. Finally, the political limits of taxable capacity are affected by what is spoken of as tax consciousness, peoples' awareness of taxes. Such an awareness is often stimulated by an effective publicity program of a taxpayers' association or other civic group. It is also affected, however, by the type and administration of the revenue ^Blough, o£. cit.. p. 22. structure. A tax which is paid as a small part of the j i purchase price of some final product will cause much less j awareness than one which is paid as a separate transaction.; Similarly, a tax which is paid in many small installments j j will cause much less awareness than one which is paid in a ; lump sum. Tax consciousness at the local level is apt to be high. There are many civic organizations which devote j themselves to local affairs; the property tax is a lump sum! j tax;^ annual adjustment means that the property tax is in j effect a new tax each year; and the area of local govern- ! ment is sufficiently small so that the total tax bill can 1 be identified with a level of known governmental services. All of these forces point toward a high level of tax con sciousness, and thereby, a low level of taxable capacity. Administrative Limits of Municipal Taxable Capacity Prior to 19^0, it was generally felt that local gov ernments were capable of effectively administering only the, property tax. This belief was founded on the limited geographical jurisdiction of local governments and the mobility of most tax bases. A recent editorial in Public OQ “^Even though the property tax is frequently payable in installments, the taxpayer is sent a tax bill for the full amount of his tax as of the day the tax is levied. 94 j I Management took this point of view. ! ! I The economy of a particular area may provide tax bases— sales, income, or property— large enough to j i support an improved level of local government serv- j ices. However, the geographic boundaries of few local government units encompass a whole economic area. In practice, most units cannot tax these bases heavily— particularly Income and sales— without causing taxpayers to take the relatively | easy steps required to avoid paying the higher taxes. That is, they can move their homes or businesses or legally shift taxable transactions to low-tax or tax-free sections of the same area.40 i Nevertheless, the end of World War II marked the i jbeginning of what Mabel Walker identified as, "the new look ! in city taxes.This new look consists of a diversifies-| j • I tion of local revenue sources. I l i t ; The seeds for this change were sown by the collapse ( | of the property tax during the 1930*3. In 1934, New York City and New Orleans enacted city sales taxes to bolster 1 their finances, and in 1938, Philadelphia turned to a ho municipal Income tax. A few other cities followed, and by 1946 their records were sufficiently clear to lead Paul Studenski to state: ^Public Management editorial, "Backlog of Needed Public Facilities.' ' Public Management. 35:51, March, 1953* ! ^Mabel L. Walker, "The New Look In Gity Taxes,1 1 Tax Policy. 15:3, December, 1948. ^The Philadelphia tax was not effective until 1939* 1 | 95 The conclusion to be drawn from this experience is clear: municipalities can successfully levy non property taxes, thereby broadening their revenue base and insuring more stable income.^3 j When the revenues of the property tax were unable to| I keep pace with the rising costs of government in the post- \ | ! , war period, there was a rapid expansion in the use of non- I ! i J property tax sources by city governments. In 19^5* i Philadelphia was still alone in the municipal Income tax | field; in 1950, there were twenty-four cities levying ; income taxes. ^ The growth in the use of the sales tax was i I even more rapid, with 162 California cities dominating the | | field in 1953* j The municipal use of these sources of revenue has j « i ! not been free of complications. For example, Los Angeles ! encountered unique complications in the application of its sales tax. Mr. Lev, Deputy City Attorney, explained: ^Paul studenski, "Post-war Financing of Municipali ties and New Sources of Revenue," National Tax Association Proceedings. 19^6, p. 13. 44 A. M. Hillhouse and Muriel Magelssen, Where Cities Get Their Money (Chicago: Municipal Finance Officers' Association, 1945), P* 102. ^^Municipal Finance Officers' Association, Municipal Nonproperty Taxes. 1951 (Chicago: Municipal Finance Officers' Association, 1951)» P» 15. 46 Annual Report of Financial Transactions Concerning Cities and Counties of California. 1952-53 (Sacramento: State Controller, 195*0» PP * db-93• 96 We have a large harbor, so It was found necessary to I exempt sales of property such as ships stores, fuel j oil, etc., to operators of ships because there are ! a number of other ports in the state where these I supplies could be obtained. Long Beach, for in- j stance, has its harbor adjacent to ours and the | shipping lines were threatening to desert Los , Angeles harbor in favor of Long Beach where no sales tax was in effect.“7 I I Philadelphia learned that a special definition of income was necessary for municipal income tax purposes; this definition excluded receipts from interest and dividends since they were hard to locate and apt to be removed from the taxing jurisdiction. Several cities enacted sales | jLg I taxes, and then found it necessary to repeal them. w Also, it must be noted that the actual use of these j various taxes is not conclusive evidence that municipal!- j ties can effectively administer them all. There are no standards available by which to measure effectiveness in absolute terras, but Dixwell Pierce, Secretary of the California State Board of Equalization, remarked: ". . . the city sales taxes are only about 70 per cent as effec tive in raising revenues as would be state taxes imposed at ^Lester L. Lev, “City Sales Taxes in California," Revenue Administration. 1948 (Chicago: Federation of Tax Administrators, 1948), p. 19. 48 In California, this has occurred in Sacramento, Montebello, and Elsinore. Report of the Senate Interim Committee on State and Local TaxatTon. Part il~"(Sacramento:! California Legislature, 1953), P» 30. 97 the same rate in the same areas."^9 Regarding the raunicl- j pal income tax, Robert J. Patterson who directs the Bureau j I of Municipal Research of Philadelphia was willing to recom mend the adoption of Philadelphia's tax only under very 1 SO 1 ! specialized conditions.-' ! ! Patterson's observations appear to be the key to the administrative limits of the taxable capacity of muni cipalities. Each city must determine these limits uniquely t ! | I in accordance with its particular circumstances. As a j i i I general guide, it has been suggested that utility, amuse- j ! i ment, liquor license, and motor vehicle taxes can be suc cessfully administered by any size of city, while other ' non-property tax sources can be tapped successfully only by large cities or those in special circumstances.-*1 Economic Limits of Municipal Taxable Capacity As previously noted, Lewis H. Klramel defined the | ; economic limit of taxable capacity in terms of, "inter ference with the productive activity and the operation of ^Dixwell L. Pierce, "Why State and Local Taxes Should be Coordinated," Revenue Administration. 1948. op. eit.. p. 21. •^Robert J. Patterson, "Philadelphia Tax in Fifth Year," National Municipal Review. 33:452, October, 1944. ^Studenski, o£. cl-t.. pp. 15 f. 98 ! the economy.'’^2 a limit of this nature cannot be defined with precision for the nation as a whole.^3 General eco- ! noraic fluctuations are a phenomena resulting from such a j : i 1 complex of forces that it is impossible to isolate the j impact of any one force, i.e., the tax burden. Even ! ; i I restricting the area of consideration to a single local ;government, the economic limits of taxable capacity remain jnebulose. However, as in the previous discussion, it is :possible to identify the forces which are of greatest sig- ; i nificance in the establishment this limit. ! i 1 ! Those approaching the subject of tax limits from the I i !point of view of the national economy have stressed income |as the most vital guide. This same primacy must be awarded! income when the scene is shifted to municipal government. Income is the ultimate base of all governmental revenues. Income is important to municipal government, in the first instance, as a measure of the ability of its citizens to contribute anything to the support of government. Under, normal conditions, the contribution to municipal government CM. is small relative to total income, and can be maintained. CO Supra, p. 7 6. "^Anderson, op. eit., p. 570. -^In 1950, the 474 cities with populations in excess of 2 5 ,0 0 0 had an annual average per capita cost of $43.48, 99 i | However, in the severe depression of two decades ago, the |municipal property tax delinquency rate doubled between ! I 1930 and 1932, in some cases exceeding 50 per cent in the latter year.^ Commenting on this era, Robert S. Ford ! I |stated: i ! Local governments found it impossible to obtain suf- I ficient revenue from this source [the property tax], I and indeed it seemed that the upper limit of the j property tax had been reached.5o ! | When income levels were higher in the ensuing years, the j 1 I j property tax was able to produce greater revenues. In expectation that such a serious economic col lapse will be avoided in the future, it may be said that :income is a guide to the economic limits of municipal taxa- ! tion as it affects the bases of the taxes used by these governments. In other words, income is a general guide because it is an indicator of change in the tax bases which are actually employed by city governments. The bases of , the sales and gross receipts taxes are, of course, or $3*62 per month. U. S. Bureau of the Census, Compendium of City government Finances in 1950 (Washington: Government Printing Office, 1951), P- 8. ^Frederick L. Bird, The Trend of Tax Delinquency 1930-1944. cities over 50.00*6 Population (Mew York: Dun and Bradstreet inc., 19^7), pV B. ^Robert S. Ford, “State and Local Finance,” The Annals. 266:17, November, 19^9. I 100 |sensitive to changes in Income.^ Of much greater import i ;to municipal finance is the fact that the value of taxable i : i property is also sensitive to Income variations. j The value of real estate in a community is elosely j 1 tied to the employment and Income opportunities in the !community. Homer Hoyt observed: j If a serious long run decline occurs in the number of persons gainfully occupied in that city, even if the | j loss amounts only to 1 0 % of the total number, there j will appear a vacant margin of houses, which will by ! their competition, weaken rents and values of all j houses.5° 1 Although the above remarks were qualified by the phrase, 1 I j”long run," they are Indicative of the effect of a decline ; !in local income. This effect may not make itself felt on the property tax base immediately because of the mechanics of the assessment process, but it will ultimately result in a diminished tax base. The second consideration of those discussing the national economic limits of taxable capacity is the revenue and expenditure pattern of fiscal activities, and the way in which this pattern affects production. The fiscal activities of city governments are not of a large enough 57narold M. Groves and G. Harry Kahn, ”The Stability of State and Local Tax Yields," The American Economic Review. %2:90, March, 1952. -^Homer Hoyt, "Economic Background of Cities,” Jour* nal of Land and Public Utility Economics. 17:188, May,i'9"49* 101 ,scale to destroy or weaken production incentives; neverthe-j |less these limited fiscal activities do have an effect on | I i local production and income. Unlike a national government,i a city government must face the competition of its neigh- j i bors. This competition is in the form of comparative tax rates, comparative tax structures, and comparative services rendered. An unfavorable comparison will, in the long run, ; I result in a loss of taxable property. The loss will be evidenced in the failure of owners to maintain adequately | i t existing properties, and more seriously, in the failure to I attract new income-generating industries.^ Without these j !industries, a decline in property values will take place, i i and this decline will eventually be translated into decreased assessments. -^Whether or not local taxes are of sufficient importance as a business cost to influence Industrial loea-; tion is a debatable point. The author recently heard a representative of the California State Chamber of Commerce i state that a national firm was considering moving one of its major producing units because the voters in their present location were too willing to incur additional city debt for municipal improvements. Evidently, this move was being seriously considered even though the firm was satis- , fied with the existing tax rates. On the other hand, a California Senate Interim Committee concluded that local taxes would not be of sufficient importance to influence industrial location. Report of the Senate Interim Committee on State and Local Taxation. Pari Ili (Sacramento: California Legislature, 19^9), P* 46$. 102 i | Those concerned with the nation's taxable capacity I ! have not found it necessary to consider one of the major 1 tax limits facing municipal governments: inter-governmen- i i tal competition for tax dollars. In our federal system of i ; government, citizens must necessarily support three levels j ; i I of government. Each of these three levels is free to ; determine its own tax structure and its own tax rates. u i ! I | If one level of government taxes away most of, "the portion: ! of income that Is devoted to unessential consumption,M the j i ! ; taxable capacity of the remaining two Is drastically j ! reduced.^ I . . In recent years, local governments have, "come off third best,” In this three way competition for tax dol- j lars. Thus, local governments1 share of the Califor nians' tax dollar has fallen from 57 per cent In 1929 to a mere 15 per cent In 1948. At the same time, the citizen of California has Increased his contributions to government; 247 per cent In terms of dollars of constant value. Any further increase In the over-all tax burden, even though ^°As previously noted, local governments are some what restricted by the various states in this respect. 6lKimmel, o£. cit., p. 154. ftO u<iAlvin H. Hansen and Harvey S. Perloff, State and Local Finance in the National Economy (New York: W. W. Norton and Company, 1944), p. 274. 103 TABLE I FEDERAL, STATE, AND LOCAL PER CAPITA TAX COLLECTIONS IN CALIFORNIA Current $ Current $ 1929 $ Current $ 1929 $ Local 60,11 44.23 53.61 66.78 3 8 .5 8 State 18.17 51.77 62.75 88.11 5 0 .8 9 Federal 26.14 5 8 .1 2 70.45 293.68 16 9.66 Source: Report of the Senate Interim Committee on State and Local Taxation, Part I (Sacramento; California Legislature, 1950), p. 9*. 104 ■ |sponsored by city governments which have actually decreased !their real burden on the taxpayer in the past twenty years,: F I will meet with strong opposition. I | Even within the area of local government, cities must compete with special districts, particularly school districts, and counties for the revenue producing ability ; Jof the property tax. Legal and administrative restrictions i Ilimit most of these other local governments to the property tax as their sole source of revenue. Municipal govern- I i - i :ments, with somewhat more diversified authority, can do ! | little but yield a large portion of property tax potential i i to these other units. In 1950, city governments in the [United States received only 37-7 per cent of the total i ! : property tax receipts.^ III. MUNICIPAL REVENUES AND THE BUSINESS CYCLE Operating under the numerous limitations previously discussed, city governments have evolved a rather standard- ; ized tax structure. This structure can be changed, but the limitations are such that change can take place only gradually. It will occur under the impact of a major s. Bureau of the Census, Governmental Revenues in 1950 (Governmental Finances in the United States: 1950, No. 2; Washington: Government Printing Office, 1950), p. 7. 105 crisis, i.e., the depression of the 1930fs, or as the result of a well planned, well publicized, long range pro gram. Sinee the present pattern of locally controlled sources of city revenues in the United States is not apt to change drastically, it will serve as the frame of reference for the consideration of municipal revenues and the busi ness cycle. In 1950, these sources for California cities and for cities in the United States are shown in Table II. How will the yield of this tax structure react j through the business cycle? How will this reaction affect a municipality's ability to carry out the services which ! are expected of it? 1 64 Income Elasticity of Taxes The income elasticity of a tax may be defined as the ratio of the percentage change in yield of a tax to the percentage change in income payments of the community. Expressed as an algebraic equation, the concept is as follows: AH' A V Income Elasticity = — ~ l ^In this section on the concept of income elastici ties, the author has drawn heavily on Harold M. Groves and C. Harry Kahn, "The Stability of State and Local Tax Yields, The American Economic Review. 42:87-102, March, 1952. 106 ! I TABLE II REVENUES OF CITY GOVERNMENTS BY SOURCE IN 1950 (000,000 Omitted) California United States j Property Taxes $183 $2,8l4 Sales and Gross Receipts 31 458 Licenses, Permits and Other Taxes 20 384 Service Charges and Miscellaneous Income 38 684 Source: U. S. Bureau of the Census, Governmental Revenues in 1950 (Government Finances in the United States: 1950. &o.“"2r ; Washington: Government Printing Office, 195O;, p. 9; and Annual Report of Financial Transactions of Municipalities and Counties oF California. 195(5 Tsacraraento: Office of the Stale Controller, 1951), pp. 60-91. , 107 | If income elasticity is greater than unity, the . I percentage change in tax revenues will exceed the percen- ! tage change in income; in other words, a 25 per cent change; ; in income will result in a change in the yield of more than | 25 per cent. If income elasticity is less than one, the ! reverse is true. j | Income changes in a community may he solely monetary| i I j changes, prices and wages rising while output and employ- 1 i ! 1 ment remain constant. If this is the case, the change in j prices and wages will affect the cost of operating city ; jgovernment. Should the change he in an upward direction, a j i : city must increase its revenue if it is to maintain a constant level of service. On the other hand, changes in community income may he the result of increased production and employment at a constant price level. With no change in the level of prices and wages, the city can maintain its services with out any increase in revenues. There is no need for a muni cipality to share in income increases of this nature. The actual situation is generally somewhat between these two extreme cases: income changes are the Joint product of changes in the level of prices and wages, and changes in income. From this, Groves and Kahn concluded: It follows that in general, from the point of view of maintaining a given level of tax-financed 108 government services, tax yields may be allowed to vary in the same direction as total income, but the variation should be less than in proportion to the variation in total i n c o m e . j It should be less than in proportion to the extent that ! i income changes are due to changes in employment and produc-j | tion, rather than changes in the level of prices and wages. The Income Elasticity of the Property Tax The yield of the property tax is dependent on the j tax rate, the assessed valuation, and the rate of tax j i delinquency. The tax rate is subject to annual adjustment j by the legislative body, and therefore, the yield of the j property tax is not a valid Instrument with which to meas ure the income elasticity of that tax. Instead, the tax j base, assessed values subject to taxation, must be employed. In their study, Groves and Kahn found the income elasticity of the Wisconsin general property tax assess- ments to be 0.22 for the period 1929-19^8• On the aver age, a 100 per cent increase in income during that time span would be expected to produce a 22 per cent increase in assessed valuation. A review of the Income and assessed values of Los Angeles County revealed significantly different results 65Ibid., p. 90 ^Loc. cit. ;when assessed values were related to the Income of the | previous year.Over the entire time span 1930-1950, i i I ■ assessed values demonstrated an income elasticity of j f T O j !approximately 0.50. 0 However, this average is much less 1 I j i meaningful than the results obtained when the twenty year 6q period is broken down into three shorter periods. y From 1930 until 193^> assessments were falling at I ;the rate of approximately 10 per cent for each 7*5 per cent ; i decline in income. In the next period, 193^-19^5* income j I ; I was increasing, but for every 7*5 per cent increase in j jincome, assessed valuation rose only 1.25 per cent. Thus, ; !for a period of fifteen years assessed values had lagged j ,behind income, first falling proportionately more than income and then rising proportionately less. Since 19^5> the assessed valuation of Los Angeles County has Increased 11 per cent for each 10 per cent increase in income. San Diego County has had a similar ^Income figures were available on a calendar year basis and assessed values in California are as of the first Monday in March each year, so that the actual time lag in these calculations is considerably less than a year. ^®With the time lag, this period includes incomes for the period 1929-1950, and assessed values for the period 1930-1951* The years mentioned in the material which follows are all assessment years. 69Infra. p. 110. 110 ire 1. Assessed values related to individual Incomes of previous years In Los Angeles County, 1930-1951. (ft*om California, Office of the Controller, Annual Report of the Financial Transactions of Municipalities and Counties, 1930 to 1951, and data from the California State Chamber of Commerce.) Value Subject t o Tax 111 1 T ■ " Figure 2. Assessed values related to Individual incomes of previous years in San Diego County, 19U-0-1951. (From California, Offiee of the Controller, Annual Re port of the Financial Transactions of Municipalities and Counties, 19l|. 0 to 1951, and data from the Cali fornia State Chamber of Commerce.) 112 ; jexperience as can toe seen from the diagram on page 111.^ i i j While these two cases are an insufficient toasis for j i . . 1 jgeneralization, they do indicate that the base of the |property tax can be income elastic in an era of rising j lincomes which are due largely to price and wage increases. ; ! i iThey also demonstrate that in these two counties assessed i lvalues were not able to keep pace with income changes which j jwere largely the result of changes in output and employment. | In terms of real income, these two counties suffered I i j jmost heavily when individual incomes were declining largely; ; i i • ■ {because of a decline in employment and production. During I i ! such a decline, assessed values fell more than In propor- ! i j jtion to income, and faster than the costs of providing services. In the period 1929-33# wages and salaries of Los Angeles County employees were reduced 35 per cent.^ After , ^ Income figures for San Diego County are not avail able prior to 1939* The diagrams are presented on double logarithmic paper so that a 45° line represents propor tionate percentage increases In Income and assessment. *^The tremendous increase in population and the war time construction backlog in these two counties both con tribute to the uniqueness of these figures. f^Los Angeles County is required by its character to 1 pay wages which are comparable to those paid by other gov ernments and private industry. These wages comprise 70 per cent of the county's total budget. The reduction in wages was a county-wide percentage reduction. The increase was estimated on the basis of the restoration of this cut plus the increase In wages of deputy sheriffs, stenographers, 113 reaching a low level in 1933, assessed values were Increased very slowly, but the wage level moved upward 1 even more slowly. From 1933 untli 19*14, assessments were j Increased 24 per cent, and the wage level rose only 22 per j cent. Thus, the real Income effect of the slow recovery of the tax base was mitigated by the even slower recovery of 1 the general wage level. | i The conclusion that the failure of the property tax 1 | I to support a constant level of real income for a city is most serious when employment is falling is further evidenced by the delinquency record of this tax. Delinquency has not! I been a serious problem in municipal finance for the past j decade, but it was an acute problem in the early 1930's. 1 In 1934, Los Angeles County had $7,452,974, more than 25 per cent of that year’s total tax levy, outstanding in delinquent taxes.^3 The delinquency rate appears to be particularly sensitive to Income declines, even those of minor impor tance. The income decline in 1933, about 4 per cent in Los Angeles County, resulted In an Increase in tax delinquency and clerks. Los Angeles County Board of Supervisors, Los Angeles County Budget 1929-1930. 1933-1934. and 1943-1944. 73los Angeles County, Annual Report of the Board of Supervisors, 1935, p. 203. 114 of almost 50 pez* cent. The 1947 increase of almost a ( million dollars in county tax delinquency coincided with anj actual increase in personal incomes; this increase, however,| was at a substantially lower rate than the income increases] of previous years. i The record of Los Angeles County indicates that the property tax can be a fairly stable source of real income to a government during periods of rising income, regardless of whether that rise is associated with real changes in output or is merely a monetary phenomenon. Evidence regarding the effects of a nominal fall in income are ! meager, but in the case of a fall in income associated with; i reduced employment, the property tax receipts are not suf- ] ficient to maintain a stable level of governmental real income. The Income Elasticity of the Sales Tax Groves and Kahn found the California state sales tax to have an income elasticity of 1.11 for the period 1934- 1949.^ This, of course, was a period of rising income, with the exception of a brief decline in 1938* Since most city sales taxes in the state have adopted similar statutes, exempting food and housing, there is no reason to believe ^Groves and Kahn, 0£. cit., p. 9 0. 115 I i that their income elasticity would be substantially dif- : ferent from that of the state tax.^^ • A city can expect its sales tax receipts to vary in | the same direction as income. It can also expect that j these variations will be greater than in proportion to the ! variation in total income. In an instance in which income l i variations are solely the result of price changes, the city's real income from this tax will be relatively stable, ^ varying between plus and minus 0.11. To the extent that I income changes are associated with changes in production I with constant prices, the city will receive an increased I I 1 real income when production expands, and a decreased real income when it contracts. The sales tax, then, can be expected to create no problems as long as income is rising, one of the reasons for its great popularity in the years of rising prices and income since 1946. When income is falling, the sales tax will intensify the problems of municipal finance. Other Municipal Revenue Sources The diversity of revenue sources, other than the property and sales taxes, is so great that Individual f^rhese exemptions make the sales tax less regres sive, but also make it more sensitive to variations in income. discussion is not merited. Nevertheless, it must be noted j that these other sources are the most stable portion of J the municipal revenue structure. Their stability is not j i surprising in view of the nature of their bases. | i The items most frequently subject to locally con- | trolled revenue measures are earned income, tobacco, liquor, utility services, gasoline, and admissions. Earned income is generally taxed at a flat rate so this tax does not have the cycle sensitivity of the highly progressive j 1 federal income tax. The yield of the tax will fluctuate J j directly with the cycle, and will affect the city’s real i income adversely to the extent that employment declines I i exceed those of prices. ! Tobacco, liquor, utility services, and gasoline are ! all consumption items which are income inelastic, and con sequently the yield of taxes based on these items is also inelastic.^ The real income effect is dependent on whether they are specific or ad valorem taxes. In the former case, the real revenue of the tax will fluctuate inversely with the price level, and in the latter, directly with the price level. ^Groves and Kahn found the income elasticity of the Wisconsin taxes on these items to be: alcohol for the period 1935-1949* 0.33; motor fuel for the period 1934-1949* 0.36; and cigarettes for the period 1941-1950, O.6 3. Groves and Kahn, o£. cit., p. 90. 117 The admissions tax is a much less stable source of i revenue because of the nature of its base. The tax is 1 . generally an ad valorem tax levied on admissions to places i ! i j of entertainment, and entertainment expenditures are relatively income elastic.77 i ! i III. CONCLUSIONS j i i Although the limits of taxable capacity cannot be ! 1 precisely identified in either absolute or relative terras, j the circumstances surrounding the revenue operations of > i ; city governments Indicate a very low limit of taxable , ; capacity. j I 1. Legal tax limitations are imposed on municipal governments by both their own charters and statutes and those of the state. 2. Factors which are significant in the establish ment of a low political limit of taxable capacity are prevalent in municipal government. These include: the proximity of the government operation to the taxpayers and voters; the heavy reliance on a single revenue source, the property tax in the case of city government; the annual 77Heller Committee for Social Research on Economics, Quantity and Cost Budgets for Three Income Levels (Berkeley: University of California Press, 1947), PP* 38- 39, 64-65, and 90-91. : 118 i ■ rate adjustment of this major tax; and the failure of the i tax structure to be in accord with the politically accep table ability to pay principle. 3. The type of taxes which city governments are t j capable of administering is limited by the comparatively !narrow physical jurisdiction of municipalities and the mobility of many tax bases. 4. The possibility of intercity movement forces one :city government to adopt a tax and expenditure policy com- ;parable to that of its neighbors, so that drastic change i 1 requires a degree of common action by independent legisla- ! ■tores which is difficult to achieve. 5. Taxes of the federal and state governments have been increased so much that any tax increase, even when sponsored by a city which has contributed little to the over-all tax burden, is met with serious opposition. The tax structure which municipal governments have evolved within the narrow limits of their taxable capacity is not a stable source of either real or nominal income. 1. The property tax, the source of 65 per cent of locally controlled revenue, does have a base which is rela tively income inelastic. Its limited elasticity and the variations in the delinquency rate combine to produce a real income which is adequate during periods of rising 119 i individual incomes, but which falls drastically following ai severe decline in individual incomes. I 2. The sales tax, a revenue source of growing j importance to municipal governments, has an Income elasti- j i city slightly in excess of unity. It will provide a falrlyi stable real income only in so far as fluctuations in indi vidual incomes are attributable to price changes and not changes in employment. 3. The other miscellaneous sources of municipal revenue, providing almost 25 per cent of locally controlled; | revenues, are the most stable sources of income now avail- ! I able to city governments. j The net effect of the limitations and the tax struc-j ture which municipal governments have evolved is that these; Jurisdictions have assured themselves of relatively stable real incomes as long as individual incomes are constant or rising. If Individual incomes should decline, the delin quency rate of the property tax and the income elasticity i of the sales tax will both contribute to the financial embarrassment of city governments. This embarrassment will be particularly acute when the decline in employment is large relative to the decline in prices. CHAPTER IV ALTERNATIVE FINANCING OF CAPITAL OUTLAYS Municipal finance authorities are in general agree- j I |ment that current expenditures should be financed solely ;from current revenues; they are equally in accord that the same absolute rule need not be applied to the financing of ; !capital outlays.1 Ordinary or current expense is a recur- j i rent expenditure; funds must be available year after year 1 for a substantially similar outlay.2 The only Justifiable i ■source of funds for this type of expenditure is a recurrent! one, annual revenue. In contrast, capital outlays are non recurrent expenditures. A capital outlay made this year 1International City Managers' Association, Municipal Finance Administration (fourth edition; Chicago: Inter national City Managers' Association, 19^9), p. 316. 2Cognlzance of this fact caused the Mayor of the City of Los Angeles to take an action of questionable legality in the Spring of 1953* He votoed a proposed sal ary increase for municipal employees, even though the City has a Charter obligation to pay the going wage in the com munity and the Annual Wage and Salary Survey indicated that this obligation was not being met. His reason for the veto was that although funds could be drawn from reserves and surplus to pay the increase in 1953“5^, the Council had not provided any additional current revenues from which the higher salaries and wages could be paid in subsequent years. 121 will not have to be repeated next; the item purchased this year will serve the municipality for a number of years. It I is in recognition of the fact that capital outlays are in J the nature of investments that has led to general agreement that current revenues are only one of the acceptable means i j of financing them. Proper use of some or all of the alternative methods of financing is an important part of the capital budgeting jprocess. It is through their use that the capital outlay t ! program can be partially freed from the fluctuations in current revenues which are the product of the semi-rigid tax structure of most municipal governments. This chapter is devoted to a brief review of the most frequently sug- i gested alternatives, namely: pay-as-you-go; debt in the form of general obligation bonds; debt in the form of revenue, or special assessment bonds; and the use of lease- purchase agreements. I. FINANCING ON A PAY-AS-YOU-GO BASIS The distinctive feature of a pay-as-you-go program is that past or current revenues, rather than future reve nues, are employed to finance all capital outlays. Follow ing the financial crisis in which many communities found themselves in the early 1930's because of their large debt burdens, there developed a strong movement to avoid repe tition of this experience through the adoption of pay-as- I you-go programs. The situation in Milwaukee and other i ■ a ! solvent communities was given wide publicity at this time.-’j Again, following the financial gains which most municipali-i ties were able to effect during World War II, the pay-as- j 2 i you-go philosophy was widely propounded. Conceivably, a pay-as-you-go program might be ! achieved in three ways: j 1. Careful scheduling of all capital outlays to the; end that this type of expenditure calls for a uniform annual appropriation within the limits of current revenues.; 2. A tax rate which fluctuates sufficiently to produce current revenues as needed for sporadic capital expenditures. 3. A uniform tax rate integrated with planned, but irregular, capital outlays by means of reserve funds. The first of these alternatives requires a degree of political and administrative sophistication that few ^Paula Lynagh, "The Surplus that Made Milwaukee Famous," National Municipal Review. 21:152-56, March, 1932. A " Roger S. Baldwin, "Financing Municipal Public Works from Revenue Funds," Municipal Finance. 20:51-55> August, 1947. j communities have achieved, and furthermore, it would be i feasible only in a very large jurisdiction. The second i i alternative, a fluctuating tax rate, is legally impossible I | in many communities, and politically impractical in most | others.^ As a result, the only realistic approach to a I pay-as-you-go program is one which combines a carefully scheduling of capital expenditures with the use of capital Improvement reserves. I i Advocacy of pay-as-you-go is generally based on ; three premises: minimization of cost; limitation on the j self-indulgence of both legislators and the public; and a safeguard against future financial crisis. The first of ; these three premises is questionable. A pay-as-you-go program will eliminate the necessity for an annual appro priation for interest charges, and will in that way mini mize the cost of any specific improvement. However, Blucher noted that in many cases capital expenditures were postponed because all revenue was consumed in excessive current costs; current costs were excessive because of the inadequate and antiquated capital facilities being 5 -Tluctnations per se are not illegal, although they are limited under some state and charter regulations. However, the frequently encountered property tax rate limitations would prohibit the occasional peak rates that this alternative would necessitate. 124; I g 1 ! employed. When this is the case, pay-as-you-go minimizes i I ' ; the cost of one budgetary item, interest, while increasing j ; the cost of others. The total budget must be carefully i analyzed before it can be concluded that pay-as-you-go is the most economical approach to a city’s financial respon- I : : sibillties. i | Although the cost consideration is an important one, ! ; it is the latter two premises which are most significant : in the development of a workable capital budget. Ideally, | i I it might be hoped that the public and its legislators j i | would view all proposed public expenditures with equal | ; |self-restraint. Such may be the case in isolated t l ‘ ; instances, but the more general situation is: Appropria tions, which are not to be met by those authorizing them, receive much less consideration than those which must be met by those who are responsible."^ Customarily, capital expenditures have not been met by those authorizing them, i and have not received the careful attention inherent in an , effective capital budgeting procedure. Since a pay-as-you- g i Walter H. Blucher, "Fiscal Programming,1 1 An Approach to Urban Planning (Gerald Breese and Dorothy E. Whitman, editorsj Princeton, New Jersey: Princeton Univer sity Press, 1953), P* 101. ^Sanders Shanks, Jr., "The Present State of Munici pal Credit," National Municipal Review, 23:94, February, 1934. 125: : i j go system would necessitate an annual appropriation for I capital outlay, whether or not an annual expenditure was made, capital expenditures would be kept in the forefront Q of the legislative mind. In fact, the legislative body j would have to have an up-to-date capital budget in order to; i determine the amount of the annual appropriation. j 1 i | As noted, much of the strength of the pay-as-you-go movement has resulted from the financial crises experienced iby cities in the past. Certainly, limiting capital outlay i i | to what can be financed from past and current revenues will minimize the chances of repeating similar unfortunate experiences. Furthermore, it will protect the city's ! j i borrowing capacity so that in periods of financial strain, j the city will be free to select from a variety of alterna tive methods of financing. ! While pay-as-you-go does reserve the city's ability to borrow and so contribute to financial flexibility, there are two dangers inherent in this approach. First, the idea of pay-as-you-go may be oversold to the public and the legislators, so that capital expenditures are , approved not on a basis of need, but wholly on a basis of ; Q In case no capital expenditures were included in the budget, the appropriation would be made to a cash i reserve fund for this purpose. 126 ' available revenue from present sources. If this is done, ! municipal capital expenditures will be made in their accus-i r ! I tomed cyclical pattern. ! ! The second danger is apt to arise with the introduc-j ! i ; j j tion of reserve funds. Some method of safeguarding these : I ( I funds must be provided. i Past experience has created the suspicion that public j officials as a class are not trustworthy custodians; j j that the very volume of necessary reserves consti- ; tutes an undue temptation to intrigue and dishonesty, j On the other hand, officials know that the presence | of large reserves in the face of pressing financial needs, constitutes a temptation to dissipate the reserves which can hardly be resisted, a temptation ! to use them to finance some desirable improvements and so to tie up the fund that they are not available i for the purposes intended when most needed.9 t i ; In order to avoid the misapplication of reserves, they must; be carefully guarded; their application must be spelled out in rather inflexible terms. Thus, a city making extensive use of reserve funds will frequently find itself pledged to a fixed program in a dynamic world. Sundelson concluded: In general, asset reserves decrease the flexibility of fiscal systems, pledge the State to a particular course of action, and offer few advantages not in herent in straight borrowing.10 ^George M. Link, "Report of Committee on Long Terra Financial Planning," Municipal Finance. 13:40, August, 1940. 1C5J. Wilner Sundelson, "Fiscal Aspects of Planned Public Works," Appendix, J. M. Clark, Economics of Planning Public Works (Washington: Government Printing OflXce, 1940J, p. 1 8 5. 127; In the years since both of the above statements i were made, the general public has shown an increased will- ! I i ingness to trust its administrators and its elected offi- j cials, so that more flexible reserve funds are being intro-j i duced. However, the passage of time has not made legisla tors any more willing to levy, or citizens any more willing to pay, taxes for indefinite future improvements; until this willingness develops, the use of reserve funds, a t [necessary part of the pay-as-you-go capital expenditure I programs, has a limited future. i I ! II. FINANCING THROUGH THE USE OF DEBT j Although the ultimate solution of a municipality’s financial problems must be found in a balanced revenue and expenditure program, most cities have found it necessary to temporize through the use of borrowed funds. In fact, borrowing is referred to by Chatters and Hillhouse as the 1 1 1 "traditional” means of financing capital improvements. In 1952, two-thirds of municipal capital outlays were fi nanced by the sale of long terra bonds.^ Undoubtedly, this 11 - Carl H. Chatters and Albert M. Hillhouse, Local Government Debt Administration (New York: Prentice-Hali, Inc., 1$39), P. 3T5T 12 This figure is based on Census Bureau data which 128 ' will continue to be the dominant method of payment for ! ! ! municipal Improvements.13 I I i The explanation of the predominance of borrowing as ! I i a means of acquiring capital improvements is simply that j i the citizens of a community feel the need for immediate ' acquisition of an improvement but lack the immediate means | | of payment. However, from an abstract or theoretical point ! jof view, borrowing to pay for capital improvements is (defended on the basis of the "pay-as-you-benefit” theory.1* * i As an application of this idea, consider the financing of a | sewage disposal plant which will serve the community for ! ! ! twenty or thirty years; this improvement should be paid for| I by those who benefit from it, not by those who lived in the I city prior to the plant’s construction. If construction funds for this project are borrowed, repayment will includes all cities which had a 1950 population in excess of 25,000. In terms of expenditures, these cities are responsible for approximately four-fifths of the total, annual municipal expenditures. Bureau of the Census, ;Compendium of City Government Finances in 1952 (Washington: Government Printing Office, 1953)* p. 8. 1^From a questionnaire addressed to 334 cities, the Municipal Finance Officers' Association learned that these cities expect to finance more than one-half of their 1954- 1958 public improvements from long term bonds. Hews item in Public Management. 3 6: 6 1, March, 1954• 1^Austin F. Macdonald, American City Government and Administration (fourth edition; New York: Thomas Y. Crowell Company, 1948j, p. 384. j 129 iautomatically become the responsibility of the future iinhabitants of the community. ! : I I Provoking as such an idea may be, pragmatic eonsi- | t i |derations have been much more significant than theoretical j ;ones in the actual development of municipal debt. As A. C.I i ; Pigou observed, decisions regarding government debt are jdetermined, Hby what is technically convenient and politi- j cally feasible.1 , 1 In many instances, a city has no alter- j native: continuation of an essential service necessitates j r i ja large capital outlay and current revenues are inadequate j 1 f i ' j to finance such an outlay. ° j ; I III. GENERAL OBLIGATION BOND FINANCING j The most common form of long term security issued by municipal governments is the general obligation bond; at the end of 1952, 83 per cent of the outstanding long term debt of the nation’s 48l largest cities was general - * ■ 5 A. C. Pigou, A Study of Public Finance (London: Macmillan and Company, Ltd., 1 W $ 9 ) f P» 38. ■^In the spring of 1955* the City of Los Angeles is , in exactly this position. A sixty million dollar bond issue will be submitted to the voters in April; the pro ceeds of this issue will be utilized to maintain and expand the city’s sewage system to meet public health standards. 130 ; obligation debt.-*-? ; General obligation debt is any debt which is secured by the "full faith and credit" of the issuing jurisdiction. i Such debt may be entered into for any legal purpose, and may be repaid from any revenue source not otherwise ear marked. Because of the unqualified pledge of security, bonds of this type are normally the least costly form of i f t municipal borrowing.xo Limitations on the Use of General Obligation Bonds In the past, legislators, electors, administrators, |and investors have not always recognized that there are limitations on a city's ability to service its debt even though that debt is secured by "full faith and credit." As a result, the instances during the nation's history in which municipalities have been forced to default are numer ous. In an effort to avoid defaults, a great variety of legal limitations have been imposed. These legal limits, coupled with economic and political limits, form the frame work within which a municipality is free to consider addi tional debt as a means of financing its capital outlay ^Bureau the Census, Compendium of City Govern ment Finances in 1952. op. oit>, p. 115. l8In case the city has destroyed its credit rating through a prior default, bonds pledging the revenues of a municipal utility may be more economical. jprogram. i 1 < ■ : Legal debt limitations. — Although legal limita tions on the amount and processes of municipal borrowing | have generally failed in their major purpose of eliminatingj 1 9 ■municipal defaults, these restrictions remain in force. . ! ; They are found in state constitutions, state statutes, and : I !local charters.20 The specific restrictions vary from j i ' jurisdiction to jurisdiction, but the basic pattern is J ' common to all; it includes the following provisions: j 1 . Limitations are applicable only to general i i obligation debt. * 2. Limitations are expressed as a percentage of the assessed value of the jurisdiction in the pre vious year, or as a percentage of the average assessed value for several preceding years. 3. Limitations are applicable to a single jurisdiction without reference to overlapping debt. 4. Additional debt requires the support of at least a majority of the voters voting in a popular election.21 California is typical. Article IX of the State Constitution provides that no city shall incur any To the best of the author’s knowledge, no city has a debt limitation imposed only by its own legislative body in the manner of the federal government’s debt limitation. ^The Tax Research Foundation, Tax Systems (eighth edition; Chicago: Commerce Clearing House, Inc., 1940), p. 300 ff. This information has been omitted from later editions of this publication. 132; Indebtedness for any purpose without first securing a two- : i ' i thirds majority at a popular election, and providing annual; i I j i ; tax revenues sufficient to retire the principal in not morel ! 22 i than forty years. California statutes further provide | that fifty and sixth class eities shall not incur debts for; ; public improvements in excess of 15 per cent of the i assessed value of both real and personal property in the city.23 Charter cities are not subject to state imposed jdebt ceilings, and some of these charter cities have no | I pli | : statutory debt ceiling. However, twenty-^five of the j ! charter cities have specific charter limits, varying from I 3 to 25 per cent of assessed valuation; the most common 'charter limit is also 15 per cent.2^ j Experience has demonstrated that these statutory limitations have not been effective. u As noted, the most 22Constitution of California. Article IX, Sec. 18. 2^Deering, California Codes. 1951> Sec. 43605. 2^Morgan v City of Los Angeles. 182 Cal. 301 (1920) as cited in Report of tBe Senate Interim Committee on State and Local Taxation. Part~III ( Sacramento: California Legislature, 1947), p. 3 3 3. 25Ibid.. p. 334. 26 Leroy A. Shattuck, Municipal Indebtedness (The Johns Hopkins University Studies in Historical and Political Science, Vol. 58, No. 2; Baltimore: Johns Hopkins Univer sity, 1940), p. 135. 133 j common limitation applies only to general obligation debt, i i ;while revenue bond obligations and lease purchase agreements |can be entered into without reference to any statutory |limits. Furthermore, there is no legal restriction on overlapping debt so that existing limits are easily circum vented by the formation of special districts which can incur the desired debt in their own name. In view of these 1 ! I I obvious loopholes, it is difficult to dispute Catherine ! iClark1s rather cynical conclusion: Debt and tax limits are among the most success ful methods devised by state legislators to make , municipal finance administration a stimulating j occupation. Whether or not the Solons had this end in mind, such limits have been the means of developing ingenuity and resourcefulness in many a city official— and his attorney. The limita tions to which no one has been able to find a valid exception are rare.2® Political debt limitations. — The fact that a bond issue must be authorized by at least a majority of the voters in a popular election places great significance on the political limits of debt capacity. However, like the ^Although the courts have ruled that a lease pur chase agreement does not constitute a debt, it is clearly a means of escaping statutory debt ceilings. Supra, p. 142. 2®Catherine Clark, "Debt and Tax Limits Stimulate Municipal Fiscal Ingenuity," The American City, 66:132, February, 1951• 13^ political limits of taxable capacity, the political limits of debt capacity are not subject to precise definition. Any generalization is dangerous. Frank Bane, looking back at the crisis which occurred in municipal finance in the early 1930's, noted: It is interesting, although rather futile, to recall that many, in some cases most, of the people who now complain most bitterly about debts are the same Individuals who were most active in favoring the 'bond issues.'29 One of the chief reasons for the reversal of opin ion that Bane witnesses was that little financial thought is represented in a bond election. Some voters have such a strong antipathy for debt, public or private, that they will vote against all bond issues, preferring to sacrifice desired services rather than aecept any additional debt. At the other extreme are those who disregard financial considerations entirely, and cast their ballots solely on the basis of their personal feelings regarding the project for which the proceeds of the issue are to be used. The resulting political limits of debt are then dependent upon the balance in the community between the anti-debt forces and the popularity of the project to be financed. These forces will fluctuate over time and vary from project to ^Frank Bane, "Economy— Debts and the Dole," The Comptroller. 5:28, August, 1932. (project. | i ! ! ! Economic debt limitations. — The economic limits of ; j a municipality’s bonding capacity are dependent upon the j i jlong run margin between the city’s revenue producing j (ability and its operating expenses.3° Over the business | jcycle, this margin will fluctuate; the carrying costs of municipal debt will not.^1 Carrying costs are long run, fixed costs, and a city’s economic capacity to carry debt i |is limited by its ability to meet these fixed costs under the-most adverse circumstances. 5 i ’ j } In the special case of a self-liquidating project, I I i I , (such as a municipal parking lot, the economic debt capacity; t ' i i is clearly dependent on the expected income from that pro- 1 ject and not the Income of the city as a whole. This same self-liquidating concept might be applied to a much wider range of projects which have a less direct income effect. For example, the Improved health, social outlook and civic pride of the citizens living in a city with adequate 3®The city’s revenue producing capacity In this con text will be somewhat larger than the previously discussed taxable capacity. The reason for this difference is that the tax rate necessary to service outstanding Indebtedness is exempt from the statutory rate limitation generally imposed on the property tax. ^The term carrying costs includes both annual inter est charges and the annual contribution toward the repay ment of principal called for in the bond covenants. 136 recreational facilities could be expected to increase the income of that city. If debt is necessary to provide the recreational facilities, it can be regarded as self- liquidating debt, and so acceptable even though beyond the i city's present economic capacity. ; This broad interpretation of self-liquidation has j i ! not been generally acceptable in the case of municipal ! activities and debt. In part, this is due to the fact that: the motives behind most municipal expenditures are basically i non-economic. More importantly, however, is the fact that ! the Income benefits from expenditures such as those for recreation are too remote; in fact, many of the benefits may be completely lost to the investing community because of the mobility of the population. Chatters and Hillhouse have suggested that estimates of economic ability to carry debt be based on: population trends; wealth, income, and industrial character of the community; the past record of the tax delinquencies cover ing at least one complete business cycle; and the economic j prospects of the region in which the city is located. However, the joint authors point out that theirs is not a comprehensive list of the factors worthy of consideration, and they readily admit that the relative Importance to be 32Chatters and Hillhouse, ojd. cit.. p. 391 ff. 1 137 assigned to each factor is a pure value judgment. ! | A more precise opinion regarding a city's debt j :carrying capacity is to be found in the financial markets I ! ! in which the buyers of municipal bonds function. The prices jwhich these buyers offer are to some extent a reflection of! j their opinion of the risk which they accept if they pur chase a particular bond. Unfortunately for our present purposes, this single price is the result of a large complex i of forces and there is no method by which the contribution j ! i !of one force, the buyer's opinion of the city13 financial \ jcondition, can be identified. i The one frequently expressed limit, developed from j i : ja review of municipal bond defaults during the 1930's, is j } that the carrying costs of debt should not exceed 25 per cent of the current budget.^ Since this rule was origin ally promulgated more than twenty years ago, municipal revenue structures have been altered significantly, and the i publie has become accustomed to a different level of muni- i i cipal services. These changes are of such magnitude that conclusions based on the experiences which predate them are of doubtful validity. Although no exhaustive effort has been made to , 3^Carl jj# chatters, Municipal Debt Defaults (Chicago: Public Administration Service, 1933}» p. 23. i 138 ! determine a precise economic limit to a city debt carrying i ! I I capacity, enough evidence has been Introduced to demonstrate that the limit is an extremely nebulous one. Neither the j i statistician nor the financial expert can present a suffi- j ! ciently conclusive case to dampen the ardor of a group ! I i iwhich seeks to expand local indebtedness in the interests j | of a special project or activity. Since the economic ! limits lack clarity and the legal limits lack comprehen- I : siveness, the vacillating political limits of local indebt- | edness are all important. I ' ; 1 i I IV. LIMITED OBLIGATION BOND FINANCING > j | As noted earlier, legal limitations on municipal indebtedness are almost universally restricted to general obligation debt; this fact has been important In the devel opment of limited obligation indebtedness. By using some security other than the "full faith and credit" of the city, a jurisdiction escapes most of the statutory limita tions and preserves its legal debt margin for future use. Most commonly, this escape has taken the form of revenue bonds or special assessment bonds. The Use of Revenue Bonds Financing by revenue bonds has been Increasingly f ; 139 common In the postwar years.3^ A revenue bond is one ; : secured solely by the revenues from a specific project. j i j ;The California statutes dealing with revenue bonds state: j j i I The principle of and Interest on the bonds and j any premiums upon the redemption of any thereof are | ! not a debt of the local agency, nor a legal or 1 equitable pledge, charge, lien, or encumbrance, j upon any of Its property, or upon any of its income, i receipts, or revenues except the revenues of the | enterprise and other funds which may be legally ' applied, pledged, or otherwise made available to j their payment.35 With this limited security, revenue bonds have a j higher carrying cost than do general obligation bonds. I i ;Offsetting this cost disadvantage are two important consi- ; i derations: first, in almost all Jurisdictions revenue bonds are excluded from statutory debt limitations; and i second, the authorization of revenue bonds rarely requires more than a simple majority of those voting in an elec tion.^ Because of the above two considerations, revenue bonds can be used to enhance the flexibility of a municipal capital expenditures program. With the possibility of 3^ln 1950, there was an estimated $2.1 billion of local government indebtedness in the form of revenue bonds.i Census Bureau, Governmental Revenue in 1950 (Washington: Government Printing Office, 1951),P* 7« 35california, Government Code (as amended May 2, 1953), Section 54431. 3^Lee and Scott, o£. clt.. p. 12. ; 140 ' financing all utility outlays by the sale of revenue bonds ! i i exempt from statutory debt limits, these limits become much; I I I less confining. Politically, an issue of revenue bonds ; I I jnecessitates only a simple majority of voter approval for j ' authorization, and there is generally less popular opposi- j ;tion to revenue bonds. A revenue bond will not increase |taxes; the fact that it may increase service charges for j jnecessary municipal services is a much weaker plank on ! ! ! !which to build popular opposition to a bond issue. I i Obviously, the field of application of revenue bonds i I i ,; j ,1s limited. In some cases, for example in California, this !area of application is legally defined.*5' In all cases, ;the area is limited by the marketability of the bonds. J j j Within its limited field, however, the revenue bond is an effective financial device broadening the financial hori zons of most municipalities. The Use of Special Assessment Bonds If a capital improvement benefits a specific area rather than the jurisdiction as a whole, a special assess ment district may be formed to finance the improvement. Any debt incurred by this district is a liability of the ^Under the 1953 amendments to the Revenue Bond Law, revenue bonds may be used to finance only water, sewage, garbage, and public parking facilities. California, Gov ernment Code (as amended May 2, 1953)# Section 54300. 141 j district and is secured by the property of the district. ! In other words, special assessment debt is a type of over- ! lapping debt rather than a debt of the city itself. Such I |debt is of significance to a city's capital outlay program |because special assessment districts frequently assume I responsibilities, I.e., paving streets, which the city jwould otherwise have to assume, and because the security i j for the debt, real property is the city's major tax base. j ! i It is difficult to generalize regarding special t I i i ;assessment districts because of the tremendous variety of i i I controlling statutes affecting these districts. In any ! ’ ; case, however, their use is limited. A special assessment i i I idistrict can be used only if the benefits of the proposed improvement can be related to a specific area, and only if the majority of the property holders in the area desire it. In terms of a city-wide capital improvement program, the city can encourage special assessment financing, but it can not order it. V. LEASE-PURCHASE FINANCING I Since the legal status of governmental lease-purchase ^Refusal to appropriate general fund monies for improvements with restricted benefits is a rather forceful legislative device for encouraging special assessment financing. 142 ' agreements has been clarified, this type of financial ; arrangement for the acquisition of capital assets has ; ! "30 ' received widespread consideration. ^ While there are many j ! I | variations in the details of these agreements, the basic I elements of a lease-purchase contract are: the leaser, in exchange for a twenty or thirty year lease, agrees to con- j j struct a facility in accordance with the leasee*s specif1- | I ] | cations; the leasee agrees to regular, usually annual, j payments of a specified amount; and at the termination of j the lease, the title to the facility is transferred to the ! 4o leasee without additional compensation. i ! By entering into a lease-purchase agreement, the legislative body can acquire a capital improvement without j submitting the issue to the electorate in a bond election, without adding to the city’s outstanding debt, and without 3%he two key cases in which this legal status was clarified were: Wallnske v. Detroit-Wayne County Joint Building Authority, 325 Mich. 5b2, 39 N.W. 2d 73 (1949); and Dean v. Kuchel, 35 Cal. 2 d 444, 218 P. 2d 521 (1950). 40 The agreement must be carefully drawn so that the courts will not declare it to be an installment-purchase contract. In case the court does so interpret it, the agreement would be void since it would mean that the pre sent legislative body had committed the future revenues of the Jurisdiction beyond its power to do so. The distinc tion between these two types of agreements apparently hinges on three factors: the agreement must be in reality a one year contract with annual renewal, not a long term contract; the leasee must have frequent options to buy the facility; and the annual payments must approximate annual rental rather than purchase installments. 1^3 j an Immediate large cash outlay. In other words, the use \ of lease-purchase agreements is wholly at the discretion of I the legislative hody. Thus, lease purchase agreements are free of the statutory and administrative limitations which curtail the j 1 use of both taxation and borrowing. In the past few years, ! I this type of arrangement has been utilized in the purchase !of a great variety of municipal improvements ranging from I Ai automotive equipment to city halls. Locally, the County !of Los Angeles is negotiating a lease-purchase agreement j for the construction of a three million dollar administra- i !tlon building. i Because of their novelty, there is no evidence regarding the stringency of possible economic or political limitations. Prom the latter point of view, elected offi cials may be reluctant to adopt a financial device which i clearly circumvents existing statutory limitations; such action might be regarded as overly despotic by the citi zenry. In economic terms, there is no evidence regarding It was once thought that lease-purchase agreements would have a very limited scope because they would be adaptable only for assets which were a part of a revenue producing facility. Detroit's construction of a new city hall, basically financed by a lease-purchase agreement, destroyed any such illusions. 144 i the marketability of this type of investment in other than i ! a favorable money market. Also, although a lease-purchase i ! agreement is a series of annual leases rather than a debt, i j it does obligate the leasee to fixed annual payments. This ; obligation stems from the fact that after the first few ! years, the leasee has a considerable investment in the I facility being leased, and the rather disastrous effect ;that a failure to renew might have on the city's general ,credit rating. f Despite the relatively untried nature of governmen tal lease-purchase agreements, they do represent an alter- !native means of financing capital improvements, and thereby augment the flexibility of the receipts side of a municipal 4 2 capital budget. VI. CONCLUSIONS If the municipal accounting period could be in creased from the customary year to a decade or longer, capital outlay would be merely another charge against 4 2 The City Manager of a municipality currently using lease-purchase to acquire new fire equipment declared that he felt that the device should be used only as a last resort. However, he also stated that he would not hesitate to recommend it to a city council when essential services were being curtailed because of the electorate's refusal to approve necessary bond issues. 145 current Income. In a large jurisdiction with a great num ber of non-recurrent expenditures, careful planning and scheduling could spread the individual capital outlays evenly over the years so that In effect they would be a relatively uniform annual charge against current income. However, this method of budgeting capital outlays requires a degree of planning and adherence to plans that is rarely politically, administratively, and legally feasible. In the more general case, ways and means must be found by which an annual Income and accounting period can be integrated with large, non-recurrent investments. The ways and means consist either of the use of reserve funds or borrowing. The former method, because of political and legal considerations, has only limited applicability. By far the most common method of integration is through the incurrence of debt; the sale of debt makes funds immediately available, and the debt can be repaid gradually from small annual charges against current income. ,General obligation debt is the most economical, but this type of debt has been surrounded by a host of legal and political limitationsi Under these restrictions, general obligation debt can further the flexibility of a capital outlay program only if it is assumed that the jurisdiction has unused legal debt capacity and that the electorate is 146 heavily in favor of the projects proposed for bond financ ing. In case either of the above conditions does not prevail, flexibility can still be achieved through the use of limited obligation debt. For many years, revenue bonds and special assessment bonds have been used; more recently lease-purchase agreements have been introduced. Although each of these alternatives is subject to restricted usage, their employment where applicable will augment over-all flexibility. Careful study of the alternatives available in each municipality will reveal that even though all expenditures must be covered by revenue in the long run, there are few municipalities which do not have considerable freedom of action in the short run. CHAPTER V BUDGETING CAPITAL EXPENDITURES Viewed in the perspective of the nation's economy, j | | ; municipal capital outlays are relatively small. In 1 9 5 2 , j ; i i capital outlay of cities amounted to an estimated total of | $1,866,000,000;1 in the same year, new private capital con- struction was reported in the amount of $21,812,000,0 0 0. | : Thus, to offset a decrease of less than 9 per cent in pri- ! vate construction, a 100 per cent increase in municipal capital outlays would be required. j Obviously, municipal public works, even assuming ideal anti-cyclical management, are no panacea for the nation's economic fluctuations. This is not to say that municipal public works are unimportant except to the local community; they are a significant portion of the nation's most cyclical sensitive Industry. At the end of 1951# •^No exact figures for municipal expenditure are available. The Bureau of the Census reports on the 48l largest cities which receive 8 2 .1 per cent of total muni cipal revenues. Bureau of the Census, Compendium of City Finances in 1 9 5 2 (Washington: Government Printing Office, 1953), P. 2 . O Department of Commerce, Survey of Current Business 3^: 2-19, February, 1951 *. 148 i ! I j there was available a reserve shelf of non-federal public | works consisting of over 5,000 projects with an estimated ! I o ! i cost of $3*6 billion. In any case, as Lindahl observed: . j "The least that can be demanded of public policy is that i | | it should not aggravate fluctuations, but should remain j i 4 I neutral." I ■ j In the past, the public policy of municipalities has j not remained neutral; the capital expenditures of these ! I i Jurisdictions have reinforced the cyclical movement of j 1 private investment. The annual capital outlays of 145 { I • j cities from 1926 to 1937 resulted in the cyclical pattern ! ■ I shown in Table III. Even this record is not a true picture; I : 1 of municipal policy during the years covered, since it ! includes Public Works Administration grants. Had these grants been excluded, the outlays for the last four years e : shown would have been somewhat lower.-' ~TJ. S. Housing and Home Finance Agency, 5th Annual Report (Washington: Government Printing Office. 1951). P. 101. 4 Erik Lindahl, Studies in the Theory of Money and Capital (New York: Farrar and Rinehart, Inc., 1939), p. 35° ♦ 5 Because of the diversity of methods by which sub ventions are recorded in municipal records, no data showing solely municipal expenditures are available. Wolkind's figures include all Public Works Administration activities regardless of whether the funds came from the local or national government, but they exclude all activities of the TABLE III MUNICIPAL CAPITAL OUTLAYS OP 145 CITIES: 1926-1937 Year Capital Outlay Per Capita (in millions) Capital Outlay 1926 $8 9 0 .5 $24.66 1927 1,0 2 0 .0 27.75 1928 989.9 26.36 1929 936.1 24.47 1930 1,071.5 27.52 1931 911.0 23.29 1932 576.5 14.68 1933 2 8 1 .5 7.14 1934 331*4 8 .3 8 1935 386.5 9.73 1936 479.8 12.04 1937 586.4 14.66 Source: Harold Wolkind, Fluctuations in Capital Outlays of Municipalities (Bureau of Foreign and Domestic Commerce, Economic Series, No. 10. Washington: Government Printing Office, 1941), p. 8. 150 I. PHYSICAL NEEDS AND VARIABLE TIMING OF MUNICIPAL CAPITAL OUTLAYS j Much has been written concerning the political, I administrative, and financial obstacles encountered in the pursuit of a national, municipal public works program. The more basic question of the municipality’s physical need 1for public works has been largely neglected. In reviewing jthe question of need, municipal public works can most mean ingfully be discussed under three headings: utilities, streets and highways, and all other outlays. 1 Capital Outlays for Utilities The Bureau of the Census includes in the classifica tion of utilities any "municipally owned and operated water supply, electric light and power, gas supply, or Works Project Administration. Harold Wolkind, Fluctuations in Capital Outlays of Municipalities (Bureau of Foreign and Domestic Commerce, Economic Series, No. 10; Washington: Government Printing Office, 1941), p. 9. ^For example see: W. S. Parker, "Policies for the Control of Public Works,1 1 The American City, 68:10:94-95; Paul J. Strayer, "Public Expenditure Policy," American Economic Review, 39:383-404, March, 1949; J* Wilner Sundelson” "Fiscal Aspects of Planning Public Works," Appendix to J. M. Clark, Economics of Planning Public Works (Washington: Government Printing Office, 1935). PP. 169-94. ! transit system.”^ In 1952, utility capital outlay accounted for almost one-third of the total municipal 8 capital expenditures. j ! The services rendered by public utilities are essen-= ; i 1 tial in the urban community of today; a new subdivision is ; of little value unless prospective buyers are assured of j ; receiving utility services. New private construction j ; ! j creates a need for additional utility services, and this ! need cannot be ignored without threatening the health and ■ safety of the whole community. Thus, at least a portion of I , public utility construction is complementary to private 1 construction.^ To the extent that this complementarity is ! present, utility capital outlay will be controlled by pri- , vate construction regardless of the wishes of public offi cials. The many extraneous circumstances make it impossible to determine the exact degree of complementarity between ^Bureau of the Census, Compendium of City Finances in 1952 (Washington: Government Printing Office. 1958). p. 156. g The total capital outlay of the 48l cities reported by the Bureau of the Census was $1,493*000,000, of which $457*950,000 was utility outlay. Ibid., pp. 8-10. o * James A. Maxwell, Federal Grants and the Business Cycle (New York: National Bureau of Economic Research, Inc.. m p. 8 5. 152 i I private and utility construction, tut the data presented ! graphically on the following page indicate that this rela- j | tionshlp is not as close as might be expected. 10 The ratio ! |of water supply construction to residential construction |has varied from more than 11 per cent in 1933 to about 3 !per cent in the mid-twenties, and to less than 3 per cent XI |in 1950. It is not essential for the present purpose |that these variations be explained; the mere fact that the i ;outlay for water supply, one of the basic utility services, i 'has had such a variable record is sufficient to demonstrate ;that much of the capital outlay for utilities can be con trolled independently of the residential building cycle. I It must be noted that in the two building cycles in the years from 1920 to 1950, water supply construction has shown a substantial time lag. In the first cycle, private building reached a peak in 1925-26 and fell rapidly after 1928; water supply construction crested in 1930 and 10Water supply data are given as illustrative of utility needs because reliable data were available and because municipal ownership is most common in this field. In 1952, capital outlay for water supply represented sixty per cent of total municipal utility outlays. Bureau of the Census, o£. cit.. p. 7 9. 11Data given include public and private construction for both water supply and housing. 153 Re sl< lent li 5T6oi is t sgjfefeM!Si.^3dajfe!iag : : : ■ ©d-iisii^loiae* ■ ! = f - Sawaj JfriSti iptw*; r-Q ruction In B ilious feg[SjjO]L-iELjtmg&gjMitg . : _ OBJ i - t Tjae- stopr-i ,*r ■"Moiritnetd* w- 43ft x * 2 $ Ilgixri 3, I -' " : . : i : Scasfetnettoj •frSc iB Ha Aiiia ;KMh i ytnlu * ttflit^lpe a; 3 a- w i . : .Oil! ed[ r f c ~ i uppl* mtr jtb to fei , ! € j + ' I 154 I remained above the average of the 1920's until 1932.12 | The postwar cycle is as yet incomplete, but the fact that the 1950 ratio of water construction to residential con struction had fallen to 2.3 per cent is indicative of a i I similar lag. i I Capital Outlay for Streets and Highways A new street or expressway is, at any given moment |of time, a type of public luxury. Capital expenditures for :these improvements will create completed projects which add j to the convenience with which a citizen may move within the I community, but seldom make accessible previously isolated I areas. Over a long time span, of course, street main- Itenance and construction are essentials, but the choice of doing the work this year or next is generally available. The flexibility of this type of expenditure is well ;illustrated by the actual capital outlays made for street and highway construction in the nation's fourteen largest cities. As is shown in the table on the following page, these expenditures remained at relatively low levels from 1932 until 1949. More was spent by these fourteen cities 12 Some of this lag was undoubtedly due to the efforts of President Hoover to encourage utility expansion in 1929 and 1930. Robinson Newcomb, "Public Works and Economic Stabilization," Problems in Anti-Recession Policy (New York: Committee for Economic Development, 1954), p. 117. TABLE IV CAPITAL OUTLAY FOR STREETS AND HIGHWAYS BY THE FOURTEEN LARGEST CITIES IN THE UNITED STATES: 1929-1949 (OOO Omitted) 1929 $2 1 5 ,9 0 8 1939 1930 247,904 1940 1931 294,095 1941 1932 114,428 1942 1933 63,217 1943 1934 64,528 1944 1935 48,551 1945 1936 6 5 ,6 2 7 1946 1937 66,229 1947 1938 7 8 ,9 0 2 1948 1949 $8 1 ,5 0 2 105,661 48,228 33,022 25,485 17,060 17,098 45,385 63,276 77,679 107,323 Source: Bureau of the Census, Compendium of Gity Finances, 1929 through 1949. 156 I in the four years from 1929 through 1932 for street and | highway construction than they spent for similar purposes i ■ in the next fifteen years. When either funds or materials i i : were scarce, capital expenditures for street and highways ! were drastically reduced. I The flexible element of streets and highways con- i struction has led some persons to support this type of | capital outlay as one of the primary sources of controlled public works. In addition to its luxury nature, road con- : struction does not compete with or discourage private i investment, and the long range needs are so great that it ioffers an opportunity for a large scale program. There are two factors which severely weaken the use-; fulness and feasibility of anti-cyclical timing of street and highway construction. First, much of the most needed type of municipal street construction is of the freeway design which necessitates the acquisition of rights of way through densely settled areas. This is a time consuming process during which no actual work can be done so that much of the flexibility that was apparent when only need was considered is lost. The other factor limiting the flexibility of street and road construction is the highly specialized nature of this type of work. Efficient road construction requires : 157, the use of heavy equipment which has little substitute i usage.^3 private investors will purchase such equipment j ! only to the extent that they foresee continued usage for j | ; j it. A rapid increase in road construction with its limited! I i equipment would result in higher construction costs, wind- j i ; ;fall profits for those who own the equipment, and little j ! ! ; increase in employment. J Other Municipal Capital Outlays j I i Capital outlays for utilities arid street construe- jtion account for approximately 50 per cent of total muni- ! cipal capital expenditures.1^ The remaining 50 per cent is; i i ;spread over a great variety of projects, those associated • with sanitation and education being the most dominant. In 1952, capital outlay for sanitation facilities amounted to almost one-third of the “other municipal out lays" in the 48l cities covered in the Bureau of the Census reports.15 Physically, the sanitation services could well ^Robinson Newcomb, "Technical Possibilities in Using Public Works to Stabilize Construction," Appendix Z, Miles L. Colean and Robinson Newcomb, Stabilizing Con- j struction; The Record and the Potential (New York: McGraw- Hill Book Company, 1 9 5 2 ) , p. 2 9 « T I 14 Bureau of the Census, Compendium of City Finances in 1 9 5 2 . op. cit., pp. 54-55. 15Loc. cit. 158; •be classified as utilities. u Public health demands that i i ! sanitation facilities be expanded as private construction ! j ,expands. In other words, sewage facilities must be regarded j as partially complementary to private construction. ! • ! | Historically, as shown in Chart III, this comple- I E ; mentary relationship has certainly dominated sewage con- | [ i jstruction. However, as it did with water supply construe- ! ;tion, the record indicates a surprising degree of inde pendence between these two elements. In 1933, the cost of ; ;sewage construction was 9*8 per cent of the cost of new residential construction! in 1930, this ratio was only 2.6. i It is sufficient to note this low correlation, and the fact, that the low ratio of sewage construction to residential ! building since 19^8 Is indicative of a growing backlog of needed improvements and expansions. Second in Importance in this category is capital 17 outlay for educational purposes. All states require a 143 In some construction reports, water and sewage are combined as a single category for the construction industry. The separation of these two municipal services is based on the difference in financing rather than any physical cri teria, but even this distinction is becoming blurred as the use of sewage service charges becomes more widespread. ■^The fact that in California and many other states the schools are not a municipal responsibility prevents educational outlays from being of greater significance in the present context. 159 i j I minimum educational program, and all local jurisdictions i I i !responsible for schools are obligated to provide this j | minimum. However, the minimum physical facilities are i ! j I almost wholly subject to local determination, and the j I ; J , actual level at which they are maintained is a political, ' I ' [rather than a physical, judgment. A community which looks j i | |on double sessions with equanimity will have quite differ- ; j [ent capital requirements than one which finds any devia- j I ! ! tion from the traditional school day and calendar unaeeep- I i ; I table. ! t I ! j The remaining capital expenditures customarily made j i ;by municipalities are spread over a wide variety of acti- I vities ranging from general government to unique municipal enterprises such as the liquor store operated by the City " L 8 iof Asheville, North Carolina. Except in rare instances, capital expenditures for these activities are determined by political decision, not physical need; it is only if a political denial has been sustained over a long period of time that physical need will dictate additional capital outlay for general government.1^ 1^Bureau of the Census, Compendium of City Finances in 1952. op. clt.. p. 14. 1%he Los Angeles County Court House was destroyed by an earthquake in 1933* For over twenty years the county has not had a central court house, but has rented space in the central district and has constructed some decentralized facilities. 160 i !Maintenance and Repair Expenditures and Variable Timing | ! A frequently overlooked element of physical flexi- j i ! bility affecting all types of capital facilities is that of i !the degree of maintenance and repair activity. A willing- i j : i ness to accept the higher maintenance costs on old equip- !ment and physical facilities can postpone actual capital j I 1 outlays. The experiences during World War II were a drama-j | i !tic demonstration of this potential. The maintenance and j l repair expenditures by all public utilities increased 18 1 I i per cent from 194-1 to 194-2, and continued to increase until j ! in 194-5 they were 179 per cent of the 1941 level.20 i i Unfortunately, accurate figures on the ratio of irepair and maintenance expenditures to new construction and: purchases are not available. The distinction between repair and replacement is not a clear-cut one, and the few statistics available are of dubious accuracy. The Depart ment of Commerce, which attempts to gather these figures for a limited section of the economy noted: "The least reliable figures are those for maintenance and repair."21 With limited data of dubious accuracy, it is impossible to estimate the impact of varying schedules of maintenance on U. S. Department of Commerce, Construction and Building Materials, Statistical Supplement, May, 1951, P. 15. 21Ibid., p. 8 3. I 161 land repair on the over-all need for new capital equipment land construction. i In summary, it is evident that a portion of munici- j 1 pal capital outlays for sanitation and utilities is con- 1 1 trolled by the amount of new private construction. However,! ; 1 ieven for these two items, the record of the past thirty i i jyears indicates that this control is not rigid. Road and jstreet construction can be rather freely accelerated or 1 ! postponed without disrupting the community, but the special-! i i ized nature of this activity makes variable timing of I 1 j limited economic significance. The majority of other capl- j t tal expenditures, although they are long-run essentials, j are actually scheduled more by political decision than i physical need. II. CAPITAL EXPENDITURES FROM THE POINT OF VIEW OF MUNICIPAL OFFICIALS Capital expenditures are never an end In themselves, but are always the means to an end. In the case of a muni cipality, the end is services for the community over which it has jurisdiction. What these services are is specified I in constitutions, charters, and statutes; the area in which the services are to be rendered is clearly defined by the municipality's geographic boundaries. The level at which the various services are to be i op ; rendered is determined by the citizens of the city. It ; is the citizens who, directly or Indirectly, must pay for i ! the services, and it is their ability and willingness to ■ provide financial support that is the ultimate determinant ;of service levels. This willingness is expressed through !the normal political procedures, and in the special case of | capital expenditures frequently through bond elections. In both instances, the decision of the citizens is i i iat least one step removed from the actual expenditure deci- [ Ision. As the general case, the citizen makes his wishes ! |felt through his elected representative who is empowered to i vote in the legislative body which must authorize all city expenditures. In the special case of a bond election, the citizen acts only after some concrete proposal is put before him. The purpose of this section is to consider the view point of those are actively engaged in the decision-making 23 process prior to final determination by the citizens. To facilitate exposition, they will be divided into four op In some Instances, a minimum level of service Is specified in the legal definition of the service. 2^The citizen’s viewpoint has been considered in Chapters III and IV dealing with the political limits of taxation and debt. 163 | groups: planners; those responsible for operating depart- i I ments; top management personnel; and elected officials. i City Planners and Capital Expenditure Decisions j Planning, as a distinct functional element in city I | government, is a relatively recent innovation, and the 24 i exact scope of the function has not been clearly defined. j ! However, there is general agreement that in its role as a i | staff activity the primary concern of the planning section I i | must be the long-range social, economic, and physical I PC ! development of the community. * ■ ' Thus, a city planning agency has a broad scope, but its field of application is j 1 I ! limited to a single city. National economic and social ■! i developments are studied but they are significant to the planner only in so far as they affect the development of his city. The planning agency is almost universally charged with the establishment of the city's long-range goals in the form of a master plan. Achievement of these goals inevitably involves large capital outlays. In the past, 24 Benjamin Higgins, "Towards a Science of Community Planning." Journal of the American Institute of Planners. 15:3:3-13, Pall, 19 t § . 5 2%uch of the activity of city planning agencies has been concentrated in the field of land-use zoning where the agency exercises line responsibilities. 164 ; master plans have been developed with too little regard J for the means by which the municipality could fulfill its ' 2 6 ; responsibilities under the plan. The position of plan- ! ning as a staff agency in the administrative hierarchy has , | furthered this tendency to concentrate on ends rather than : means. j Regarding specific capital outlays, planners can be | expected to show concern that the results will be in accord with their master plan, be it an aesthetically satisfactory! ' | civic center or a functionally satisfactory system of j j itraffic movement. Regarding the timing of capital expendi tures, city planners are apt to be opportunistic; they are :well aware of the vicissitudes of municipal finance, and are unlikely to accept the point that a project should be delayed because the city’s private economy is too prosper ous. On the other hand, this same knowledge of municipal finance insures that city planners will ardently support any program which gives greater assurance of stable progress towards fulfillment of the goals specified in the master plan. Finally, and most important of all to professional planners, it [a capital budget] provides a means of 2^Supra, pp. 65 ff 165, getting our plans and proposals systematically trans- ! lated into reality. It provides the most formidable instrument yet devised for implementing the master plan.27 i I ! Operating Departments and Capital Expenditure Decisions j i j Under the usual budgetary procedures, the various j jdepartment chiefs are the source of the majority of budget requests. The major concern of the head of any municipal department must be the adequacy with which his department i I jis able to fulfill its assigned responsibilities. As a i jspecialist in his field, an alert department head will at j i all times be aware of new, improved, or extended physical j I facilities which would make it possible for the department og | jto do a better job of fulfilling these responsibilities. i 'It is to be expected that the departments will request such additional facilities at every opportunity. Furthermore, each section of a municipal government is in a semi-competitive position regarding the amount of its appropriation. Normally, every department in a city can advantageously use additional funds. If the head of one department falls to express the needs of his depart ment, no one else will do it for him; the city's limited ^American Institute of Planners, California Chapter, "1954 Report of the Committee on Capital Improvement Pro grams and Procedures" (unpublished), p. 3» pQ George S. Bean, "Administrative Leadership by the Manager." Public Management. 33*270, December, 1951* I 166 !funds will be allocated to those departments which do i express their needs. Under these pressures, a single i department head is not apt to temper his budget requests j jfor capital projects in light of local or national economic; !conditions. ' 2 9 I iCity Managers and Capital Expenditure Decisions ^ j j The city manager is responsible to the elected !legislative body for the operation of the entire city. ;This position was once thought to be limited to directing j the most efficient use of authorized funds in the achieve- | i ; jraent of the council's goals. In more recent years, the j enlarged scope of the manager's responsibilities has been i i . recognized. Gradually over the last two decades, however, the concept of council-manager relationships has broadened to include the manager as a community leader. As a community leader, the city manager is responsible for giving the council all possible assistance in studying, reviewing, and finally determining city government policies. As city government becomes more and more complex, the city manager has more responsibility for providing not 2 9 ^For present purposes there is no advantage in dis tinguishing between a city manager and the chief adminis trative officer of a city, both have comprehensive respon sibilities. In those cities which have neither of these positions, the decision-making process moves from the department head directly to a politically responsible official. 167 only plans and programs but also advice, suggestions, and arguments which will give the city council a basis for making decisions.30 | In this broader role, the city manager is subject to] pressures from his department heads, elected officials, andj citizens. These pressures will generate considerable | force, but the manager cannot afford to lose sight of his i basic goal, "the best use of men, materials, and time in getting the work of the City done."3^ i Decisions of the city manager on capital expendi- j I tures must be in accord with his basic objective but they ; must be made in a mixed environment. Each decision will I be a compromise. A balance must be struck between the | needs of the city and its ability to pay; the needs of one 1 service must be balanced against the needs of all other services; and finally, no decision can be made without considering the reactions of the public, the legislative body, and other municipal employees. The reaction of those concerned with national economy policy will be of signifi cance to a city manager only if all of the above factors fail to dictate a definite course of action. In addition, the city manager is undoubtedly aware 30C. C. Ludwig, "Procedure In Determining Municipal Policies," Public Management. 36:147, July, 195^. 33- Ibid.. p. 150. of the ever-present needs of the municipal services, of the! unstable pattern of municipal finance, and the political i !pitfalls of a bond-financed program. In light of this knowledge and the desire to render the best service pos- i sible, it is to be expected that the city manager will i recommend capital construction whenever funds are avail- I able. However, as in the case of city planners, managers i can be expected to ardently support any program which jpromises more stable appropriations for capital improve- jments. The larger the area of stability, the easier will j jbe the manager’s task of planning and operating efficient j i municipal services. ! ! | :Elected Officials and Capital Expenditure Decisions i Only the legislative body can authorize municipal expenditures, so that the ultimate decision regarding each , capital expenditure rests in the hands of popularly elected officials. The desires and needs of planners, departmental officials, and city managers will remain merely plans unless the legislative body authorizes appropriations which will make it possible to translate plans into realities. i i Assuming that the majority of elected officials wish, to retain their present office or to advance to a more Important political post, their primary concern in the decision-making process is the manner in which their 169 decisions will be received by the voters. On the one hand, it is politically advantageous to be able to point to a record of lower taxes, but, on the other hand, a record of , i I improved municipal services is also a political asset. i The citizens always want both better services and lower taxes. The desire for improved services is largely i ' I l ,unaffected by the business cycle, while the desire for : i lower taxes is somewhat weakened by general prosperity. I t i Thus, from the political point of view, replacement and j expansion of the city's physical facilities can be most j i i expeditiously accomplished when private incomes are high. i i This is particularly true of those facilities, such as ; ;sewage trunk lines, which have little popular appeal at any | time. Prom a purely political point of view, a well regu larized program of capital outlay has little to recommend it. A large percentage of the expenditures under such a program will necessarily be devoted to maintenance, exten sive repair, and equivalent replacement. Expenditures of this type have little political value, since their merit is evident only over a long period of time. Elections do not wait for the long-run results of an administration. Also, a regularized program necessitates careful scheduling of all capital outlays for five or six years 170 j in advance. Legislative endorsement of a long range plan publicly, if not legally, pledges the legislature to a ■ i i specific course of action, and deviations may require i explanations. Without a long-range program, the elected j 1 representatives are freer to adjust capital Improvements annually to the immediate political situation. j i The attitude of elected officials to the management j \ emphasis in city government, careful scheduling of capital | I outlays being only one manifestation of this emphasis, is j I all too frequently typified by the following remark: I When a reform group is in power, these political contractors don’t push new projects because there : is no personal gain to be secured. There is not enough profit to warrant spending the money neces sary to educate public opinion to favor the pro- j posed improvements. The result is that instead of new public projects, the reform administration points to its reduced tax rate and dollar saving. As a long-range poliey, civic progress steps along faster under the old-fashioned political rules than under these new trained administrators of reform governments.32 III. THE ROLE OP THE CAPITAL BUDGET ‘ The general characteristics of the municipal environ ment in which capital outlays are planned, financed, and constructed are: 32Anonyraous, quoted in Henry G. Hodges, City Manage ment (New York: F. S. Crofts and Company, 1939)* P» 718* 171 1. A semi-rigid current revenue structure which provides a relatively stable real income for the municipal ity as long as individual incomes are stable or rising, but which will be inadequate when individual incomes fall. 2. A variety of alternative means of financing capital outlays, but their use is restricted by: a. the necessity of popular approval in some cases b. the city's financial condition and credit rating c. the general condition of the money markets. 3. Physical needs which are essential from a long range viewpoint, but, with few exceptions, are flexible in the short run. 4. Municipal employees whose viewpoints are cen tered on the operational and immediate needs of a single municipality. 5. Political officials who serve as the city's ultimate decisions makers, and whose viewpoint is largely governed by the more immediate popular reaction to their decisions. The role of the capital budget is to further a rational program of municipal capital outlays in this environment. 172 Administration of a Capital Budget From the studies of the National Resources Planning Board, the knowledge which has accrued from the more wide- j I spread use of capital budgets, and the efforts of the , Municipal Finance Officers* Association, a body of general-; ly accepted procedures for capital budgeting has been j developed.33 j 1. All the capital expenditure requirements for the; i city should be included in one program; in other words, the- capital budget should be comprehensive with regard to its special province. Each city is free to define capital i expenditures in any fashion it desires, but having once decided upon a definition, all objects which qualify must be included in a single capital budget regardless of the means by which it is anticipated that they will be financed. The practice of limiting capital budgets to projects financed either wholly by bonds or wholly by current income destroys one of the major advantages of this type of budg eting. Commenting on the relationship between local gov ernments* capital budgets and control of local debt, C. A. Harrell noted: “The relevance of capital budgeting to debt control is that borrowing is seen in its true context as 33The grouping of the procedures presented was adopted from George G. Sipprell, "A Capital Budget Program," Municipal Finance, 21:18, February, 19^9. 173 | just one of the various methods for financing capital | improvements."^ Only a comprehensive capital budget will ] ; provide legislators and the public with a true picture of i j the alternatives which are open to the city in its imme- i |diate situation. | j 2. The tirae-span of the budget requests for capital I expenditures must be the same for all organizations sub- Imitting such requests: it would be exceedingly difficult I to evaluate the relative merits of two programs if one ;covered only five years while the other spanned ten years. 1 The time-span recommended by the National Resources Plan- |ning Board was six years, although it recognized that this was a somewhat arbitrary choice. However, the Board did state that detailed planning in excess of ten years in advance was more in the nature of wishful thinking than of careful planning.^5 3« The capital budget must include a thorough analysis of the city’s finances. The purpose of the financial analysis is to deter mine approximately the present and future ability of the municipality to pay for the construction and maintenance of public improvements, by estimating the present availability of funds, by research into ^Harrell, oj>. clt., p. 165. ^^National Resources Planning Board, Long Range Programming of Municipal Public Works, op. cit.7 p. 4. 174 the probable future trends of municipal revenues and , expenditures, by appraisal of all factors related to the administration and operation of the program, and 1 by determining what limitations are imposed, by statutes or prior commitments, upon the freedom of ; the municipality to act. This amounts in reality , | j to comprehensive financial planning for the city.36 I I |Without such a careful financial analysis, the long range I : !public improvement program is apt to be little more than an j i j |idealistic statement of goals, never translated into actual iachievement. Income estimates are Just as integral a part i i ;of capital budgeting as revenue estimates are of current j i budgeting. ' | i 4. There must be a person, or group of persons, i I I definitely assigned the responsibility for integrating the various departmental requests into a recommended program which will indicate the sequence in which the projects should be undertaken. With regard to the current budget, this responsibility for integration is assigned to the chief executive officer, and he may also be made respon sible for the programming of the proposed capital budget items. However, public support for a bond issue is so fre quently a part of a municipal public improvement program that it may be desirable to assign the duty of program integration to a public or semi-public committee. If this 36lbid., p. 7. 175 i |is done, the committee must be given statutory authority , i ! ! 07 ! for its existence and its responsibilities. - > i Even with i 1 ; I i such authority, a public committee is little more than an j ]advisory group, since action will be taken only after ! - i j specific projects have been included in the current budget,1 j - 1 land responsibility for the preparation of this latter docu-| 1ment remains in the hands of the chief executive or adminisf :trative officer.3® ! ; 1 5. The capital budget must be reconsidered, revised,; 1 ;and extended in the light of current conditions each year; I i :both the expenditure and income sections of the budget must i 1 !be included in this annual reconstruction. I 6. The capital budget must be given some type of legal status to Insure its continued existence, but the way must be left open for the annual adjustments mentioned above. This can be accomplished by a statute which requires the annual preparation of a capital budget, the submission of that budget to the legislative body annually, and, after *3 7 “"The lack of such legal status was one of the major weaknesses in the earlier city planning movement. Robert 1 A. Walker, The Planning Function in Urban Government (second edition; Chicago: The University of Chicago Press, 1950), pp. 330-35. 08 J The New York City experience offers adequate proof of the confusion which can result if action budgets origin ate both from the chief executive and a special capital projects committee. I 176 I |legislative review and adjustment, legislative endorsement !of the capital budget. George M. Link, after reviewing 1 ;the failure of a number of long range municipal programs, concluded: But to a much greater extent that failure is due to 1 the absence of legal requirements that an expendi- i ture program must be prepared for long-term needs, I as well as for current operating needs, than to any ! other cause. Government officials are human beings i with the common failing that prompts the avoidance j of any act that is not clearly mandatory.39 The endorsement does not commit the government to any future expenditure, but merely signifies legislative I |approval of a definite program of future capital outlay, ‘subject to annual revision. i 1 IV. CONCLUSION As was the case with current budgeting, the princi ples of capital budgeting are of pragmatic origin. In the above rules, the administrative goal of an orderly program of capital expenditures for operational reasons has been compromised with a degree of flexibility which is dictated by the political and financial realities of municipal gov ernments. Nevertheless, the capital budget as conceived by ^George M. Link, "Report of Committee on Long Term Financial Planning,” Municipal Finance. 13:43. August. 1940. 177 i the public administrator is a significant step toward the i ’ economists' goal of combining public and private spending !to produce a more stable economy. i I It is unlikely that a capital budget will overcome j the political obstacles which stand in the way of aceumu- ;lating large municipal reserves during prosperous eras, I j expending these reserves for public improvements only when I jless satisfactory economic conditions prevail in the pri- i i vate sector of the economy. Yet, the mere existence of a !capital budget setting forth a rather definite plan for ,future development should encourage a more uniform program !of capital expenditures. Legislative endorsement of a i j definite program toward which funds are to be accumulated should weaken the popular resistance to current taxes for future spending. In the event that federal financial assistance became necessary during a severe economic recession, locally, prepared capital budgets would be of great value. The existence of capital outlay programs extending five years into the future is an assurance that projects will be available without the lengthy delays experienced during the 1930‘s. The annual revision of the program insures that this immediately available supply of public projects will be up-to-date, and the fact that the various lists were 178 i ■ I I ' J prepared under the assumption that each city would have to j I ! | do its own financing insures that the projects will be more ! i j i 1 than mere make-work undertakings. Finally, projects which | I ‘ I ; j |have been designed and endorsed in the environment of a j i I !city's limited financial ability are not apt to be so large] i 1 ! that it would be impossible to complete them within a single phase of the business cycle. The capital budget also contributes to the optimum ! ;allocation of public expenditures. This supplementary j 1 budget offers the legislator and the public a more corapre- j > \ ihensive view of public expenditure alternatives by placing j i !these expenditures in a setting which is not arbitrarily j jlimited to a single fiscal year. As Buck observed, the j ; annual budget is “only a link in the ever lengthening chain of government’s financial experience.1 1 ^ Legislators have customarily been foreed to consider a single year's expen ditures in the light of past experience and commitments; a capital budget makes it possible for them to view these expenditures in light of both past and expected future I needs and income. This increased prospective should cer tainly contribute to a more rational program of municipal i expenditures. 4-0 / A. E. Buck, Budget Making (New York: D. Appleton and Company, 1921), p. 47 CHAPTER VI CAPITAL EXPENDITURES AND BUDGETING IN THE CITY OP LOS ANGELES j In I85O, the City of Los Angeles comprising twenty- jeight square miles and a population of 2,200 was incorpor- lated by state statute.1 One hundred years later, this city i Jwas the fourth largest city in the United States and the central city of the nation’s third largest metropolitan I 2 :area. During the one-hundred-year period, the land area ;of the city was expanded until it included 453.5 square miles of varying types of land, incorporating uninhabitated mountain areas and over-populated central districts. In the same period, the population of the city increased to 1,970#358, while that of the Los Angeles urban area had risen to 3,996,946. This tremendous growth, most of it 1Richard Bigger and James D. Kitchen, How the Cities Grew (Los Angeles: Bureau of Governmental Research, Univer sity of California at Los Angeles, 1952), p. 225. 2 Bureau of the Census, Census of Population: 1950 (Vol. I; Washington: Government Printing Office, 1952), p. 1-27* •5 JUrban areas were defined for the first time in the 1950 Census. The boundaries for these areas are determined 180 , concentrated in the years since the turn of the century, , has not been without serious social, economic, and political ; i , problems. This chapter considers one aspect of these prob-: ! :lems: the provision of municipal capital facilities suffi-j cient to service the expanded area and population of the J City of Los Angeles. I i ’ i i I I. THE ECONOMY OP LOS ANGELES The ability of a city to pay for desired governraen- j tal functions rests on the wealth and activity of the i i people in that city. In the case of a metropolitan city such as Los Angeles, the activity and population of the j i urban area, not merely that within the city limits, affect this ability.^ Population Growth and Size Since 1900, the population of the City of Los Angeles has increased almost twenty-fold.^ This by housing, population density, and land use, and they do not necessarily conform to political boundaries. In the case of Los Angeles, the area includes the land between the mountains and the ocean from the northwest end of the San Fernando Valley to a southeastern boundary extending from Azusa to Long Beach. Ibid.. p. 5-25. ^City of Milwaukee, Report of the Commission on the Economic Study of Milwaukee {Harold M. Groves, Research Director;'"Milwaukee’ : city of Milwaukee, 1948), p. 13. ^infra.. p. l8l. TABLE V POPULATION OF LOS ANGELES CITY AND COUNTY: 1900-1960 Year City of Los Angeles County of Los Angeles Per eent of County Population in City 1900 102,479 170,298 6 0 .2 1910 319,198 504,131 6 2 .1 1920 576,673 936,455 6 1 .6 1930 1,238,048 2,208,492 5 6 .0 1940 1,504,277 2,785,643 54.0 1950 1,970,358 4,151,687 47.5 I960 2,540,000^ 5,526,000^ 46.0 Source: Bureau of the Census, Population (Vol. I ; Washington: Government Printing Office, 196^-1952). ♦Estimate received from the Los Angeles City Plan ning Department. ♦♦Estimate received from the Los Angeles County Regional Planning Commission. | spectacular growth has not been attained by the addition ofj i 6 i I a regularized increment or by annexation. It has been 1 I ! | attained in irregular spurts which have invalidated the ; work of demographers and made long range planning diffi- j cult.*^ Los Angeles County has compiled a substantially j I ! j similar record of erratic growth. | The strain which population increases have thrown j t j on the capital facilities of the city have been intensified I by population shifts within the city. Because of the I ! city's far-flung boundaries, much of the postwar move to I 1 ' ! i fringe areas has been a move from the central district of j I the city to its more remote areas. The central and sou thern sections of the city have both lost population, while most of the growth has been concentrated in the western section and in the even more distant San Fernando ; ^Since 1927, the area of the city has been increased only 12.4 square miles. During the era of rapid annexa tion, 1909-1920, only 11 per cent of the population growth was attributable to annexation. Constantine Fanunzio, > "Growth and Character of the Population," Los Angeles: Preface to a Master Plan (G. W. Robbins and L. dT Tilton, editors; Los Angeles: The Pacific Southwest Academy, 1941), p. 30. *^In its 1929 report, the Los Angeles County Plan ning Commission estimated the 1950 population at six million. After the decreased growth rate of the 1930's had been experienced, Panunzio estimated the present city popu lation would not be reached until 1980. 8 'Valley. Land availability and climatic conditions indi- j cate that this last named area, the San Fernando Valley, I will be the locale of the greatest population growth in the: i | I present decade. The problems which develop as a part of ' l \this diffused growth are illustrated by the fact that the |city has already found it necessary to develop plans for i j twelve regional administrative offices to supplement the Q i I centrally located city hall. i : l i Employment and Economic Stability I ! Population and employment are mutually dependent ivariables, each being dependent on the other.10 In 1950, I there were 1,726,600 employed persons in Los Angeles i i County. As shown in Table VI, manufacturing, wholesale and1 retail trade, and services provided 73*8 per cent of the total employment. A large percentage of the employment in both the service industries and in trade is non-basie employment, i.e., employment which is of importance to the proper functioning of an urban community, but which itself cannot : Q City of Los Angeles, City Planning Commission, Accomplishments 1953. p. 13• 9Ibid., p. 22. 10City of Milwaukee, o£. clt., p. 26. TABLE VI EMPLOYMENT IN LOS ANGELES COUNTY: 1920-1950 1920 ___ ___ Number $ of Number f > of Number i » of Number $ of Industry Group Employed Total Employed Total Employed Total Employed Total Agriculture, For estry and Fishing 10,028 Mining 2,047 Construction 10,567 Manufacturing 75,252 transportation, Communications, and Ut. 22,792 Wholesale and Retail Trade 49,569 Finance, Insurance and Real Estate 7,912 Services 63,300 Government 5,398 Not reported* 19,237 3.8 .8 4.0 2 8 .3 1 9 , 0 6 5 8,560 24,094 163,151 2.6 1.2 3.3 22.5 35,104 12,839 65,441 205,138 3.4 1.2 6.3 19.8 31,600 14.500 83.500 469,300 1.8 ' .8 4.8 27 .2 8.6 51,972 7.2 75,115 7.2 125,750 7.3 18.6 97,749 13.5 248,750 24.0 458,300 2 6 .5 3.0 2 3 .8 2.0 62,061 192,208 13,906 91,058 8.6 26.6 1.9 58,616 279,036 46,821 10,148 5.6 27.0 4.5 85,800 347,450 110,400 4.9 20.1 6.4 Total 92.9 723,824 8 7 .4 1,036,984 99 .0 1,726,600 100.0 Sources: 1920, 1930, and 1940 data from Prank L. Kidner and Phillip Neff, An Economic Survey of the Los Angeles Area (Los Angeles: The Haynes Foundation, H?45), p. 7 l and 1950 data from California Department of Employment, Los Angeles Labor Market Bulletin. 5s 3, January, 1951* *No unreported figure was given for 1950. sustain the community.11 The most significant portion of , | the county's basic employment is its manufacturing which J ;utilizes 27.2 per cent of the total employed labor force, i | and 5 0 .1 per cent of those employed in basic industries. . The cycle-sensitivity of the basic employment in Losj !Angeles can be seen from Table VII. In July of 1950, 61.4 j ! I per cent of manufacturing employment was in durable goods, j ! ! j thus showing a continuation of the trend toward this type j I |production which Kinder and Neff traced back to the J I no ! 1930's. These authors noted that the 1930 trend had been: 1 j intensified by the wartime activity of the early 1940's; Table VII Indicates that the Increased output occasioned by! I * . : ithe Korean conflict has had the same effect. Durable goods, which have become relatively more important in Los Angeles' production, are generally agreed to be highly 1^ sensitive to business fluctuation. 11In some communities, it would be correct to classic fy all service and trade employment as non-basic. Los Angeles has a large number of retired persons and tourists, however these people would not be attracted to the commu nity without extensive service and trade facilities. For this reason, an indeterminate portion of these generally non-basle industries constitute basic employment in the City of Los Angeles. 12Frank L. Kinder and Phillip Neff, An Economic Survey of the Los Angeles Area (Los Angeles: The Haynes FoundatTon, 1948), p? 62. ^j. m . Clark, Strategic Factors in Business Cycles (New York: National Bureau of Economic Research, 1934), PP. 33-35- ... . 186 i TABLE VII WAGE AND SALARY WORKERS IN MANUFACTURING, LOS ANGELES METROPOLITAN AREA (OOO omitted) Industry July 1950* September 1950** March 1953*** . Food 42.9 44.5 44.8 Textiles and Apparel 42.6 45*7 48.3 Paper and Printing 31.4 3 2 .6 34.8 Chemicals 1 3 .2 13.8 1 6 .6 Petroleum 14.2 14.3 1 9 .2 Rubber 11.2 11.8 13.9 Other non-durables 3.6 3*7 5.4 Total, non-durables 159*1 166.4 183.I Lumber and Furniture 24.8 2 6 .5 2 7 .2 Stone, Clay, and Glass 17*T 1 8 .6 19.0 Primary metal products 17.8 19.9 25*9 Fabricated metal 34.8 38.4 40.7 Machinery (except electric) 29*2 3 2 .6 53.3 Electrical Motor vehicles and 17*3 20.6 47.0 Supplies 1 6 .9 17.4 22.0 Aircraft and Parts 70.5 77.8 161.4 Shipbuilding and Repair 1*7 2.8 3.9 Instruments 6 .9 7.3 13.3 Ordinance **** **** 6 .5 Other durables 11.3 13.7 14.8 Total durables 249.3 276.7 4 3 8 .5 Total 4o8.4 443.0 6 2 1 .6 Source: California Department of Industrial Rela- tions, California Statistics Bulletin: Area Supplement (mimeographed): *313A: A-2, August, 1950* **315A: A-2, October, 1950. ***351A: 2, October, 1953* ****Not available. From the point of view of stability, Table VII I points up a second problem: the dominant position of the i ; aircraft industry in the local economy. This single Indus-> I i try which relies heavily on military demand employed 1 7 .2 ; i per cent of all manufacturing employees in July of 1950; ! ; in March, 1953* one out of every four persons working in ! manufacturing was employed in aircraft production. In the ' < ~ ! | happy event of a stable international settlement and a ! | sudden decrease in the demand for military aircraft, almost: 10 per cent of the total labor force in the Los Angeles j ; area might be forced to seek new employment. ! ! The continuing expansion in the area's population will undoubtedly make recovery from a recession somewhat more rapid in Los Angeles than in other more mature commu nities. On the other hand, the area's growing dependence on the production of military aircraft and other durable goods increases its vulnerability to economic fluctuations. II. THE CITY'S REVENUES The sources of revenue upon which the City of Los Angeles is dependent do not differ materially from those of other large cities in the United States. The property tax, although declining In relative Importance, remains the city's dominant source of income. TABLE VIII REVENUE BY SOURCE, CITY OP LOS ANGELES: 1952-53 Source Amount (000 omitted) City of Los Angeles % of Total Other U.S. Cities of Total Property Taxes $*9,229 39.7 *8 .8 Sales and Gross Receipts 15,063 1 2 .1 1 1 .0 Licenses and Other Taxes 11,559 9.3 6.7 Subventions 2 1 ,3 8 1 1 7 .2 19.1 Current Charges 13,121 10.5 8 .5 Special Assessments 5,990 * . 8 1.5 Unallocable Revenue 6,987 6.* *.* Total $124,26* 1 0 0 .0 100.0 Source: These are the *8l cities with populations in excess of 25,000. Bureau of the Census, Compendium of City Government Finances in 1953 (Washington: Government Printing Office, 1954),P. 25. 189 Property Tax Revenues The property tax levy in 1953 produced a record 14 return of $49 million. This figure represented a 70 per cent increase in the yield of the tax above the previous 1931 peak of $28,953,278. Since the city's tax rate has been increased less than 12 per eent above the 1931 rate, most of the additional revenue must be attributed to an increase in assessed valuation. The charter property tax limit of $1.25 per $100 of | assessed valuation has been instrumental in the establish ment of a stable tax rate. Specifically exempted from this limit are, ’ ’payment of the principle and interest of municipal bonds, district bonds, pensions, borough taxes, or special district taxes.In recent years, pension costs and bond charges have contributed about equally to the rate of approximately $ .5 0 per $100 in excess of the charter limit. ^ 14 ■^Unless otherwise cited, all tax figures in this section are quoted from the Controller's Annual Report. City of Los Angeles. ^Charter Qf the City of Los Angeles, 1948. Sec. 3.1. The City of Los Angeles operates its pensions on a cash disbursement basis. Employees contribute a fixed per centage of their gross pay, and the council is bound by the charter to provide through annual appropriation what ever additional funds are needed. 190 i i The charter further requires that the Council, ; within the $1 .2 5 limitation, appropriate not less than the | i i following amounts on each $100 of assessment: j I $.06 Permanent Improvement Fund i ! .07 Library Department I I .13 Department of Recreation and Parks .0025 Bureau of Budget and Efficiency $.2625 With these various charter provisions, the city council has a maximum property tax rate of less than $ .9 9 which can be 1 levied for general city operations. I ! The maximum rate of $1.25 was stated in the original | j freeholders1 charter of the city, and the council found It | ' 17 ! ; necessary to levy this maximum rate from 1920 to 1950. ' ! 1 ! With such an historical precedent, it would be extremely ! difficult to secure the requisite popular majority to amend the charter limitation; increases in the yield of the property tax Gan be expected only as the "assessed value" is increased. Assessed values are stated as being 50 per cent of the fair market value, the standard publicly accepted i Q throughout the state. In Los Angeles, all assessing is ^In the fiscal year 19^9“50, the tax rate dropped under the charter limitation by 2 .0 3 cents per $100 of assessed valuation. ^California, Report of the Senate Interim Committee on State and Local Taxation. Part iTl (Sacramento: California Legislature, 1951), p. 5 0 3. 191 ; done by the county so that a general write-up of values | might be instituted by the county or by the city. Neither I is apt to do so. The county is inhibited by the state-wide ! school subsidy program which is scaled partially on a basis I " 1 Q of need as demonstrated by assessed values. Any upward I adjustment of the county assessment figure by the city is I such an obvious means of increasing the property tax that ! it is politically unlikely. I Paced with existing low assessed valuation ratios, i j a charter limitation of long standing, and a long period ! of taxing at this limit, the City of Los Angeles can not I ! be expected to increase the yield of its property tax by any substantial amount. There will be a gradual increase as the growth of the city continues, but the additional services required by this growth must also be supported. Nevertheless, the charter requirement for property tax contributions to the Permanent Improvement Fund and the exemption of debt service charges from the tax limit mean that the property tax will be called upon to support future capital expenditures. •^School districts are independent, but the counties are their official assessment agencies, and district budgets must be approved by the County Superintendent of Schools. 192 Sales and Gross Receipts Tax Revenues In October of 1946, the City of Los Angeles adopted i a retail sales tax of .5 per cent. In the fiscal year ! 1952-53, this tax produced 10.7 per cent of the city’s total revenue even though the sale of food is not subject J to the tax. The retail sales tax is not a type of tax which is amenable to annual or frequent rate adjustments to meet the needs of the taxing jurisdiction. However, in 1954 the city’s financial situation was critical, and an additional j .5 per cent retail sales tax was proposed. There was ample: precedent for the 1 per cent rate since fifty-two cities in the state were already using it, including Santa Monica j 20 '• and Pomona in the Los Angeles Metropolitan Area. The City Council approved the higher rate to become effective July 1, 1954, so that the city now has a 1 per cent retail sales tax which is the maximum allowed cities under present < state legislation. Revenues from Other Locally Controlled Sources Los Angeles receives almost 25 per cent of its total revenue from a large number of heterogeneous sources, i.e.,; 20California, Report of the Senate Interim Committee on State and Local Taxation, Part II (SacramentoT Califor- nla Legislature, 1953), P. 28. 193. business licenses, dog licenses, building permits, etc. No: one of these sources is of sufficient importance to warrant: individual attention.21 Even generalities about the total j figure may be misleading since the individual items which j ! make up the total figure are frequently changed, some ' being increased while others are being decreased. Nevertheless, it must be noted that the miscellane- j ous charges of the City of Los Angeles do not include either sewage or garbage removal service charges. These I charges are not a part of the city’s revenue structure, j despite the fact that they have been adopted by many other j 22 ! eities since the end of World War II. A nominal monthly | charge of $.75 per household for either of these services would yield the city an additional $8,000,000 of annual revenue. Revenues Received from Other Governments Other governments contributed 17 per cent of the city's total revenue in the fiscal year 1952-5 3* The great majority of this contribution, approximately 85 per 21Business licenses, in itself a conglomerate cate gory, is the only one of the sources in this group which produced more than 2 per cent of the city's total revenue in 1953* Op A. M. Hillhouse and Muriel Magelssen, Where Cities Get Their Money (Chicago: Municipal Finance Officers"1 Association," 194o), pp. 142 ff. 194 I ;cent of It, was tied directly to some revenue source: i actual receipts being dependent upon pre-determined state 1 I apportionment formulas and the yields of specified state j jtaxes. For example, the city receives five-eighths of a cent per gallon from the state-collected gasoline tax. ! In addition to the gasoline tax, the city receives j i ! ■ a share of the state collected Motor Vehicle License fees i I in lieu of a property tax on these vehicles, and a pre- ! ; _ i :determined share of the motor vehicle fines and forfeitures! j ;collected by the state. If these subventions are attribu- j ted to their ultimate sources, sales taxes, property taxes,; and unallocable revenue respectively, the revenue structurej ! r i iof the City of Los Angeles is as shown In Table IX. 1 Municipal Revenues and Fluctuations in Income In view of the revenue structure of the City of Los Angeles, it is evident that a decline in the income of the community will have an adverse reaction on the city's income. In real terms, this reaction will be the more serious the greater the portion of the income decline which is due to reductions In output and employment rather than to price declines. The property tax, representing 48 per cent of the city's revenue, has shown remarkable Income elasticity in ] TABLE IX REVENUE BY ADJUSTED SOURCE, CITY OF LOS ANGELES; 1952-53 Source Amount (000 omitted) Per cent of Total Property Taxes $59,666 48.0 Sales and Gross Receipts 20,974 16.9 Licenses and Other Taxes 15,332 12.4 Subventions (Grants) 3,265 2.6 Current Charges 13,121 10.6 Special Assessments 5,990 4.8 Unallocable Revenue 5,916 4.7 Total $124,264 100.0 196 | the period of rising incomes since 19^5*On the other ! hand, it has demonstrated great sensitivity to Income j j j ; I ;declines, even responding adversely to degressive income I j i j growth. : ; I j ! j The second most important source of revenue, the | isales tax, operates with a base that fluctuates directly with income. Since food and shelter are exempt from the city's sales tax, fluctuations in the tax base will be ; even greater than those of the community's income. Flue- I ! !tuations of this nature are a definite aid in the main tenance of the city's real income in periods of rising 1 prices. Under reversed conditions of falling income and stable prices, heavy reliance on sales tax receipts will intensify the city's financial problems arising from the decline in property tax receipts. The remaining 35 per cent of the city's revenues are received from a great variety of sources. The changes in rates and regulations regarding these sources have been so frequent that historical evidence is of little value as a measure of their expected responsiveness to income varia tions. Nevertheless, it can be noted that in the critical I ^Supra, p. 112. The figures shown are for Los Angeles County, but the county administers the property tax for the City of Los Angeles. 197 i ;years of the early 1930's, these revenues showed only I ’ slightly greater stability than did the property tax in oh, :the City of Los Angeles. ^ i { Operating with its present revenue structure, the I jCity of Los Angeles can be expected to maintain its real j income when the income of the community is stable or irising. When the community's income declines, however, I the city's real income will fail, and it will be forced to i seek new revenue sources, get greater aid from other gov- ;ernments, or accept the fact that it must reduce its serv- iices to the public.^ IV. CAPITAL OUTLAYS AND DEBT OF THE CITY OF LOS ANGELES The record of capital outlays and debt made by the City of Los Angeles during the past thirty years is not an ^Measuring from the peak year of the 1920's to the trough year of the 1 9 30's, the yield of the property tax fell 39 pe** cent, while the yield of other locally con trolled sources of revenue fell 33 per cent. ^^This statement can be questioned on the assumption that the reduction in income is attributable solely to reductions in prices and wages. This, of course, is a highly unlikely circumstance, and becomes even more unreal istic in the case of municipal governments whose major expenditure is for wages and salaries paid civil service or merit system position holders. 198 | |encouraging one. This record conforms too closely to that I of private enterprise during the same period, and not p & ;closely enough to the needs of the community. u i i ;Expenditures for Capital Outlay The capital expenditures of the City of Los Angeles I ireached a peak of fifty-five million dollars in 1928, and |a depression low of nineteen million in 1939-For the |ten year period from 1931 to 19^1, the average capital 1 : outlay of the city was $24,605,600. This surprisingly high I average was maintained largely because of the outlays made ! !by the Department of Water and Power, an independent city oft department. w 1 In 1928 and 1929* the voters had authorized large bond issues for the extension of the cities utilities under the Department of Water and Power. Happily, this 26 The reeords of business capital outlays diverge significantly from those of city during the war years. This is explained by the rather limited number of municipal capital outlays which could qualify for materials as necessary adjuncts to a wartime economy. ^Unless otherwise noted, all figures concerning capital outlays of the City of Los Angeles are from Cali fornia State Controller, Annual Report of Financial Trans- ; actions of Municipalities and Counties TSacramento: State of California, 1921-1933). 28 twThe revenues and expenditures of this department are under the control of its board of commissioners, not the city council. I department moved slowly through the expansion which had I I been authorized; throughout the 1930's this department : i I ; i i continued to make capital outlays at approximately the same; ; rate it had during the prosperity of the 1920's. It was j i not until November of 1936 that the last of the 1928 and i ! 1929 bond authorizations was utilized. | ; j If the capital expenditures of the major independent departments in Los Angeles are subtracted from the total, ; the city's record resembles that of private business even j i I more c l o s e l y . The high level of highway construction in [ | 1928 contributed to a peak level of non-utility capital j ! outlay of $41,711,000.3° This level was not achieved again; ; i j until 1950, and the 1931-1941 average was only $8,233,0 0 0. j The parallelism between private Investment and the capital outlays of the city Is clearly demonstrated by the sharp drop in private investment in 1937, followed by an equally ;sharp drop in the city's capital outlays in 1938* 29There are three agencies in this group: Depart ment of Water and Power, Harbor Department, and Department of Airports. While there are several other agencies which also operate under Independent commissions, they are not truly independent since each is forced to seek a substan- I tial annual appropriation from the city council. 3°The term non-utility is here used to include the entire city with the exception of the three independent agencies mentioned in the preceding footnote. ^Since private Investment data Is for the calendar ? ear and that of the city for the fiscal year, the time lag s actually six months, not a full year. 200. The historical record of the city's non-utility, j i non-highway capital expenditures reveals even greater cycle! sensitivity. From a 1927 peak of $18,597,000, these expen-: dltures declined to a low of $2,19 1,0 00 in 1936; the aver- | age for the ten year period 1931-1941 was $3,859,500, 20 per cent of the pre-depression high. Thus, in the City of i I Los Angeles, capital expenditures by the utilities, fre- } | quently thought to be the least amenable to anti-cyclical ! timing, have demonstrated the greatest stability over the j cycle. 3 2 Throughout the 1930's, the annual capital outlays) of the utilities were never less than 50 per cent of their i 1920 peak year, while those of the rest of the city fell as! low as 11 per cent of their 1920 peak. Had the non-utility, non-highway capital expendi tures of the City of Los Angeles for the thirty year period; 1921-1951 been regularized at a rate which allowed for population growth in those years, the city would have spent an additional $45,000,000 in the decade of the 1 9 3 0's. Under the same assumption, present annual capital outlays would be almost $17,000,000. With annual outlays of such significant proportions, even major projects could be ^2Paul Strayer, "Public Expenditure Policy," American Economic Review, 39:391, March, 1949* 201 T o tal} f lf a pi t a t : C : % H P H S SS" ? ? tT T T m i f ^ i t i T'm ^ ^ . tfts i © a p rtii u r»: **- ton *1 W4-1 ^-4 $£ r^- *-< fcl t#*s* I* ., : ~ ,. .. .~, ~,_ 'joT:T?naaO ial;Ti l i j f e t i l r f ie# a i t d t i t a a p e t a f c : r 1 9 5 g , - ^ 1 9 g * 202 |integrated into a regularized capital outlay program.33 I The Use of Debt to Finance Capital Outlay Since 1911, the City of Los Angeles has had a I charter debt limitation. From that date until 19^7, the ;limit was 3 per cent of the assessed value of all taxable real and personal property, plus an additional 12 per cent |of the same base for self-sustaining utility debt. 34 when | 'the charter was amended in 1947, the debt limitation was i I rewritten as 15 per cent of the assessed value of all real j and taxable property without reference to the type of jdebt.35 jn addition, the amended charter stated: 1 Nothing herein shall limit the power of the city or any board or department thereof to issue bonds payable solely and exclusively out of the revenues of revenue producing utilities or projects owned, controlled or operated by the city for which revenue bonds were issued.3o 33»rhe efforts which the city has made toward the achievement of this end will be discussed in the final section of this chapter. 34a utility could be classed as self-sustaining by a council ordinance which had to be approved by the majority of the voters voting in any municipal election. Until the 1923 charter revision, this provision was found in Sec. 224; of the Charter of the City of Los Angeles. Charter of the ' City of Los Angeles (Ray L. Cheseboro and William H.’ TTeal, compilers; Los Angeles: Parker and Company, 1937), Sec. 3, Para. 3. 35pharter of the City of Los Angeles (Ray L. Chese boro, William H. Neal, and Bourke Jones, compilers; Los 1 Angeles: Parker and Company, 1949), Sec. 3, Para. 3. 3^L o c . cit. j 203 In the past, debt has played a prominent role in financing the capital outlays of the city.37 This was ! | particularly true of the decade of the 1920's; in the ten j i I year period from 1920 through 1929, the city's debt rose j |from $37,587,000 to $146,646,000.3® in this period, new ! i debt represented more than 65 per cent of the city's capi- 1 |tal outlays. However, since a large portion of this debt ; j 1 was attributable to the utility expansion, the City of Los j ! ( !Angeles entered the depression era with a remaining general; i 1 ;purpose bond capacity in excess of ten million dollars, andi I 1 |a utility bond capacity in excess of one hundred million I ' ! (dollars. 1 I | I t ! On March 5, 1931, the voters authorized three bond [ 1 ! ]issues totaling five million dollars for the express pur pose of alleviating unemployment.39 These bonds were Issued and the proceeds expended, but their sale put the 37city of Los Angeles, Office of the Controller, History of Bonded Indebtedness at the City of Los Angeles, 1895-1931. ^7 PP. 33unless otherwise noted, debt figures are taken from City of Los Angeles, Controller's Annual Report. 3^Specifically, the voters approved a three million dollar issue for street construction and repair, and a million dollars each for parks and playgrounds. All of these issues were identified as unemployment bonds. City of Los Angeles, Office of the Controller, History of Bonded Indebtedness of the City of Los Angeles. l895“1931, p. 21. 204; I ! I city very close to its legal bonding capacity applicable ■ ! . ! |to general purpose bonds. Despite a small reduction of 1 I I general purpose debt in 1933, that year's decrease in i jassessed valuation was sufficient to cause the city's j \ existing debt to exceed the legal limitation. In the next j jfour years, Los Angeles was able to reduce its outstanding i debt $2 0,583,000, the remaining $36,82 0,8 62 being just |under the legal limit. It was not until 1938 that the city ;was in position to consider any additional general purpose Idebt, regardless of need or merit. I Prom 1938 until 1946, the net general purpose debt of the city was reduced slightly, while capital expend!- j i tures were held at very low levels. In the next five years,’ the city's general purpose bonded indebtedness was i increased $53,840,000, representing 40 per cent of the city's non-utility capital expenditures of that period. The debt increase was made legally possible by the postwar increase in assessed value and by the 1947 charter amend ment.1 * - ^ At the close of fiscal 1953-54, the city's remaining bonding capacity was in excess of $450,000,000, even though its non-utility debt stood at the peak level 4 o Since 1935, the Department of Water and Power has been using only revenue bonds. Since such bonds are exempt from the legal limitation, this action has contributed to the expanded debt capacity. 205 'of $140,943,000. | Thus, at the present time the City of Los Angeles I has a large margin of unused legal debt capacity; it has ! ! Soutstanding a debt which requires that about 10 per cent i , iof the city’s annual budget be appropriated for bond redemp- i ition and interest; and it has established a pattern of j ! , i financing a sizable share of its capital expenditures with j i i i - i I |the proceeds of bond issues. These factors all promise J |continued use of partial bond financing as a means of ! ;acquiring future capital assets. ; ' i j j I i ! V. CAPITAL BUDGETING IN THE j CITY OF LOS ANGELES j ! Although the City of Los Angeles was one of the leaders in the field of long range planning, it has neglected the financial aspects of the city’s own respon sibilities for the realization of such plans until rela- 4p tively recently. This neglect occurred despite the fact ; ^The utilities all contribute the cost of servic ing their debt to the city, so that the actual debt burden : to the taxpayers is approximately 5 per cent of the annual budget. 42 Charles M. Robinson’s 1907 work, Los Angeles, the City Beautiful, was one of the first city master plans. In the same year, Los Angeles enacted the first zoning ordinance in the United States which included undeveloped j 206; i | the problems of actually getting funds for the citjte capl- . ! tal outlays has long been recognized. The 1925 Charter * i specified that six cents on each one hundred dollars of assessed valuation within the city should be paid into the j j Permanent Improvement F u n d . This provision, which is in j i ' | the present Charter, further stated that moneys in this i | fund could be spent only for: i | ... the acquisition of lands, rights of way, or I buildings, or the construction of street improvement i work, building structures or other public work or | improvements of an estimated life of not less than I ten years.*4 The fact that a portion of the city's revenues was i j earmarked for capital outlay did not lead to the systematic j i Iplanning~which is an essential ingredient of a capital b u d g e t . in their annual report for the fiscal year 1929- t 30, the Board of City Planning Commissioners stated: land. Robert A. Walker, The Planning Function in Urban Government (second edition; Chicago: University of Chicago Press, 1950), p. 6l. ^Charter of the City of Los Angeles, 1948, section 3b. 44 Loc. cit. ^In a pamphlet published in 1927, C. E. Rightor referred to a five year program of capital improvements being prepared by the Los Angeles Bureau of Budget and Efficiency. Apparently, this project was never completed. C. E. Rightor, The Preparation of a Long-Term Financial Program (New York: Municipal Administration Service, 1927), p. 12. 207 It was the general nature of the City Planning Commission's contact with city problems rather than with any single one of the previously mentioned activities that impressed upon its members the importance of devising a more orderly method in dealing with the rapidly increasing expenditures for all types of publiG improvements. It was thus that on November 3# 1925# the pronouncement and recommenda tion to the City Council to devise and adopt a firm policy of budgeting of all capital expenditures for all public improvements. Though no actual practice in this respect has yet been established, it is nevertheless interesting to note that the repeated insistence by the Commission that such a policy be employed together with the terrific financial burden which the unprecedented development program has placed upon property have finally produced a public awakening that has even spread well beyond the con fines of the City within which the proposal origin ated.^6 However, the public awakening referred to was not suffi cient to produce the desired result. Early Capital Budgeting Efforts The first capital improvement program which included any consideration of the city's financial status was prompted by the federal government. In 1935, at the request of the Federal Govern ment, the City Engineer prepared another list of projects involving 178 projects for an estimated construction cost of $85,509,646. This list was accompanied by a report covering the financial status of the City and indicated that, although the financial condition was sound, no surplus ^City of Los Angeles, Annual Report. Board of City Planning Commissioners, July l“ 1929 to June 30, 1930, p. 467 208; I I I money was available in the general fund to finance ! the City's portion of the work relief program.47 j | Thus, the 1935 report was prepared as two Independent j : sections, and not as a single plan integrating the city's ; needed capital facilities with its ability to pay. I i In 1940, the City Engineer submitted to the Board of Public Works a "Report on the Advantages of Adopting a Long Range Public Works Program for the City of Los j Angeles. On the basis of this report, the Board author- I ized the City Engineer to proceed with the preparation of j j i ; I ; such a program. The final program, "A Proposed Six Year i i ! Program of Public Works Construction for the Fiscal Years I i -1941-42 to 1946-47 Inclusive" was approved by the Board, j ! , ; but before any Council action was taken the nation became actively engaged in World War 11.^9 Interest in long range planning was re-stimulated ^George A. Terhune, "Advance Financial Planning in the City of Los Angeles: (unpublished paper submitted to fulfill requirements for Public Administration 535# The University of Southern California, Los Angeles, January, 1954), p. 2. 4®Thls was an unpublished, unpaged report signed by Lloyd Aldrich, City Engineer, City of Los Angeles, April 1, 1940. ^city of Los Angeles, "A Proposed Six Year Program of Public Works Construction for the Fiscal Years 1941-42 to 1946-47 Inclusive," mimeographed, 1941. n.p. 209 ; by the fear of a postwar slump In private employment. The i ;City Council had already instructed the City Engineer to i bring his 19^1 program up to date when the state appro- j priated ten million dollars for matching grants-in-aid for ! ithe preparation of postwar public works programs by rauni- ; cipallties in June, 19^.'^ The City Engineer complied with the Council's request;^1 the Board of Public Works approved the program and forwarded it to the Council in ! December, 19^4; it was not until June of 19^5 that the | ;legislative body designated the sewage treatment plant as i the top priority item and requested state aid for detailed I I ! I ■ |planning. It was not until December, 19^5* a full year | after receiving the City Engineer's work, that the Council ' officially adopted the entire priority list. Postwar Capital Budgeting Efforts I • ■ ■ w i H m m m m w I * a a p iiiiP f iiiiv a n f iB i In the years following the war, most of the capital : ! expenditures made by the City of Los Angeles were drawn from the approved priority list. However, this was a tribute to the care with which the City Engineer had pre pared his program, rather than a rational approach on the i 5°Stat. California. 19^4, 58th Legislature, fourth extra session, Chapter 47. ^City of Los Angeles, "A Proposed Six Year Program , of Postwar Construction (compiled by Lloyd Aldrich, City Engineer; mimeographed, 19^*0, 86 pp. j 210 part of the Council. j I The random and individual nature in which capital j ■ projects were being selected was recognized by Mayor j I Fletcher Bowron, and early in 1951, he requested the j | ! ;Director of the Bureau of Budget and Efficiency to suggest | |an alternative plan.^ The end result which the Mayor hoped to achieve was a better coordination of capital out- jlay, ability to pay, and current budgeting. I The essence of the suggestions made by the Director ! of the Bureau of Budget and Efficiency was: i ! 1. To give stature to a capital improvement program, j the Mayor and Council should pass an ordinance j I stating that in the best interests of the City, j an Annual Capital Improvement Budget be submitted j ! by the Mayor concurrently with the Current Budget. J These two budgets would be considered concur- ! rently by the Council in the manner set forth in the Charter. 2. Eaeh department should annually submit to the Coordinating Board a list of projects arranged in order of their priority.53 3. The Coordinating Board should prepare a master priority list for the entire City, and submit this list simultaneously to the Mayor and the Council. 52The title of this office has since been changed to City Administrative Officer. 53The Coordinating Board was created by Charter Amendment in 19^1. The Board is made up of the Director of Planning, Chief City Planner, and the heads of the major departments; it is required to meet at least once a month to discuss the City's master planning. Charter of the City of Los Angeles. 19^8, Section 95 1/2. 211 i | 4. The Mayor, assisted by the Bureau of Budget and : Efficiency, should prepare a Capital Improvement | Program based on the priority list, taking into ! consideration financial, legal, and time limita tions. l I I This plan was acceptable to the Mayor; however, 5 I | 1 there was not sufficient time to follow the suggested pro- I i j :cedures for the items to be included in the 1951-52 budget.j : ! !In his proposed budget for that year, the Mayor included a j I lump sum appropriation of $24,549» 000 identified as the j i ! I Capital Improvement Program. This proposed outlay had the I i i i :following notation: i | i Project allocations to be determined by Mayor and j Council upon recommendation by the Coordinating | j Board of a program embracing project priorities, ! cost estimates and time schedules; such recommenda tions to be based upon careful analysis to deter mine relative importance and urgency of projects requested and submitted by the several departments, bureau heads and officers of the city.54 The Council deleted the Mayor’s Capital Improvement Program from the budget, and successfully overrode a veto of this deletion. In the Council discussions of the matter, a suggestion was made that a new committee be established to perform the function assigned to the Coordinating Board under the Mayor's plan. In October, 1951, such a committee was established: the Public Works Priority Committee. This committee has the following 54city of Los Angeles, Proposed Budget 1951-52. p. 6l. 212 membership: Council: l Chairman of State, County and Federal ! Affairs Committee Chairman of Public Works Committee Chairman of Finance Committee Administration: City Administrative Officer | Engineer of Administration | Director of Planning j Independent: President of Board of Public Works-'*-3 i : Thus, the Council established itself on a committee whose ! ! duty it is, "to review all plans for the construction of I i public improvements, including plans for financing, and i j make recommendations to the Mayor and Council as to the | relative importance of each project."^ i Since the Public Works Priority Committee was i clearly assigned a review function, impetus for an original list of capital projects was assumed by the City Adminis trative Officer. This means that final action on a spe cific capital project can be taken only after: 1. Request for the project submitted to the City Administrative Officer by a department head. 55rhe fact that the Mayor requested a lump sum appropriation, with specific projects to be selected at a later date, undoubtedly motivated a desire for Council representation on this priority committee. Had time per mitted the Mayor to follow the suggested procedures, the legislators might never have felt the necessity for repre sentation. ^Terhune, oj>. cit., p. 10. 2. Review of that request and assignment of priority by the City Administrative Officer. This review | includes certification as to conformity with the | Master Plan. ! 3. Review of the City Administrative Officer’s list ! by the Public Works Priority Committee. ; 4. Review of the Public Works Priority Committee’s I list by the Mayor in the preparation of his pro- j posed annual Capital Improvement Program. I 5. Review of the Mayor’s Capital Improvement Pro- | gram by the Council in its budgetary deliberations. The legislative body's great concern with capital 1 | outlay is further evidenced by the fact that the above screening has not been sufficient to satisfy the Council in i , the two years that the plan has been operative. In both ■ these years, the Council has attached a note to the appro priation for the Capital Improvement Program stating that the projects shown were tentative only and subject to modification. A comparison of the actual capital expenditures in 1952-53 with those proposed for that year in the Mayor's Capital Improvement Program revealed that 74 per cent of the outlay had been made as proposed.57 Nevertheless, the City Administrative Officer realized that the procedures being followed were Insuring careful selection of capital outlay projects only on a year to year basis; the actual 57 i b i d ., p. 12. 214 i I amount of capital expenditures was still being determined ; i i as a residual item in the budgetary process; and the city*si ratio of actual capital expenditures to needed capital \ j expenditures was still declining. In other words, despite j i an improved selection process, the problem of providing ; i j the necessary capital facilities for the City of Los 'Angeles was becoming more acute. i | In June of 1953, the City Administrative Officer, i ;with the approval of the Mayor, assigned a part of his i jstaff to the development of what was called an ’ ’ Advance ! I Financial Planning Survey.” This project was to explore i |foreseeable future needs of the city, both operational and ! i ; I capital, and to develop a long range financial plan for the; next six years. The results of this survey were to be submitted to the Mayor, the Public Works Priority Committee, and the Council in an effort to appraise these groups of the needs and abilities of the city in the area.of capital outlay. | The ’ ’ Advance Financial Planning Survey” was com pleted in February of 1954, and it had a significant, .impact. At least partial credit must be given this survey I for the following: passage of the previously noted one- half cent increase in the city's retail sales tax; passage of an ordinance providing for an Annual Capital Improvement 215 ;Program for the Gity of Los Angeles; and passage of the |first annual budget which included specific project appro priations in strict accord with a capital improvement pro- j igram.^ Unfortunately, the Department of Water and Power, \ the Department of Airports, and the Harbor Department are i ;not covered by the present procedures. i 1 ! VI. CONCLUSIONS i i i ! The Gity of Los Angeles is a diversified, rapidly igrowing, metropolitan city. Its financial history reveals i { enviable financial soundness, even through the critical iyears of the early 19 30's* and a regretfully unstable pattern of capital outlay. In recent years, the city has operated well within its legal debt limits, but very close to its legal property tax limits. Also, a growing relianee on the sales tax and a concentration of employment in the aircraft industry are indicative of less stability in the future. The city is not in dire financial straits, but the problems of the future are apt to be greater than those of the past. Despite being one of the leaders in the field of city planning, the City of Los Angeles has experienced 58City of Los Angeles, Ordinance 103,047, April 7, .1954. 216 i | j great difficulty in instituting capital budgeting pro- l | cedures. Numerous efforts were made, but only the most recent has had marked success. The greatest obstacle which has confronted the capital budget has been the | unwillingness of the legislative body to commit itself to I ! a specific capital outlay program for even a single year. | ! Such a commitment was made for the first time in the j budget for 1 9 5 ^ - 5 5 t but that commitment contained no ; reference to a long-range program. In other words, the I City of Los Angeles now has an Annual Capital Improvement ! ’ Program; whether this device can achieve the goals of a ■ capital budget remains to be seen. CHAPTER VII CAPITAL EXPENDITURES AND BUDGETING IN THE CITY OF SAN DIEGO San Diego's spacious harbor was discovered in 1542 by Juan Rodriguez Cabrillo who had sailed northward from Mexico. More than two hundred years elapsed before the first permanent settlement was established under the lead ership of the Franciscan, Father Serra. 1 This settlement became the City of San Diego by act of the California legislature in March, 1 8 5 0 .2 At the time of its incorporation, the City of San Diego had a population of 650 and an assessed valuation of $375,160.^ Economically, the city was dependent upon the 4 surrounding agricultural area and the ocean. One hundred ^-This two hundred year interlude was aptly described by one author as "one of history's longest mananas." Max Miller, Harbor of the Sun (New York: Doubleday, Doran and Company, Inc., 1940), p. 14. 2Walter Gifford Smith, The Story of San Diego (San Diego: City Printing Company, 1892), p. 95’ . 3Ibid., p. 1 0 1. i t ^In addition to the employment provided by the harbor traffic for many years the ocean was the source of another of San Diego's major industries, whaling. Miller, op. cit., pp. 182 ff. 218 C ' years later, the city's population was 33^>387# and its j assessed value was $311,586,940.^ ! 1 i I. THE ECONOMY OP SAN DIEGO | The City of San Diego owes its origin to the fine | natural harbor it possesses; this harbor, and the temper- I | ate climate have attracted much activity to the city, not the least of which is military activity. ! | ! I 1 1 I Population Trends j ! The Bureau of the Census identifies the City of San ! • ! | Diego as the central city of a metropolitan area whose j i I boundaries are coterminous with those of San Diego County.1! : Clearly, the city itself dominates the area which it serves, although the rate of growth outside the city has 8 been more rapid since 1940. ^Bureau of the Census, Census of Population: 1950 (Vol. I; Washington: Government Printing Office, 1953)# p. 5-11. ^City of San Diego, Annual Budget for 1953-54. p. viii. 7 Bureau of the Census, Census of Population: 1950 op. cit., p. 1-68. Q °The City of San Diego contains more than three- fourths of the urbanized population in its metropolitan area. TABLE X POPULATION OP THE CITY OP SAN DIEGO AND OP SAN DIEGO COUNTY: 1880-1952 Year San Diego San Diego Percentage County of County Population in City 1880 2,637 8 ,6 1 8 30.5 1890 16,159 334,987 46.2 1900 17,7 0 0 35,090 5 0 .6 1910 39,578 6 1 ,6 6 5 64.2 1920 7 4 ,3 6 1 112,248 6 6 .2 1930 147,995 209,659 7 0 .6 1940 203,341 289,348 7 0 .2 1950 334,387 556,808 6 0 .1 1952 434,924 7 1 0,0 00 6 1 .2 Source: Bureau of the Census, Census of Population: 1950 (Vol. I; Washington: Government Printing Office, 1953), PP* 5“H; Bureau of the Census, Census of Popula tion: 1920 (Vol. I; Washington: Government Printing Office, 19^1), p. 95; and City of San Diego, City Planning Com mission Biennial Report 1952-53, P« 3« 220 I ! The rapid growth shown by the Census Bureau’s fig- ; i ; ures does not fully reveal the erratic growth pattern which' the City of San Diego has experienced. ^ in almost every j ! j ; decade, the population increase has been concentrated in j j two or three of the ten years reported. This was true of i i j the first decade shown, when population growth was concen trated in the years, 1886, 1887, and 1888; it was true of J i I 1 | the decade of the 1940*s, when growth was concentrated in j 1 1941, 1942, and 1943; and a similar concentration is very ! apt to be revealed in the early years of the present ; j decade. ! i 1 The erratic pattern of growth makes it difficult to , prepare useful, long range plans for municipal services. In 1944, the State Reconstruction and Reemployment Com mission prepared population estimates for San Diego County; the most optimistic estimate given was a 195Q population of 450,000 almost 25 per cent below the actual figure of 556,8 0 8.10 Regardless of such errors of estimate, ^Some of this growth is attributable to annexation. The original city boundaries included 95 square miles, while the 1953 boundaries encompass 1 1 0 .7 square miles. City of San Diego, City Planning Commission, Biennial Report 1952-53. p. 26. 10San Diego Chamber of Commerce, Industrial and Commercial Survey. City of San Diego and San Diego County (prepared by Day and Zimmerman, Inc., San Diego: San Diego Chamber of Commerce, 1945), Book I, p. 8 9. 221 ! I governmental services must be provided for these citizens, ; and funds to support the services must be raised. ! i Future growth within the Gity of San Diego is i equally unpredictable. However, it is fairly certain that j l the city will continue to grow. Physically, there is still! i a large amount of vacant land within the city limits. Also, the present city administration has taken a rather liberal attitude toward annexations, and because of the i city’s advantageous water rights, it is likely that much j of the post-1950 growth in unincorporated areas east of j 14 I the city will petition for annexation. x Thus, the City j of San Diego must be prepared to expand its physical facilities; the future will reveal how great and at what rate this expansion will have to take place. Employment and Economic Stability I The economy of the San Diego Metropolitan area has changed significantly since 1939 when the area ranked 79th 13-The City of San Diego does not seek or encourage annexations. However, unlike many other cities, San Diego ! will accept annexation of a deficit area, an area which will add more to costs than it will to revenue. Orin Cope, Assistant to the City Manager, City of San Diego (interview: September, 1954). 222 among industrial centers of the nation. Since the middle of 19^0, as a result of the defense program and the demands of war, the San Diego industrial area has undergone substantial j changes in its economic life, changes which have ! come so rapidly that they have not failed to leave their visible mark upon the community. The eco nomic and cultural composition of the population has been changed. An increased variety in condi tions of living has been added. New burdens in governmental responsibilities to be borne by the whole community, particularly as resting upon the property tax base of the County and its cities, have necessarily been accepted. Many public services of various kinds, particularly in the City of San Diego, have been strained to capa city. The industrial and occupational pattern ( of the area have been drastically altered.■ * ■ 3 With the expansion of the defense effort, the pro- j i !duction of aircraft increased rapidly and by 19^3# San I j Diego was the 28th ranking industrial center of the 14 nation. At the present time, the general economic structure ! of San Diego is very similar to that of urban United States, with the exception of a greater than average employment in ^San Diego Chamber of Commerce, Industrial and Commercial Survey, City of San Diego and San Diego County (prepared by Day and Zimmerman, Inc., San Diego: San Diego Chamber of Commerce, 19^5), Book I, p. 136. ■^Arthur G. Coons and Ar jay R. Miller, An Economic and Industrial Survey of the Los Angeles and San Diego Areas (Sacramento: California State Planning Board, 1941J, p. 346. ^San Diego Chamber of Commerce, loc. cit. TABLE XI PERCENTAGE DISTRIBUTION OF EMPLOYED PERSONS IN SAN DIEGO COUNTY Classification 1940a 1950b 1952° Agriculture 9.4 7-3 4.6 Construction 6.7 7.4 6.1 Manufacturing 13.5 14.3 27.0 Transportation, Communication and Utilities 5.1 5.7 4.8 Service Industries 3 0 .1 2 8 .1 17.8 Public Administration 9.3 12.5 1 3 .2 Wholesale and Retail Trade 23.5 21.7 21.5 All Other 2.3 3.0 5.0 bureau of the Census, Population (Vol. Ill, Part 2; Washington; Government Printing Office, 1943), PP. 304-305. ^Bureau of the Census, Census of Population; 1950 (Vol. II; Washington; Government Printing Office, 195^3» PP. 5, 433-W. cThe San Diego Chamber of Commerce, San Diego. 1954 Annual Business Survey, unpaged. 224 public administration. However, within the manufacturing category, there is a heavy concentration in the durable goods field, caused by the dominance of the aircraft indus try. In June of 1952, when total employment in all manu facturing in San Diego County was 51,000, the aircraft industry was employing 39,400, or 77*2 per cent of the total.^ Next in importance was food processing which 16 employed only 7 per cent of the total. The above employment figures exclude military per- j i sonnel which are an important segment of San Diego's I i i economy; they make a significant contribution to the sup- j port of non-basic employment in the trade and service fields. The importance of the military is apparent from the breakdown of San Diego County income by source as shown in Table XII on the following page. In addition, 1952 dis bursements to San Diego based forces afloat and to mili tary personnel assigned to camps in the surrounding area totaled $365,000,000. An unidentifiable portion of this income flows through the economy of San Diego. Clearly, the economy of San Diego is based on mili tary expenditures. A serious reduction in military IS ^California Department of Industrial Relations, California Labor Statistics Bulletin: Area Supplement, 355“A:6, June, 195^ ^Loc. cit. TABLE XII INCOME BY SOURCE, SAN DIEGO COUNTY: 1954 Source • Income Manufacturing Payrolls Navy Payrolls Agriculture Tourist Trade Source: The San Diego Chamber of Commerce, San Diego. 1954 Annual Business Survey, unpaged. ♦This figure includes civilian pay rolls of $68,537,7 00 and military payrolls for those permanently assigned to San Diego activities of $106,159,300. $230,0 0 0 ,0 0 0 174,697,000* 83,962,736 39, 000,000 appropriations would be ruinous for the city’s major indusj try, aircraft production, and would reduce the city’s I | income from basic activities to almost nothing. In fact, i the whole city of San Diego might be regarded as a military' base, and as such, its level of activity is dependent upon j Congressional action. In terms of economic stability, the annual military appropriation made by Congress is much more important to the City of San Diego than any of the usual economic indi- j cators. At the end of World War II, San Diego was one of j 1 the few cities in the nation which had a severe unemploy- j | ment problemj1^ it continued to have this problem until | i after the outbreak of the Korean crisis in 1950* In J I effect, economic stability in the City of San Diego is dependent upon the military expenditures of the federal government in the San Diego area. II. REVENUES OF THE CITY OF SAN DIEGO San Diego’s unique economy has had an impact on the type of tax structure which has been developed, but it has •^Employment in aircraft manufacturing fell from 49,258 in January, 1945 bo 7,910 in December of that same year. California, Department of Employment, Employment and Payrolls in California in 1946. Report 127, No. b, p. 36"! 227 I i s ! TABLE XIII I j REVENUE BY SOURCE, CITY OF SAN DIEGO: 1952-53 Percentage of Percentage of Total Revenues Total Revenue: Source San Diego All Cities |Property Taxes 32.9$ 49.1$ j Sales and Gross Receipts I 1 3 .6 10.3 j j Licenses and Other Taxes 6.4 6.4 ;Subventions 2 6 .0 19.7 Current Charges 8.9 8 .3 Special Assessment 5.2 1 .6 Unallocable Revenue 6 .9 4.6 SS S mS B S S B t S BSB KSt tSKSB BSS BBB SSMBMKBS SSB SBS BSBE MS MS SBS SSS SBSS BSS BSS SSSS SKS BSB BSS S^ ^ Source: Compiled from the Bureau of the Census, Compendium of City Government Finances in 1953 (Washington: Government Printing Office, 195*0* P* 157* 228 I ;by no means resulted in a complete departure from the tra ditional tax supports employed by municipal governments. I Property Tax Revenues I " " The Charter of the City of San Diego states that the tax levy "shall not exceed the rate of $1.3^ on $100.00 of iassessed valuation." Exempt from this levy are the costs I of the city's contributions to employee pension funds, the i ;cost of debt service, and a two cent levy for the support of the zoological exhibits in Balboa Park. Apparently, this limit has never seriously hampered the city; since its jinception in 1931, the maximum rate subject to the statu tory limit was the 1938 levy of $1,201.^® As illustrated, San Diego's experience with the property tax during the 1930's was not encouraging. The yield of the tax fell almost 30 per cent, despite a 33 P©i* cent increase ip the tax rate and an Increase in the assessment ratio from 40 to 50 per cent of market value in 1935» In 1933, the San Diego Union had to publish a special 170 page edition to list the ^3,431 parcels of tax l8The Charter provides that this limit may be sus pended on an annual basis in times of emergency by an affirmative vote of 2/3 of those voting in an election. Such a proposition has never been presented to the voters. i ! 1 1 PROPERTY TAX, TABLE CITY OF XIV SAN DIEGO: 1929-■1939 i i Year Tax Ratea Delin quency Rate*3 Yield3- (000 omitted) Assessed, Valuation0 (000 omitted' • f i 1929 $2.08 5.14 $3,1 8 1 $1 7 7,0 20 1930 2.27 5*14 3,554 165,359 1931 2.19 6.94 3,741 164,431 1932 i 2.17 13*42 2,831 143,018 1933 2.49 17*77 2,731 120,927 1934 2.91 17*50 2,648 101,0 96 1935 2.86 14.82 2,821 10 0,5 67 1936 2.10 8.77 3,378 136,740 1937 2.10 7*0 6 2,941 133,723 1938 2.13 5*21 3,160 140,005 1939 1.96 3.12 3,058 143,6 8 5 Source: aCity of San Diego, City Planning Commission, It Happened This Way (San Diego: City of San Diego, 1944J7 p. 3<L b Ibid., p. 28. The actual delinquency rate was somewhat greater for all years, since the City of San Diego anticipates and budgets a 5 per cent delinquency on all non-operative properties. 230 delinquent land in San Diego C o u n t y .^ Adjustments for population growth in the years shown revealed that the per j capita property tax levy fell from $2 5 *3 8 to $1 5. 6 1. i Throughout the decade of the 1940's both the base | and the yield of the property tax continued to grow. While; this growth was sufficient to keep pace with the increase in population, it was not sufficient to keep pace with the rising price level; from 1940 to 1950, per capita assessed AA J valuation rose $2.32, or slightly more than 30 per cent. j I The future yield of the property tax can be increased if it is politically feasible. However, the ! assessment is done by the San Diego County assessor so j that the base of the tax is not immediately determined by the city. Furthermore, the city's tax rate has varied within a few cents of two dollars for the past twenty years: so that this general rate is well established in the minds of the taxpayers and would be difficult to exceed. Both of these factors make any radical adjustment in the property 1 9 San Diego County, Planning Commission, San Diego County, California (mimeographed, 1937), P. 2 9. ^°Almost all of this per capita increase has been made since June 30, 19^7 when per capita assessment amounted to $6 3 0. If this date is used as a base, the increase has been almost 40 per cent. 231 21 tax a major political problem. Sales and Use Tax Revenues In 1946, San Diego joined the growing number of California cities which had adopted retail sales taxes. i The rate was established at one-half of one per cent, and the tax immediately became an important source of revenue. The instability of this revenue source is apparent from the above record of receipts. From 1946 until the outbreak of the Korean crisis in the summer of 1950, the 1 City of San Diego was troubled by unemployment, and sales tax receipts were relatively stable during this period. When military activity expanded, taxable sales Increased $126,662,200 In a single year and the receipts from the ! sales tax increased 30 per eent.^ Fortunately, this was an Increase, but It is indicative of the cyclical sensi tivity of sales tax receipts. The city could increase the yield of the tax by increasing the rate to 1 per cent, as has been done in many other California cities. However, this does not appear likely or desirable. It is not likely since the 21 Any adjustment must, of course, be within the legal limits. 22 &^The San Diego Chamber of Commerce, San Diego, 1954 Annual Business Survey, unpaged. TABLE XV RETAIL SALES AND USE CITY OP SAN DIEGO: TAX RECEIPTS, 1946-1952 Year Receipts 1946-47 $1,404,875 1947-48 1,58 2,5 85 1948-49 1,629,581 1949-50 1,589,136 1950-51 2,065,715 1951-52 2,307,043 Source: California, Report of Senate Interim Committee on State an? Local T^^l][on,~^^FTT, ”(Sacramento: California Legislature, 1953)* p. 77. 233 one-half per cent rate Is levied by all the cities in the | San Diego urban area, and it would be politically difficult! to break that pattern. It is not desirable since the : yield of the tax is so sensitive to economic changes; j ! | assuming a one per cent rate, a drop in the yield equal to i ! the increase of 1950-51 would cut the city's total tax receipts by more than $1,000,000. t I Other Locally Controlled Revenues 1 I I The four revenue categories of Licenses and Other , Taxes, Current Charges, Special Assessments, and Unallo- j cable Revenues are the source of a substantial portion of I San Diego's total revenue. These categories include a ; 1 ] great number of individual sources, many of which are of relatively minor importance. ^ In the first category of Licenses and Other Taxes, the most important source is parking meter revenue which has consistently produced about $450,000 annually for the past several years.^ Also; of Importance in this category are the head taxes which are; * levied on manufacturers, wholesalers, retailers, contrac tors, and almost all other employers, and the amusement taxes, which have been relatively consistent revenue ^The Annual Budget 1951-52 of the City of San Diego lists forty-two separate sources. 2i*City of San Diego, Annual Budget for 1953-54. p. ix. 2$k • producers since the end of World War II. ^ I ' 1 The City of San Diego receives slightly in excess of! i 0 6 1 ;one million dollars from service charges. The most • i j {significant of these, accounting for two-thirds of the i i I total, are charges collected by the Department of Engineer- i i i |ing and Public Works. At present, the city has not adopted 'either a sewage or garbage service charge. i Special assessments have always been an Important j , i !source of funds for public works construction in the City ; ! \ !of San Diego. In 1952, the Special Assessments reported to; i ; j the Bureau of the Census totalled $1,054,000, which meant that San Diego ranked tenth in the nation with regard to |the volume of special a s s e s s m e n t s . i n view of the city’s; 1 f erratic growth pattern, there is no doubt that special assessments will continue to play an important role. Combined, these various locally controlled sources produce about one-quarter of the city’s total revenue. However, since so many of them represent recovery of expenses incurred, their impact on the financial status of 25>rhe rate of the flat fee tax on places of amuse ment was raised In 1951, so that the yield of that tax was Increased some 40 per cent In that year. 26 This does not Include Water Department revenues. ^Bureau of the Census, Compendium of City Govern ment Finances 1952. op. cit., p. 2o. i 235 i |the Gity of San Diego is substantially less than their |percentage of total revenue would indicate. ° Combined, i this miscellaneous group of revenue sources is the most j stable element in the financial structure of the city. 1 I : i iRevenues from Other Governments | The Gity of San Diego depends somewhat more heavily i J on financial aid from other governments than does the ;average city of California. This is due to the fact that ^ the federal government contributes a quarter of a million j ; I |dollars annually as in lieu tax payments for federally j owned housing within the city limits. Otherwise, as is ! i :true of all California cities, the bulk of the subventions j : i received result from shared taxes. If these shared taxes and in lieu payments are i allocated to their respective sources, the revenue base of the City of San Diego is shown in Table XVI. Municipal Revenues and Fluctuations in Income Because of the enormous change which has taken place in the past fifteen years in the economy of San Diego, the o f t ' cwThis point is most clearly illustrated in the case of special assessments; the city will incur only minimal engineering costs prior to receiving the assurance that all costs will be reimbursed. In other words, if the revenue had not been forthcoming, no expenditures would have been made. TABLE XVI REVENUE BY ADJUSTED SOURCE, CITY OP SAN DIEGO; 1952-53 Percentage j Source Amount of Total Property Taxes $8,967,366 48.1 Sales and Gross Receipts 2,842,043 15.3 Licenses and Other Taxes 1,739,7 0 6 9.3 Grants-in-Aid 692,213 3.7 Current Charges 1,205,688 6 .5 Special Assessment 1,054,000 5.7 Unallocable Revenue 2,121,805 11.4 18,622,821 100.0 E38Bi^BCS3SSOEEB35HSSS3S5S3S55S5SS5535S35S53(BBS8BSB6HB Total 237 historical record of the tax revenues prior to that date is: of little value for present purposes. However, in the casej i of San Diego the past fifteen years encompass a mild busi- j ! ness cycle dating from a peak in 1951-5 2. j ! Although the property tax is less Important to the i City of San Diego than it is to most other municipal juris dictions, it is still the city's most important single source of revenue. As indicated by the figures below, recent revenues from the property tax have increased each year with the exception of 1946-47. The increased receipts; have been due to increases in assessed valuation. In rela-i tion to stability, however, the doubling of the delinquency! rate at the low point of the pycle is indicative of a much | less promising future. However, it must be noted that this rate did not reach its maximum of 3*178 per cent until 1948-49, two years after the reduction in employment in the San Diego area. The city's retail sales tax was not initiated until 1946-47, so that it can be reported for only one-half the cycle. The 30 per cent increase in revenue in 1950-51 is evidence of the upward income elasticity of this source, and it can be safely assumed that it would be equally elastic in the" down-swing. These two sources, property taxes and retail sales TABLE XVII PROPERTY TAX, CITY OP SAN DIEGO: 1945-1953 City Tax City Taxes % County Taxes Year Ratea Collected3, Delinquent1 3 1944-45 $2.00 $4,19 2,0 00 1.472 1945-46 2.14 4,835,000 1.454 1946-47 2.05 4,7 8 2,0 00 1.996 1947-48 1.90 5,043,000 2.278 1948-49 2.05 5,6 6 2,0 00 3,178 1949-50 1.95 6,008,000 2,530 1950-51 1-95' 6,112,000 2.004 1951-52 1.95 6,6 8 1 ,0 0 0 1.943 1952-53 1.95 7,486,000 1.719 Source: aCity of San Diego, Annual Budget, 1944-45 to 1953- 54. ^California, Office of the Controller, Financial Statistics of Counties and Municipalities, 1945 to 1953• taxes, are the basis of 6 3.^ per cent of the revenue , i realized by the City of San Diego. Combined, they should provide the city with a relative stable real income when j the community’s money income is stable or rising. If the 1 1 community’s money income falls, sales tax receipts will drop immediately. Receipts from the more stable property | | tax should enable the city to maintain its real income for j j a period of one to three years, depending upon the severity' of the decline in private money incomes. If the decline j | continues beyond this period of grace, a rising delinquency; rate will undoubtedly destroy the stability of the yield and the City will find itself in serious financial diffi- ! I culties. III. CAPITAL OUTLAY AND DEBT OP THE CITY OP SAN DIEGO Despite the wide variation in the rate of population growth and the unstable economic conditions experienced by San Diego, the city has maintained a surprisingly stable level of capital outlay and debt. Expenditures for Capital Outlay The unusual cyclical behavior of capital outlay by the City of San Diego is clearly demonstrated in the chart presented on the following page. The pattern is unusual in 240 ronal jtesifcu 5 t l r n i Hvnlsi E j 2 * 1 !that the decline in the city's capital outlay began in the jfiscal year 1928-2 9. To a large extent, this decline was 'the result of a $8 0 0 ,0 0 0 decrease in utility outlay. i j However, in the next year, 1929-30* all types of capital i i expenditures were reduced to levels well below the average j |of the 1920's. ! J I Also unusual was the fact municipal capital outlay I ! ! jin the City of San Diego did not remain at the low level ofj 1929-30, but in the next fiscal year rose to $1,975*000, an! ! 3 increase of $759*000. A relatively high level of capi- ! tal outlay was maintained until 1935-36. Despite a some- , j i jWhat lower figure in the late 1930's, the city's average | 1 ' jannual eapital outlay for the decade of the 1 9 3 0's exceeded! that of the 1 9 2 0's by more than $100,000. As in the other California cities studied, capital outlay for the municipal water system dominated the capital expenditures of the early 1930's. The fiscal year 1931-32 . was the exception. In that year, a $300,000 municipal t improvement bond issue was authorized by the voters; pro ceeds from this issue were used for improvements, chiefly 29 in Balboa Park, requiring at least 60 per cent hand labor. ; 2%). W. Campbell, "San Diego's $300,000 Bond Issue Aids Recreation Expansion Program." The American City, *6:4;99* April, 1932. I In the next fiscal year, the city received approval of a I 1 $2,350,000 loan from the Reconstruction Finanee Corporationj i I for the further expansion of the city's water supply sys- ! i 4 . 30 ! item. ) I i j Between 1935 and 1941, the non-utility outlays of ! !the City exceeded those of the Water Department. Aided by j * i federal funds, major improvements were carried out in con- ; i jnection with the civic center, the harbor, and the munici- I pal airport. For the period 1935-38# the City of San Diego| .received $6,014,688 from the federal government for ! 'improvement projects.^1 I Because of its rapid population growth and its mill-j i ■ 1 tary significance, the City of San Diego's expenditures for1 capital improvements were higher than those of most cities of comparable size during World War II. Nevertheless, at the end of hostilities, the city had accumulated a substan tial backlog of needed public improvements. Prior bond authorizations, accumulations in a Capital Outlay Fund, and, advance physical planning enabled the City of San Diego to expand its capital outlay program rapidly following 3°The American City. 48:1:5, January, 1933 (news item). ^City of San Diego, Annual Report 1937-38. p. 26. 243 ;1946.32 j ; i ! ! 1 Use of Deficit Financing ; j The Charter adopted by the City of San Diego in 1931! ! prohibited the city from issuing revenue bonds,33 an(j fur- j ther stated that the city's bonded indebtedness for pur- j '< I iposes other than water supply could not exceed 10 per cent 1 ! 04 I of the assessed value of all real and personal property.-5^ The debt policy of the city has been sufficiently conserva-j tive so that these debt limits have never been a restric tive force. In 1935, when the city's assessed value was at! i its low point, there was an unused general purpose debt j i . i 'capacity in excess of six million dollars, and an unused 1 water bond capacity in excess of three million dollars.35 This conservative policy has been dictated by the state's legal requirement that a general obligation bond issue can be passed only if it can register a two-thirds 32The program was also accelerated by the federal government's prompt allocations for the Mission Bay Project as an unemployment relief measure. 33under a charter amendment approved by the voters in November, 1954, the City of San Diego may use revenue bonds to finance the city's water supply. 3^Charter of the City of San Diego. 1953 edition, Sections 90(a) and 90(b). 35in the following year, the ratio of assessed value to market value was raised from 40 to 50 per cent. 244 j ! jmajority at the polls. With only one minor exception, the j I I jvoters refused to approve any bond issues from 1929 until j j O g ! ,1941. 0 Since 1946, considerably more liberality has been i jshown, and issues for water, recreation facilities, a I library, and an improved sewage system have been passed. Because of its inability to finance its water system j on a revenue bond basis, this utility has dominated the i . [general obligation borrowing of the City of San Diego. In I 1939# the bonds which had been issued to acquire and con- ! ' :struct the water supply amounted to 92 per cent of the city's total outstanding debt. In 1952, this percentage had dropped to 7 7 • \ I [ San Diego's phenomenal growth during the 1940's | forced a rapid expansion of public facilities. There were no cash reserves to finance this expansion, and so San Diego was one of the few cities in the nation which had a greater outstanding indebtedness in 1945 than it did in 1940. The war-time expansion of public facilities was of a minimum nature, so that at the end of the war, the city still had a substantial backlog of needed public improve ments. In order to carry out these improvements, large . 1 bond issues were submitted to, and approved by, the 36city Q f San E)j.eg0> city Planning Commission. It Happened This Way (San Diego: City of San Diego. 1944). p. 14, ielectorate in 1945-46 and again in 1950-51. After the j Majority of these authorizations had been sold, the City of; San Diego's outstanding indebtedness stood at an all time high of $32,814,000. 1 Although the City of San Diego has made frequent usei ■ of debt as a means of financing capital outlay, the history of the city's deficit financing is indicative of a conserv-, ative debt policy. There would seem to be little reason to j i i doubt that the future will see continued use of deficit | I I 1 ■ i jfinancing, particularly in the utility field. j ! I 1 j I ! | IV. CAPITAL BUDGETING IN SAN DIEGO ' ' 1 Although long range planning got an early start in ' the City of San Diego, capital budgeting is a comparatively recent development. Long range planning was first under taken in 1908 when John Nolan was officially called by the city, but was paid from contributions made by George 37 Marston and other citizens. In the years that followed, sporadic interest was shown in the development of San Diego along the lines suggested by Nolan. ^Hardigan Clower, City Planning in San Diego (City of San Diego, mimeographed, 193&)> P* 13* i 246 i iLong-Range Planning i : In 1917> favorably impressed by the planned develop-J i ment of Balboa Park, Major Wilde appointed the first City j i Planning Commission in San Diego. This was a very tem- ! 1 _ ! jporary body. Resignation of the membership was requested j in the year of their appointment because the Commission demanded that the Mayor include the proposed location before jit would approve his plans for a new city hall.six i lyears later, a second Commission was appointed, but it was i (devoid of power. In 1926, John Nolan returned to San Diego ! 1 ! * i jto prepare a more detailed plan and "found matters much as he had left them eighteen years before."^ Nolan's 1926 plan was not definite enough to be the i basis of an expenditure budget, and little progress had been made toward translating it into an expenditure program when the city's revenues collapsed under the impact of the 4o « depression. However, in 193° the City of San Diego made national news with the adoption of its Long Term Program of 3^City Df gan Diego, Biennial Report of the City Planning Commission 1950-1951. p. 5- 39city of San Diego, Biennial Report of the City Planning Commission 1952-1953. p. 3. i L f i One such translation was the Major Street Plan of 1932. I 247 4i Capital Expenditures. x This program had been compiled by the City Planning Director and was a comprehensive list of all needed public works projects. This 1938 effort served the city well in two ! |respects: it enabled the city to respond promptly to |requests made by the Works Progress Administration for ! local projects, and also enabled the city’s administration jto forestall a wartime tax reduction on the basis of the 42 large backlog of needed public improvements. The program ifell short of a capital budget because of its lack of a I comprehensive financial plan and its failure to assign or suggest project priorities. Throughout World War II and the years immediately following, absolute necessity dictated the capital projects which the City of San Diego had to undertake, but the city’s officials did not lose sight of the need for an orderly expenditure program. In 19^3, the Planning Com mission published Planning the Future which was basically a public relations document; it was intended to appraise the public of the city's long range needs, both physical and 41 *City of San Diego, Long Term Program of Capital Expenditures (City of San Diego, 1938), 45 pp. 42 Wartime excess revenues were put into specially created Public Improvement Fund. Samuel M. Roberts (interview, July 16, 1952). !fiscal.^3 Also in the immediate postwar period, the city I instituted a program of regularized annual replacement of jail equipment, office machines, police cars, fire trucks, i etc., in lieu of depreciation. These expenditures, there- jfore, could be included in the regular operating budgets. I Major construction projects, streets, buildings, storm j j drains, sewers, and parks remained to be regularized under k I a capital budget. i i i ;Introduction of a Capital Budget In 19^9, two charter amendments dealing with capital |outlays were submitted to and approved by the voters. The i ;first of these specified that the City Manager submit annually to the Council: A long-term program of proposed activities, devel opments and improvements listed in order of relative importance and specifying whether the work is to be done by bond issue or taxation.^ The other amendment established the Capital Outlay Fund. There is hereby created a fund in the City Treasury, to be known as the Capital Outlay Fund. Into this fund each year there shall be placed all monies derived from taxation required or needed ^3city of San Diego, City Planning Commission, Planning the Future (City of San Diego, 19^3), 28 pp. ^Charter of the City of San Diego. 1953 edition, Section 6 9j. 249 I i for capital outlay expenditures and all proceeds ^ received from the sale of city-owned real property. i ! ! !Once in this fund, monies can be spent only for permanent ■ ■ i ipublic improvements unless a transfer of monies is author- ; lized by two-thirds of the qualified voters, voting in a .special or general election. i ! In the same year, the City Manager appointed a com- ; i 1 imlttee to study the city's capital project needs and to j j ; prepare a long range budget for them. This was a nine man i f committee including seven city officials, the Manager of the ! I !San Diego Taxpayers' Association, and the President of the ! I ! I San Diego Chamber of Commerce. I 1 i Working with the various department heads in the city's administration, the Committee compiled a six year capital budget. The final document included a comprehen sive financial plan and scheduled recommended projects for each of the six years, although no order of priority was indicated within each year. This proposed budget was sub mitted to the council in advance of the annual budget: it was discussed, but no final action was taken by the legis- 46 lative body. However, the capital projects for which ^5Ibid., Section 77. 46 A second committee of fifty civic leaders was established to consider unused revenue sources which might be adopted to provide additional pay-as-you-go funds for : 250 ! . ; !the Council actually voted appropriations in the Annual j Budget 1950-51 were all included in the Committee’s capital! ! budget. i j | j Since 19^9> the responsibility and the procedures , i ' j I for capital budgeting have been more clearly defined. ■Responsibility for the annual revision of the capital Ibudget has been assigned to a three man committee; the j members of this Committee are the City Manager, the City j t ■Budget Officer, and the City Planning Director. In prac- ! i ^ jtice, the latter two officials have assumed the major i | ! Iportion of the duties associated with the preparation of ; jthe capital budget. ' i { | Project requests are prepared by the various depart- ! i ments and intra-departmental priorities assigned by the ■requesting departments. All financial data, except esti mated costs of construction and operational savings, and final priorities are the responsibility of the Committee. In its annual report to the Council, the Committee sets forth projects recommended for the ensuing fiscal year in three categories, "A1 , 1 "B” and "C.f l These categories are not verbally defined, but it is understood that the capital projects. Differences of opinion prevented this group from making a positive contribution, and the com mittee was dissolved without a final report. , 251 jcoramittee is recommending that an appropriation should not be voted for any "B" project until appropriations for all j "A" projects have been made. Thus, San Diego's capital j i ; budgeting system establishes a project priority on a year ! < ;to year basis and also a project priority among those ! 47 Iprojects recommended for the next fiscal year. ' | The legislative body is not legally required to take ! jany action on the capital budget, but merely to accept it j i ; as a source of information when acting upon the capital project requests in the Manager's current budget. In prior i 1 i years, the Council has received the capital budget well in I advance of the current budget, but since it has been used almost wholly in connection with the current budget, the Council has requested that the two budgets be submitted simultaneously for 1955-56. Thus, the City of San Diego has a rather well defined capital budgeting program. The legal basis consists of the single requirement that a "long-term program of proposed ^The long range view which the capital budget has made a part of the administration of the City of San Diego has enabled the city to enter into an informal agreement not to compete at the polls with.the county or the school district for the necessary public approval of a bond issue. Advance knowledge of probable future borrowing enables the city to avoid placing any of its bond issues on the same ballot on which either the county or the school district is seeking an approval. ; 252 i ; j activities, developments and improvements" be submitted to | |the Council annually by the City Manager. The Council has j no legal obligation to act upon this program, per se; to j j date, it has followed the program rather closely in making j - 48 ' its annual appropriation. j i i I ! i j V. CONCLUSIONS i ! I ! i The City of San Diego dominates a metropolitan area j !of almost three-quarters of a million persons. This size j i i :has been attained through extremely irregular population I ! I growth. Future growth seems highly likely since there is ; still much vacant land within the city limits. The economy; ‘ i of the city relies heavily on military activity; much of its service trade is dependent upon the demands of military personnel and their families, and its major manufacturing industry is the production of military aircraft. The citizens and officials of the City of San Diego have for many years demonstrated an Interest in the orderly development of the community, even though many of the early efforts proved fruitless. The Long Term Program of Capital Expenditures prepared in 1938 proved to be of some value, 48 Orin Cope, Assistant to the City Manager, City of San Diego (interview, September 14, 195*0 • |but the most noteworthy contributions towards true capital budgeting have been made in the last decade. ! i , The present capital budgeting procedures in the City i i I of San Diego are as follows. 1. The City Manager is required by the Charter to ; |prepare annually a long-term program. This program must iinclude expenditures and the means by which the expendi- ! [tures are to be financed. 2. The City Manager satisfies the above require ment through the preparation and annual revision of a six j ■year capital budget. Responsibility for the actual prepa- > ration of this budget has been delegated to a committee on j j jwhich both the planning and budget officers are represented.! I ( 3. The capital budget is limited to major con struction projects. By means of detailed replacement schedules, all equipment expenditures have been regular ized, and are therefore processed through the annual budgeting procedures. 4. The capital budget as submitted to the Council employs a dual priority system. Projects are recommended for each of the six years, and those suggested for the ! ensuing fiscal year are further divided into three cate gories on a basis of need. 25^ 5. The Council is not obligated to take any formal action on the capital budget. However, in making appro priations, the Council has followed the recommendations set forth in the capital budget. i CHAPTER VIII i i CAPITAL EXPENDITURES AND BUDGETING IN THE j I CITY AND COUNTY OP SAN FRANCISCO | ; i At the first session of the California State Legis- | ; l llature in 1850, the City of San Francisco was incorporat- ' i 1 ed. The same legislature also created the County of San ; t JFrancisco, including within its boundaries the greater | !part of the San Franciseo peninsula. The life span of , 1 j I these two as distinct Jurisdictions was short. Spurred on ! by the contrast between an orderly county government and a eorrupt and inefficient city government, the state legis lature in 1856 created the consolidated City and County of O San Francisco. A new county, San Mateo, was created from the southern portion of the original San Francisco County, so that the area of the consolidated Jurisdiction was only slightly larger than that of the original city. The City and County of San Francisco still retains the 1856 John C. Bollins, The Problem of Government in the San Francisco Bay Region (Berkeley: Bureau of Public Administration, University of California, 194-8), p. 7. 2Ibid., p. 2. 256 boundaries which delimit a total land area of 41.7 square miles. i j I. ECONOMIC BASE OF SAN FRANCISCO San Francisco is a city which owes its origin to its excellent natural harbor, and its early growth to the dis- jcovery of gold in California. The harbor continues to play ! an important role in the city's economy, but the descend ants of those who sought the gold fields have turned to other pursuits. Population Growth and Trends Like Los Angeles, San Francisco is a metropolitan city, and the hub of a much larger economic unit. There fore, in order to comprehend San Francisco's economic situation, data concerning both the City and County of San Francisco and the Bay Region of which it is a part must be A reviewed. At the time of its incorporation in 1850, the City • 5 JBollins, loc. cit. 4 As defined by the U. S. Bureau of Census, the San Francisco-Oakland Standard Metropolitan Area includes six counties: Alameda, Contra Costa, San Mateo, Marin, San Francisco, and Solana. 257 I c |of San Francisco had a population of 3^>775> but toy 1880, 233,959 persons lived in the city, and the Bay Region con- itained approximately one-half of the state's total popula- | tion. 8 During this era, and as late as 1900, San Francisco i was "by almost every quantitative measure the preponderant j part of the Bay Region.^ 1 i I Following the disastrous earthquake and fire of 1906, a process of decentralization was begun, and as early las 1 9 1 0 , 5 0 , 0 0 0 commuters a day were coming into San i « Francisco. As shown in Table XVIII, San Francisco has j ; ! continued to grow, but its rate of growth since 1900 has : been significantly less than that of the rest of the Bay j Q 1 IRegion.^ j Unlike Los Angeles and numerous other western Pities, the population growth of San Francisco has followed: ^The United States Census, Statistical View of the United States (Washington: Senate Printer, 1854),p. 3&1• £ United States Department of Interior, Census Office, Population of the United States at the Tenth Census (Vol. I ; Washington: Government Printing Office^ I883X p. 109. ^City and County of San Francisco, Department of City Planning, The Population of San Francisco: A Half Century of Change. p. 7» 8Ibid., p. 3. ^William A. Spurr, Forecasts of California’s Popu lation and Production (Stanford, California: Stanford University Press, 1953), P» 227. TABLE XVTII POPULATION OF SAN FRANCISCO AND THE BAY AREA: 1900-1960 San Francisco as Percentage of Metropolitan Metropolitan Year San Francisco Bay Area Bay Area ! 1900 3^2,782 552,964 62 1910 416,912 773,975 54 1920 506,6 76 1,009,477 50 1930 634,394 1,347,772 50 1940 634,536 1,461,804 43 1950 775,357 2,240,767 35 i960 8 5 0 ,0 0 0 2,8 9 9 ,0 0 0 29 ■ j i l.ju ,i!...i f i 8Baaxm8BaaBgaa8sa Source: William A. Spurr, Forecasts of California^ Population and Production (Stanford, California: Stanford University Press, 1953),P- 227. 239 i the pattern of the older eastern cities such as Boston. ;Limited areas suitable for housing, inability to annex additional property, and an existing population density I i !which is exceeded only by Chicago and the New York Metro- ;politan Region all indicate that future growth will be slow.10 In fact, the city's Planning Department, assuming |a substantial reduction in U.S. military expenditures, pre dicted a population decrease of 2 5 ,0 0 0 by i9 6 0 .11 San Francisco's total population has been eompara- itively stable, but the location of this population within .the city has not. Despite a population increase of 140,000, 45 of the city's 114 census tracts lost population between 1930 and 1950; the population growth of that era was concentrated along the southern border of the city while the population of the central district declined. This relocation created the need for new facilities in some 12 areas, while older facilities stand idle in others. How ever, since the City and County of San Francisco includes only 41.7 square miles, population shifts within the city 10City and County of San Francisco Department of City Planning, op. cit., p. 11. 11Ibid., p. 33. 1? The Board of Education is using a vacant downtown high school building as an office for its administration offices, as an example. ! 260 ! should not create any acute problem In the fulfillment of | |capital expenditure needs. ; i In summary, San Francisco is the center of a rapidly! j ' | igrowing metropolitan area. However, the city itself has I ! a comparatively stable population, and the need for future ! t i i capital outlays will arise from normal replacement and Icorrection of present inadequacies. I j i ^ Employment and Economic Stability i i From the point of view of employment, the City and ! • j jCounty of San Francisco is diversified. The greatest area j l of economic concentration Is in the fields of trade and | > service which employ almost two-thirds of the employed j j i o i persons. -* Since its earliest days, the economic role of San Francisco has been concentrated in this non-basic field of trade and service^ it is obvious from Table XIX that this continues to be the case. As further evidence of the service nature of San Francisco’s economy, the San Francisco Department of City Planning stated that in July, 1952, "71# of the Bay area employment in wholesale trade and 66.8$ in finance, Insurance, and real estate is located ^Included as trade and service are: Finance, Insurance, and Real Estate; Wholesale and Retail Trade; Professional Services; Personal Services; and Transporta tion, Communication and Public Utilities. 261 TABLE XIX WAGE AND SALARY WORKERS IN MANUFACTURING SAN FRANCISCO-OAKLAND METROPOLITAN AREA (000 omitted) July September October Industry 1950 1950 1953 1-durables Food 3 8 .8 45.5 40.1 Textiles and Apparel 10.9 11.3 11.8 Paper and Printing 19.3 20.5 22.3 Chemicals 11.4 12.0 11.6 Petroleum 11.9 12.1 13.7 Other non-durables 2.5 2.7 2.9 Total non-durables 94.8 104.1 . 102.4 Durables | i Lumber and Furniture 8.0 9.4 6 .7 ; Stone, Clay, and Glass 6.1 6.4 6 .5 1 Primary Metal Products 13.5 14.6 1 3 .4 j Fabricated Metal 1 6 .0 17.4 1 9 .7 Machinery (except electric) 10.8 11.7 1 5 .0 Electrical 3.8 4.2 8 .0 Motor Vehicles and Supply 7.3 7.8 9 .3 Aircraft and Parts 3.6 3*6 3 .1 Shipbuilding and Repair 3.6 3.6 5 .9 Other durables 2.1 2.5 5.7 Total durables 72.3 1 7 8 .7 93.4 TOTAL I6 7.I 1 8 2 .8 1 9 5 .8 Source: California, Department of Industrial Rela- . tions, California Labor Statistics Bulletin. Area Supple ment, Table 3," 314-A, September 1$5^> and Tabie”TF7 351-A, October, 1953* 262 ! 14 |in San Francisco. , j Thus, the level of economic activity in San j Francisco is dependent to an unusually large extent on the j j economic conditions of the area for which it acts as a J I i [service center. As shown in Table XX, the Metropolitan j ! i Area has a structure of economic activity which falls j between that of its central city and that of urban United J j j States as a whole. It is definitely a diversified region: I 1 - manufacturing, 20 per cent; wholesale and retail trade, j , 1 j22.9 per cent; professional and personal services, 18.4 j ; i 'per cent; and public administration, transportation, com- 'munications, and public utilities, 1 8 .8 per cent. Even within the single classification of manufac- I turing, the area is well diversified, with more than 50 per cent of manufacturing employment being in the rela tively stable non-durable lines.The production of durables is also well diversified; the greatest concen tration is in metal fabrication which provided only 10 per cent of manufacturing employment in 1953* 14 City and County of San Francisco Department of City Planning, o£. cit.. p. 23. ^The food processing industry is a highly seasonal one, employment dropping approximately one-third between the peak of the season and the midwinter low. However, cyclically speaking, it is a relatively stable industry. 263 TABLE XX PERCENTAGE DISTRIBUTION OF EMPLOYMENT OF POPULATION BY MAJOR INDUSTRIAL CLASSIFICATION San Franciseo- Oakland Classification San Francisco Standard Metropolitan Area Urban United States Manufac turing Finance, Insurance, 16.9 20.0 29.4 Real Estate Wholesale and Retail 8.2 6.2 4.4 Trade 25-4 22.9 21.9 Professional Services 11.2 11.5 10.7 Public Administration 7.6 8.0 5.2 Construction Transportation, Communication, and 5.7 7.1 6.0 Public Utilities 11.7 10.8 9.0 All Other 5.* 6.6 6.2 Source: San Francisco Department of City Planning, The Population of San Francisco: A Half Century of Change (San Francisco: City and County of San Francisco,T9'54), p. 22. 26^ ! The service nature of employment in the City and JCounty of San Francisco and the diversity of manufacturing I ;in the area which it serves can be expected to produce a I irelatively stable economy. Naturally, the city's economy ! |will fluctuate in response to area-wide or nation-wide economic fluctuations, but in its role of an economic rider, the economy of the City will suffer less violent jolts than its vehicle, basic industry. ° II. MUNICIPAL REVENUES J Revenue-wise, the City and County of San Francisco |has been following the national pattern: the property tax is declining in relative importance, but remains the most important single source of revenue.1^ It must be borne In mind, however, that revenues are those of a consolidated city and county government, so the structure is not * | Z T After a detailed study of the economy of the San Francisco Bay Area, it was concluded that the region fol lowed the national pattern very closely during the 1 9 3 0's. However, it was also noted that the Bay Area fluctuations were much less severe than those of the industrialized Northeast and the agricultural Middlewest. Robert D. Calkins and Walter E. Hoadley, Jr., An Economic and Indus- trial Survey of the San Francisco Bay Area (Sacramento: California State Planning Board, l<m), p. 268. ■^Unless otherwise cited, all tax information is ■ taken from the publication by the City and County of San Francisco of the Controller's Annual Report. 265 TABLE XXI PERCENTAGE OP REVENUE BY SOURCE, CITY AND COUNTY OP SAN PRANCISCO: 1952-53 . Per cent of Total Revenue Source San Francisco All Cities Property Taxes 50.3 48.8 Sales and Gross Receipts 6 .2 1 1 .0 Licenses and Other Taxes 2 .0 6 .7 Subventions 33.3 19.1 Current Charges 4.3 8 .6 Special Assessments • 3 1.5 Unallocable Revenue 3.6 4.3 Total 1 0 0 .0 1 0 0 .0 Source: Compiled from Bureau of the Census, Com- f endium of City Finance in 1953 (Washington: Government rinting“cTffice, 1954), p. £5. 266 comparable except with that of other consolidated Jurisdic tions. Property Tax Revenues The charter limitations on the use of the property tax in the City and County of San Francisco were set so high that they have had little Impact in recent years. Section 78 of the charter states: The tax levy shall not exceed the rate of one dollar and sixty-five cents ($1. 6 5) on each one hundred dollars ($100) valuation of the property assessed in and subject to taxation by the city and county, exclusive of the following items: (1) State taxes, and taxes for the interest and sinking fund on bonded indebtedness of the city and county; (2) the cost of constructing, main taining and improving (a) schools, (b) libraries, which tax shall not be less than four cents on each one hundred dollars, (c) parks and squares, which tax shall not be less than ten cents on each one hundred dollars, (d) playgrounds, which tax shall not be less than seven cents on each one hundred dollars, (e) for the art commission for the purpose of maintaining a symphony orchestra one-half cent of each one hundred dollars of assessed valuation, (f) streets, sewers, and buildings; the cost of (a) elections, (b) civil service, which shall be not less than one-half cent on each one hundred dollars, (c) obligations imposed by state legislation or constitutional enactment and (d) obligations imposed by vote of the people of the city and county. 18 With this large number of exemptions, the Board of •^Charter of the City and County of San Francisco, 19^9, Section 7 8. 267 i I Supervisors has found it necessary to approach the $1 .6 5 limit on only one occasion since 1920. In 1934, the tax rate was $1 ,6 0 7 per hundred dollars of assessed valuation. |In 1953, the rate subject to the charter limit was only $1,100. i The yield of the property tax in the City and County (of San Francisco demonstrated remarkable stability during |the depression years of the 1930's. I From the point of view of the City and County, the 1 ! actual situation was more favorable than that depicted by j the data in Table XXII. During this period, the San Francisco schools were supported from the city's tax levy, and it was the schools which absorbed most of the decrease in revenue. The tax rate for the schools was $1 ,0 6 9 of the consolidated rate of $4.04 in 1931; in 1934 when revenue reached its low point, the school rate was only $.5H o f the consolidated rate of $3.48. In other words, the school system absorbed approximately two-thirds of the total decrease in revenue. In the postwar years, the property tax yield has increased from $39,425,000 in 1945 to a peak of $70,595,833 1 in 1952. This increase has resulted from the combined impact of a higher tax rate and a larger tax base. In the years considered, the consolidated tax rate has been 268 TABLE XXII PROPERTY TAX REVENUE AND DELINQUENCY, CITY AND COUNTY OP SAN FRANCISCO: 1929-1936 (000 omitted) Delinquency Year Yield Rate 1929 $32,426 1.09 1930 33,313 1.22 1931 33,335 1.44 1932 32,495 2.20 1933 30,450 5.37 1-93* 26,867 4.95 1935 2 8 ,8 3 6 3.33 1936 30,674 2.00 1937 30,9 8 5 1.45 1938 31,512 1.50 1939 33,352 1.32 Source: City and County of San Francisco, Controller1s Annual Reports, 1930-1939• “ 269 'increased from $4.69 to $6.19, while assessed valuation has, i < risen from $846,622,867 to $1,195,201,655. ! i Thus, the property tax has been an excellent source l j of revenue for the City and County of San Francisco. In ■the critical years of the 1930's, the revenue from the tax | !fell significantly, but not in catastrophic proportions. ; | A charter amendment approved by the voters in April, I 1933 permitted salary reductions which effected an j ! estimated savings in excess of two and a half million dollars. This saving, plus the curtailment of capi tal expenditures, enabled the city to carry on its current services with only minor adjustments.19 j In the postwar years of rising municipal costs, the revenue| t i !from the property tax has Increased 4l per cent. The property tax can be utilized more extensively in in the future if such use is politically desirable. As noted, the legal limitations are no barrier to further use. Economically, the total property tax burden in the City and County of San Francisco is somewhat higher than that in surrounding unincorporated areas, but it is comparable to 20 that imposed in other cities of the Bay Area* ■^City and County of San Francisco, Annual Report of the Controller: 1932-1933. p. 13- 20 Studies by the California Senate Interim Committee on State and Local Taxation indicated that the tax rate in the City and County of San Francisco was lower than the combined city, county, and school district rate in all other Bay Region municipalities, except South San Francisco. However, San Francisco's ratio of assessed value to 270 j Administratively, of course, an increase presents no prob- j I ! i lem. In summary, the property tax in the City and County ! i ■ ! of San Francisco is relatively free of legal, economic, and; j f |administrative limits; political limits remain as the all- ' I important factor determining the future use of the tax. ; ; I I Sales and Cross Receipts Tax Revenues j I j A local sales tax is an excellent revenue producer ! I | 1 i j in a metropolitan city, such as San Francisco, which con- j !centrates in the trade and service field. This tax was i i ,adopted in San Francisco in 1947, becoming effective on iJanuary 1, 1948. The original and present rate of the | !tax is one-half of one per cent. i I In 1952-53, this tax produced over five million * dollars for the City and County of San Francisco. An increase of thirty cents per hundred dollars of assessed valuation would be required to get an equivalent amount of revenue from the property tax. An increase in the rate of the sales tax to 1 per cent would produce an additional appraised value was the highest in the Bay Region. California, Report of the Senate Interim Committee on State ;and Local Taxation. Part VI (Sacramento: California Legislature^ 1953), p.‘ £8TT 21Because of the wording in the city’s charter, the tax levied in San Francisco is a "purchaser's tax." Admin istratively and effectively, however, it is a retail sales tax, and the legal distinction of titles will be ignored. 271 five million dollars, and precedent for such a rate has i already been established by many cities in the area, |including Oakland, Berkeley, Pleasanton, San Leandro, jVallejo, and El Cerrito.22 To date, there has been little pressure for an increase in the sales tax rate, but there • is no doubt that any future demand for a large increase in l ■revenue will be met by an increase in the rate of the tax. t 'Revenues from Other Locally Controlled Sources The four categories of Licenses and Other Taxes, Current Charges, Special Assessments, and Unallocable \Revenue contribute less than 9 per cent of the total rev enue of the City and County of San Francisco. Included in each of these categories, except Special Assessments, are a great variety of small revenue sources, ranging from park ing meters to symphony concerts. No single source is dom inant, although the more significant are parking meters, business licenses, current charges of the Department of Recreation and Parks, and inspection fees collected by the Department of Public Safety. 22 Report of the Senate Interim Committee on State and Local'T’ axation, Part II (Sacramento; California Legis- lature, 1953), PP. 69-72. I Subventions i i ! As a consolidated city and county operation, San i i ! j ■ I Francisco receives a large percentage of its total revenues,! j l i 33*3 per cent, from other governments. However, if the | ' ! igrants-in-aid for welfare, wholly a county function in ! j ! |California, are deducted, the relative importance of sub ventions to San Francisco is similar to that found in other | jCalifornia eities.2^ j A large portion of the receipts from subventions j i I accrue from shared taxes. The local governments' receipts |from these sources are dependent on the state revenues fromj i specific taxes and the allocation formulas. If these J I ! revenues are reassigned to the basic type of taxation from , which they originate, the revenue pattern of the City and pit County of San Francisco is as shown in Table XXIII. Municipal Revenues and Fluctuations in Income The City and County of San Francisco depends upon the property tax to produce two-thirds of its total reve nues. In the past, this tax has demonstrated considerable 2^In 1952, the grants for welfare received by the City and County of San Francisco totalled $14,964,000. Bureau of the Census, Compendium of City Government Finances. 1952. op. cit.. p. 39* 24 In order to further comparability, all welfare subventions have been omitted. TABLE XXIII REVENUE BY ADJUSTED SOURCE, CITY AND COUNTY OF SAN FRANCISCO: 1952-53 (OOO omitted) Source Amount % of Total Property Taxes $55,728 7 1 .6 Sales and Gross Receipts 1 0 ,4 3 8 13.4 Licenses and Other Taxes 3,246 4.1 Grants-in-Aid 396 .5 Current Charges 4,266 5.5 Special Assessments 240 .3 Unallocable Revenue 3,510 4.6 Total $77,824 100.0 1 Source: City and County of San Francisco, Controller^ Annual Report, 1952, p. 8. 274 flexibility. During the recession of the 1930's, assessed values fell only IQ per cent and the delinquency rate reached a maximum of 5»37 per cent.2^ jn eras of rising prices, assessed values have risen: 1920-1929, assessed i valuation rose 38 per cent while population increased 25 ; per cent; and 1941-1951, the increase in assessed valuation| was 3 2 .5 per cent and the population increase was 22 per cent. San Francisco has added flexibility to its property i tax by varying the rate of the tax: 1920-1930, the total | i property tax rate was raised 24 per cent; 1930-1940, the rate was decreased less than 1 per cent; and 1940-1951* the j rate was increased 37•5 per cent. If this rate flexibility! continues to be politically feasible, the City and County of San Francisco will be able to adjust its revenues to meet a wide range of contingencies. Sales and gross receipts taxes, which are the basic source of almost 12 per cent of the city’s revenues, will produce yields which fluctuate directly with the economic cycle. Food and housing expenditures are exempt from the tax, and so it will definitely have an income elasticity greater than one. Receipts from this source will fall 2-*The 10 per cent decrease eited is exclusive of the properties returned to local tax roles by the state in 1934. 275; i drastically when income and employment decline. j | Of the remaining 21 per cent of San Francisco’s | , i ; i jrevenue, almost half is received from subventions other { I i !than shared taxes. These grants, of course, are beyond the i control of the city, but it is to be expected that they i will be a stabilizing force. Many of the other miscel laneous revenues stem from service charges for self-sup porting services so that they have little over-all effect !on the city's revenue picture. j ’ i In summary, the City and County of San Francisco has! i ! a relatively stable economic climate, and a revenue struc ture which should prove to be adequate unless a prolonged (economic recession undermines the property tax. j IV. CAPITAL OUTLAY AND DEBT OF THE CITY AND COUNTY OF SAN FRANCISCO The recent history of capital outlay and debt in the: City and County of San Francisco exhibits the wide fluctua tions which have been typical of municipal governments 26 throughout the nation. 26 Unless otherwise cited, capital outlay data are taken from the State of California's publication, Annual Report of the Financial Transactions of Municipalities and Counties. 276 Expenditures for Capital Outlay ! The record of San Francisco’s expenditures for !capital outlay in the period from 1921 to 1952 is shown jgraphically on the following page. In terms of total capi- tal outlay, the rapid increase during the prosperous ; twenties is typical. Atypical, however, is the fact that J a relatively high level of expenditure was sustained until ! !1938- Even excluding the $40,193,000 spent in 1930 for the purchase of the existing facilities of the Spring i Valley Water Company, the total capital outlay of the I 19 30’s exceeded that of the 1 9 20's by more than twenty i 1 ! million dollars. 1 1 However, this expenditure pattern is unlikely to recur. In 1928, the City and County of San Francisco began the development of a municipal water system which involved the purchase of the Spring Valley system and construction of the Hetch Hetchy system. Prior to the acquisition and development of these systems, the city’s maximum capital outlay for utilities had been $478,000 in 1928. Only once since assuming responsibility for the water system has the utility outlay fallen below the 1928 figure, and that was the result of the material and 277 ! 0 * 7 jmanpower shortage which prevailed in 19^* I If San Francisco’s utility outlays are excluded, the ; i ; icity's pattern of capital expenditures leaves much to be J J j jdesired from an anti-cyclical point of view. Rapid j i increases throughout the 1920's were followed by precipi tous declines in the 1930's. The brief reversal of the i jdownward trend in 1936 and 1937 was largely the result of |the receipt of federal grants-in-aid for construction. I j Significantly, however, the peak in non-utility j I j I capital outlay was not reached until the fiscal year 1930- J 1931* In the following fiscal year, the non-utility, non- j highway outlays achieved a peak of $3,938,000, but there I I jwas a 30 per cent decline in the expenditures for streets j I • and highways. Thus, although 1933-193^ brought a serious decline, the City and County of San Francisco had sustained a high level of capital outlay for three years after the beginning of a serious economic recession. The low level of capital outlays, other than for the water system, during the latter part of the 1 9 3 0's and the war years resulted In serious deficiencies by 19^6. 2^Sinee 1935, the City and County of San Francisco has not reported utility capital outlay to the state. The utility figures from 1935 to 1952 are taken from City and County of San Francisco, Controller's Annual Report for those years. 28city and County of San Francisco, Mayor's Annual Message to the Board of Supervisors. 1937, p. o. _ 279 jDespite the postwar increases in capital outlay, the |Proposed Capital Improvement Program: 1952-1958 contained projects with an estimated total cost of $180,424,358, of which $58,7 3 5 ,6 5 5 was requested for the fiscal year 1952- |1953. 29 If the 1 9 2 1 - 1 9 5 2 average, non-utility capital outlay 'of the City and County of San Francisco is adjusted for |population growth, the average annual outlay for 1952 would be $5,266,000.^ Adding the annual depreciation charges for the utilities, a stabilized program of capital outlay for San Francisco would necessitate an annual expenditure i for capital outlay of $10,510,0 0 0. The Use of Debt The Charter of the City and County of San Francisco states: No bonded indebtedness shall be incurred by the city and county which together with the amount of bonded indebtedness outstanding shall exceed twelve per cent of the assessed value of all real and per sonal property In the city and county subject to taxation for city and county purposesj provided, 2Q ■^San Francisco Bureau of Governmental Research, Bulletin Number 7, April 1, 1952, p. 2. 3®The 1952 requests in the Proposed Capital Improve ment Program for non-utility outlay were in excess of twenty-three million dollars. San Francisco Department of City Planning, Capital Improvement Program. 1952-53 through 1957-5 8, p. 1 0. 280 i ! ! , i however, that bonded indebtedness heretofore or hereafter created for water supply, storage, or distribution purposes, bonded indebtedness created 1 pursuant to section 103 hereof, and bonded indebt- 1 edness heretofore created in aid of the Panama- i j Pacific International Exposition shall be exclusive I of the limitation on the amount of bonded indebted- | ness of the city and county contained in this I section.31 I ! I 1 ; In the past thirty years, a conservative debt policy has i kept the actual outstanding debt subject to the charter I limits at less than 50 per cent of the maximum allowed. j I I I Since the end of World War II, San Francisco has never had j I |less than sixty million dollars of unused bonding capacity,; and on June 30, 1953 the unused capacity amounted to more f I than one hundred million d o l l a r s . j | | j Legal debt limits have, thus, been relatively unim- ! portant in the recent financial history of the City and County of San Francisco. Economic limitations have also been of little Import, since the city has apparently never had any trouble marketing its bonds at reasonable rates of interest. Even in 193^, the year following San Francisco's unprecedented tax delinquency rate of 5.37 per cent, the ^Section 103 has reference to the sale of bonds for the explicit purpose of creating a revolving fund to facilitate the financing of special assessment projects. Charter of the City and County of San Francisco. 19^9, Sections 103 and 104. 32City and County of San Francisco, Annual Report of the Controller, 1953, P» 16. 281 I : city was able to market its short term 3/4 per cent tax I 'notes at a premium.33 The effective debt limitation which i dictated the conservative debt policy has been the politi- ; i 1 I cal one: the approval of a two-thirds majority of the j i * i ;voters casting ballots in a bond election. Fortunately, the two-thirds majority is not required) ! in the case of revenue bonds; also, San Francisco entered i 5 i ithe decade of the 1 9 30‘s with a substantial backlog of iauthorized but unissued general obligation bonds. In 1928 : and 1929, the citizens authorized $70.7 million in new j bonds.The last of the bonds under this authorization ; I 1 I were not issued until 1933# hy which time an additional $3 6 .0 million had been authorized.35 o f the total authori zations from 1928 through 1933# 8l per cent were for the development of Hetch Hetchy and other municipally owned utilities. Although revenue bonds dominated San Francisco's depression borrowing, smaller amounts of non-utility bonds 33eity and County of San Francisco, Annual Message of the Honorable Angelo JF. Rossi. Mayort January, 1935# p. 11. 34 California, Financial Transaction of Municipali ties and Counties. 1930. p. 138* ^California, Financial Transaction of Municipali ties and Counties. 193^'. p. 1 3 8. 282 I 1 1 were authorized by the voters in 1928, and again in both I i ! j1932 and 1933- Due to the delay in marketing, the peak of i San Francisco's borrowing for both utility and non-utility purposes was not reached until the end of the 193^-35 | fiscal year. j In the ten year span 1936-19^5 inclusive, the City i |and County of San Francisco reduced its outstanding debt I !each year. By 19^5* the total reduction was in excess of !$6 9,000,000. The end of World War II brought a reversal | of this trend as shown in Table XXIV. Thus, the pattern ; . S |of debt has shifted somewhat in the postwar years. In j !19^6, the utility debt was 76 per cent of total city and ; ! county debt, but in 1953, it was only 60 per cent of the j total. In terms of purpose, the postwar non-utility issues - have been primarily for modernization and replacements In the sewage system, and the proceeds from utility borrowing have been rather evenly divided between the water system and the municipally owned transit facilities. In summary, San Francisco has maintained a conserva tive debt policy, but nevertheless, the city has used debt extensively In the financing of both utility and non-utility 1 capital outlay. The present outstanding debt is 3^city and County of San Francisco, Annual Report of the Controller. 1952, pp. 36-37. TABLE XXIV OUTSTANDING LONG TERM DEBT, CITY AND COUNTY OF SAN FRANCISCO: 1946-1953 (OOO omitted) Utility Non-Utility Year Total Debt Debt Debt 1946 $114,734 $ 86,358 $28,376 1947 1 1 6 ,8 6 8 92,161 24,707 1948 137,074 104,936 32,138 1949 149,661 109,452 40,209 1950 169,315 113,333 55,982 1951 182,077 11 8,3 55 63,722 1952 1 8 7 ,8 1 8 115,442 72,376 1953 19 7,8 66 119,760 7 8 ,1 0 6 Source: City and County of San Francisco, Annual Report of the Controller, 1952» pp. 36-37; an<^ City and County of San Francisco, Annual Report of the Controller, 1252, p- 16. 1 sufficiently large that any attempt to shift to a pay-as- jyou-go approach must be a long range program, and so futurej |capital outlays will necessitate the authorization of addi- ! -27 |tional bonds.Neither legal nor economic forces are apt to forestall additional issues, so that the requisite voter j japproval of bond issues is vital to the capital development I program of the City and County of San Francisco. V. CAPITAL BUDGETING San Francisco, like Los Angeles, was one of the j 1 j 1 first cities in the nation to take an active interest in ! j ! i icity planning. The first of these planning activities was : ! ^8 I financed by a citizens' group, but in 1913* a charter 1 amendment empowered the Board of Supervisors to create by ordinance an unpaid City Planning Commission.^9 The 3?The $58,7 3 5 ,6 5 5 Capital Improvement Program for 1952-1953 called for 62 per cent bond financing. City and County of San Francisco. Capital Improvement Program, 1952- j 53 through 1957-5 8. p. 10. 3®The Association for the Improvement and Adornment of San Francisco was formed in 1904. A few years after their founding, this group employed Daniel H. Burnham of Chicago to prepare a development plan for San Francisco; this plan was published In 1905. American Institute of j Architects, City Planning Progress in the United States. 1917 (George B. Ford, editor; Washington: The Journal of the American Institute of Architects, 1917)> P* 1 6 5. 39charter of the City and County of San Francisco, 1925> Article II, Chapter II, Section 42. 285 legislative tody delegated the task of creating the com- ‘ mission to the Mayor who still is empowered to appoint the ilQ; members of the present five-man City Planning Commission. : Early Efforts to Provide a Capital Improvement Program In 1924, a detailed ten-year program of public : improvements with supporting financial data was prepared I under the sponsorship of the Chamber of Commerce. Despite j quite active citizen support for the plan, no action was . 4l ever taken regarding it. Eleven years later, San Fran cisco responded to President Roosevelt's request and sub- ! mitted to the Works Progress Administration a list of ; needed public works projects costing an estimated ■ 42 ! $37,000,000. This list was prepared by the City Engin- 1 eer, Clyde Healy, and was accompanied by a statement of financial condition. This latter statement was prepared independently by the Controller, and had reference only to the immediate situation without any comment on future revenues or expenditures. 40 Charter of the City and County of San Francisco, 1939, Section 115. 41 C. E. Rightor, The Preparation of a Long Term Financial Plan (New York: Municipal Administration Service, 1927), P. 11. 42 City and County of San Francisco, Mayor *s Annual Message to the Board of Supervisors. January, 1936, p. 9. 286 In 1937, the newly appointed Controller, Harold J. ,Boyd, included the following recommendations in his Annual j : 1 j I iReport: (1) No more general obligation bonds be placed on ■ the ballot. I i j i (2) A Charter Amendment be submitted to the voters ! | which would authorize the creation of a 'Reserve for ! { Public Improvements'; that the amount to be put in j ! this fund annually shall be the difference between I the present requirements for both bond interest and j redemption and the reduced requirements for such | purposes for each succeeding fiscal year; that j expenditures from this fund be confined exclusively ! I to public improvements and that a prior authoriza- I | tion from the voters.be obtained before any such ' | expenditure is made.^3 (Also included In this report was a schedule indicating that I 1 ! jthis program would make available $8 5,0 0 0 ,0 0 0 during the ; i .next twenty years. The Mayor recommended that Mr. Boyd's suggestions be given legislative priority, but no action was taken by the Board of Supervisors. San Francisco's lack of interest in long range planning during the 1930's was further evidenced by the fact that the City Planning Commission was not given suffi cient funds to prepare a master plan, one of its major duties under the 1931 charter, until 19^0. Work on the 43 City and County of San Francisco, Annual Report of the Controller. 1937. p. 7. ^Loe. cit. 287 master plan was Interrupted toy the entry of the United j / States into World War II, and In January of 19^, the Mayor i ! I was forced to admit that the city was without any integrated i 1 postwar plans. i : i A new report on Public Works is being prepared for publication. This will be a compilation and j ' analysis of construction projects prepared to date j i by other city departments. The total estimated i cost of these improvements will approach 300 million | dollars. In the absence of a completed Master Plan I these lists must be given consideration as the only. i j available basis for a postwar public works program.| I ;The list mentioned was prepared under the "reserve shelve" J approach, and no consideration was given to the city’s ; lability to finance the projects recommended. Introduction of a Capital Budget The difficulties which the City Planning Commission experienced in its attempt to coordinate suggestions and proposals submitted for a postwar program convinced the Commission that it needed additional powers. In collabora tion with the San Francisco Junior Chamber of Commerce, the planning personnel developed a charter amendment which strengthened the city’s planning function and provided for ^City and County of San Francisco, Mayor * s Annual Report to the Board of Supervisors. January, 1944, p. 39. 288 Ian annual capital budget. This amendment was approved by I the voters In November, 1947 and became effective in March i jof 19^8. Since this amendment spells out the capital budget ing procedure so completely, it is quoted in full: I j Each officer, board, and commission shall annually, on or before the 30th day of November, file with the department of city planning a schedule describing all capital improvement projects which are proposed for inclusion in the budget for the ensuing fiscal year, together with a schedule of all capital improvement 1 projects which in the opinion of such officer, board, 1 or commission should be undertaken in the five suc ceeding years. The department of city planning shall prepare and j submit to the mayor, the board of supervisors, the controller, and each officer, board or commission concerned on or before the 20th day of January, a report recommending a program of capital improve ments based on the projects submitted for inclusion in the budget for the ensuing year segregating in such report those projects which do not affect the master plan. The report shall state whether each of the pro posed eapital improvement projects conforms to the master plan and if conformity does not exist the report shall give the particulars of the differences between the proposed eapital improvement projects and the master plan; provided, however, that if any such capital improvement project does not conform, it shall be the duty of the department of city plan ning, prior to the submission of its related report, i i f i ^ Under this amendment, a Department of City Plan ning was created with a Director of City Planning responsi ble to the five-man City Planning Commission. Charter of the City and County of San Francisco. 1 9 4 - 9 # Section 1 1 6 V 289 to confer with the officer, board or commission concerned for the purpose of modifying either the project plan or the master plan in an endeavor to eliminate conflict as far as may be possible. The report shall also include the recommendations of the department of city planning for additional capital improvement projects and for the advance planning and acquisition of land necessary for the development of all capital Improvement projects. Requests for supplemental appropriations for capital improvement projects, which projects have not been previously submitted to the department of city planning, shall be subject to all of the pro visions herein contained except time, and the department of city planning shall report on each such proposal within thirty days from the date that each such proposal is filed with it. The board of supervisors shall not appropriate any money for any capital improvement project which has not been referred to and reported on by the department of city planning in accordance with the provisions of this section. Failure of the department of city planning to report within the time limits herein established shall constitute its concurrence.^7 The first Capital Improvement Program was issued by the Department of City Planning in January, 1949. Under the above amendment, the City and County of San Francisco has established procedures which operate as an effective device for coordinating capital improvement ^Charter of the City and County of San Francisco. 1949# Section 6 9.1. 290 requests.^ All city departments, all municipal utilities, .the San Francisco Unified School District, along with the 1 Housing Authority, Redevelopment Agency, and the Parking i 'Authority of the City and County of San Francisco annually ;submit their proposed capital expenditures for the next six years to the city planners. Each agency categorizes its !requests, and assigns priorities within each category.^ The annual Capital Improvement Program is then compiled by :the Department of City Planning on the basis of the depart- i mental requests. Limited financial data are supplied by the depart- I !ments originating requests. Each department is required to submit an estimated cost for each project, suggested sources of revenue to meet these costs, and the effect of the project on future operational expenses. These figures are accepted without modification by the planners, and are included in the published program. As a result, the pro posals for non-utility capital outlays have been ^For Material covering the actual operation of the capital budgeting procedures, the author is indebted to Mr. George Grubb, Assistant to the Mayor, and Mr. William A. Proctor, Associate City Planner, City and County of San Francisco. ^For example, the Department of Public Works uses the following categories: Trafficways, Traffic Removal, Traffic Signals, Sewers, and Public Buildings. TABLE XXV CAPITAL IMPROVEMENT PROPOSALS AND APPROPRIATIONS, CITY AND COUNTY OP SAN FRANCISCO: 1949-1952 i I ' Ti 1 . " . . : ; . . ' . ! . ! . . 1 1 i . . . i . 3 B aa B B a 5 B S 3 S B 5 B s s a s a s 5 3 g 3 s g g s g 3 s s s s s s s s a a s s s s s B s a e 3 5 . . , . . . . . . . . j sa sas t t sassasgB B g asaB S ss Capital Improvement Appropriations forj Year Program Proposal Capital Outlay i ........ — ||,l|| ............. ....... ............. ...... . II '■!!! ■ ■ I I W H — — — lllll ■ ■ ■ ■ j 1949-50 $33,771,643 $19,652,735 ; 1 1950-51 56,520,228 24,614,597 1951-52 8,828,645 2,212,832 Source: San Francisco Bureau of Governmental Research, Bulletin No. 7, April 1, 1952, p. 1. 292 |unrealistically high. j I i i I | I i I ; j VI. CONCLUSIONS j I ! | | Although the future population growth of the City j > i I and County of San Francisco is expected to be small, the I city is the hub of a rapidly growing metropolitan area. i i i The service nature and diversification of employment in l |this metropolitan area promises relatively stable economic ! |conditions. Neither the property tax, the city’s predom- j jinant source of revenue, nor borrowing are seriously ham- | ipered except by political considerations. Despite the , rather favorable climate resulting from the above condi- 1tions, capital outlays have been highly unstable. Since the end of World War II, an effort has been made to improve the coordination of capital expenditures, and since 19^9, a Capital Improvement Program has been pre pared annually by the Department of City Planning. This document, however, is not a capital budget; the program is not related to any comprehensive financial plan, and It receives no formal endorsement from the legislative body. Although both the Mayor's office and the Department of City Planning are aware of the desirability of ex ante financial guide lines, neither Is willing to assume respon sibility for preparing them. 293 The present situation in the City and County of San Francisco can he summarized as follows: 1. The annual preparation of a six-year capital outlay program is required by the Charter. 2. This program must be completed prior to the final preparation of the executive's budget. 3. Effective procedures have been established for the collection of the data necessary to prepare a compre hensive list of the city's capital outlay needs. 4. The legislative body is not required to give formal recognition or endorsement to the Capital Improve ment Program. 5. No advance financial guidelines are prepared, and the financial data in the Capital Improvement Program consist of the uncoordinated information supplied by the individual departments submitting requests. Thus, the present Capital Improvement Program is a planning mechanism rather than a budgetary device. CHAPTER IX j CAPITAL EXPENDITURES AND BUDGETING ! IN THE CITY OP LONG BEACH i j The City of Long Beach is located on the Pacific •Ocean twenty miles south of Los Angeles, and it is gen- Ierally regarded as a satellite city of the Los Angeles metropolitan area. However, it is by no means a "bedroom ,city"; in fact, the citizens of Long Beach feel that their ’city has sufficient economic importance to warrant desig- ,nation of the area as the Los Angeles-Long Beach Metro politan Area. The first settlement in the Long Beach area resulted from the promotional efforts of William E. Willmore in the early l880‘s. These efforts met with only very limited success, and the City of Long Beach did not become a cor porate municipality until 1897*^ At that time, the city‘s boundaries encompassed only 3-10 square miles, and the Long Beach was first incorporated in 1888, but the wet-dry controversy became so bitter that the citizens voted to disincorporate in 1896. John B. Wentz, An Analysis of the Annexing All or Part of the Lakewood Area to the City of Long Beach (mimeographed, 1951J# P* 52. 295 p population totalled less than one thousand persons. i Presently, the city covers almost 40 square miles, and the | o population is estimated to be 298,1 5 8. ! i ' i I. THE ECONOMY OF THE CITY OF LONG BEACH ! ; I i Although its citizens feel that the City of Long !Beach is being slighted by its anonymous inclusion in the i ,Los Angeles Metropolitan Area, it is obvious that it is a j j part of that area. The economy of Long Beach would be I i j | vastly different if it were not for the existence of the j population and industrial centers on which it borders. 1 Therefore, the economy of Long Beach must be viewed in 1 relationship to that of the Los Angeles Metropolitan Area. Population Growth and Trends In the first half of the twentieth century, the population of the City of Long Beach increased from 2,252 to 250,7 6 7.^ Despite this rapid growth the city has merely kept pace with the growth of Los Angeles County. 2 Wentz, loc.cit. “^Unpublished January 1, 1955 estimate of the Department of City Planning, City of Long Beach. bureau of the Census, Population (Vol. I; Washington: Government Printing Office, 1902-1952). 296 The problems of rapid growth have been accentuated by the irregular population increments which are typical of demographic records in Southern California. In the two I I decades of most rapid growth, 1920-1930 and 1940-1950, |increases were concentrated in the early years of the decade. For example, the population increased 99,000 from 1940-1945, and only 9 ,6 0 0 from 1946-1950.5 , The population growth since 1920 has been largely in the uninhabitated areas which the city has annexed to the north and east of the original boundaries. This means |that long range planners have the dual problem of estimat- 5 jing population growth within existing city limits and estimating the area likely to be annexed and developed in the foreseeable future. However, since Long Beach is a relatively small and young city, the problem is not one of maintaining services as the population shifts away from the central area, but one of providing service to an expanding population in newly developed areas. At the present time, the city is hemmed in by the City of Los Angeles to the ^City of Long Beach, The City Planning Commission, Planning Progress. 1944-46, p. 2. £ ■ The City of Long Beach has annexed over one-hundred parcels of land since its founding. The only two which added large blocks of population at the time of annexation were Greater Long Beach in 1923 and parts of Lakewood in 1953. TABLE XXVI j POPULATION OF THE CITY OF LONS BEACH AND OF j LOS ANGELES COUNTY: 1900-1950 Per cent County i City of County of Population; Year Long Beach Los Angeles in City j 1900 2 ,2 5 2 1 7 0 ,2 9 8 1.32 1910 1 7 ,8 0 9 504,131 3.53 1920 55,593 936,455 5.95 1930 142,032 2,208,492 6.43 1940 164,271 2,785,643 5.93 1950 250,767 4,151,687 6.04 Source: Bureau of the Census, Population (Vol. I; Washington: Government Printing Office, 1902-1952 J. ; 298 ■ west, the Pacific Ocean to the south, and the newly incor- jporated City of Lakewood to the north. However, there is 1 a large amount of unincorporated area to the east and I |annexations are continuing. t i Employment and Economic Stability in Long Beach The movement to industrialize the City of Long Beach got underway in the late 1 9 2 0’s following the discovery of oil and the development of both Long Beach and Los Angeles | ] harbors. One of the first major plants to be located in I jLong Beach was the Ford Motor Company’s assembly plant I i i which actually began operating its assembly lines early in 1 7 I i 1930.' The depression of the 1 9 30's halted further devel- ! I | opment, and it was not until World War II that Long Beach ! had an extensive industrialization. In 1940, the Douglas Aircraft Company bought land adjoining the Long Beach Municipal Airport and began con- Q ! struction on a new $12,000,000 plant. Early in 1942, the j United States Navy took over Terminal Island, and ^The original Ford plant actually straddled the Los Angeles-Long Beach boundary, but all future expansions have been in Long Beach. Long Beach Blue Book (Walter H. Case, editor; Long Beach: Long Beach Press-Telegram, 1942), p. 117. 8 This plant was actually just outside the boundaries of Long Beach until that area was annexed in 1953* 299 established major ship construction and repair facilities there. Other industries moved in as war production expanded so that the diversity of employment opportunities |in Long Beach was comparable to that found throughout Los Angeles County. As is shown in Table XXVII, this com parability has been retained in the postwar years. i ; The basic employment in Long Beach is made up of j ' I mining (petroleum), manufacturing, and servicing of the tourist trade and military personnel. Within the raanufac- i turing category, the processing of petroleum provides the ; , greatest employment, with aircraft production being a close second. Both tourists and military personnel receive J incomes which are independent of local employers, so that an indeterminate percentage of the trade and service employment in Long Beach should also be classified as basic. Because of the importance of petroleum production and processing in its economy, Long Beach can be expected to show somewhat greater economic stability than the metropolitan area of which it is a part.^ However, Long Beach is definitely a part of the Los Angeles Metropolitan Area, and cannot move, economically speaking, independently of the larger area. The area, with its growing ^Supra. pp. 183 ff. TABLE XXVII PERCENTAGE DISTRIBUTION OP EMPLOYMENT IN THE CITY OP LONG BEACH AND COUNTY OP LOS ANGELES 1940________ 1950 Employment Los Angeles County8, iio'rie Beach*3 Los Angeles County® Long Beach0 Agriculture and Pishing 3.4 1.4 1.8 .1 Mining 1.2 6.7 .8 2.5 Construction 6.3 6.0 4.8 9.0 Manufacturing 19.8 13.8 27.2 27.6 Transportation Communication, and Utilities 7.2 6.6 7.3 6.4 Wholesale and Retail Trade 24.0 24.7 26.5 22.1 Finance, Insurance, and Real Estate 5.6 5.9 4.9 4.2 Services 27.0 2 3 .2 20.1 1 6 .1 Government 4.5 11.4 6.4 11.8 Not Reported 1.0 .3 .2 .2 Total 100.0 100.0 100.0 100.0 Sources: aFrank L. Kidner and Phillip Neff. An Economic Survey of the Los Angeles Area (Los Angeles: The Haynes Foundation, 194^7# P» 7* ^Long Beach Chamber of Commerce, 1953 Annual Business Review (Long Beaeh: Long Beach Chamber of Commerce, 1954), unpaged. California, Department of Employment, Los Angeles Market Bulletin. 5:3, January, 1951. 301 |concentration in the production of durable goods, is ! ilncreaslngly cyclically sensitive. Also, the economy of i both the part, Long Beach, and the whole, Los Angeles County, is heavily dependent upon the military policy of (the federal government. ! i j i II. MUNICIPAL REVENUES The revenue structure of the City of Long Beach is |unique. The property tax is low, and many of the taxes common to other municipalities are not utilized. This is jpossible because of the city’s income from municipally- owned natural resources, income which the Bureau of the Census classifies as "Other and Unallocable.” Because much of the thirty-five million dollars which accrue to the city from its natural resources is not available for Immediate expenditure, a more realistic pic ture of the City of Long Beach’s revenue structure Is obtained with a fund breakdown.10 The revenues shown in Table XXIX support the general 10A complete fund breakdown is not necessary for this purpose. The following funds are combined under the general heading of "Operating Funds” in the schedule in Table XXIX: General Purpose Fund, Library Fund, Municipal Band Fund, Recreation Fund, Traffic Safety Fund, Special Public Health Fund, and Special Gas Tax Street Improvement Fund. TABLE XXVIII GENERAL REVENUE BY SOURCE, CITY OF LONG BEACH: 1952-53 (OOO omitted) All U.S. City of Long Beach citiesa Source Amount $ of Total $ > of Total Property Taxes $ 4,105 8.8 48.8 Sales and Gross Receipts 353 .8 11.0 Licenses and Other Taxes 1,055 2.3 6.7 Subventions 2,833 6.1 19.1 Current Charges 2,227 4.8 8.6 Special Assessments 143 .3 1.5 Other and Unallocable 35,710 76.9 4.3 Total $46,426 100.0 100.0 Source: Bureau of the Census, Compendium of City Government Finances in 1953 (Washington: Government Print- ing Office, 1954), P. a,,All Cities” includes the 48l cities with popula tion in excess of 25,000. 303 TABLE XXIX REVENUE OP OPERATING FUND, CITY OP LONG BEACH: 1954-55 Property Taxes $5*862,494 Sales and Gross Receipts 423,512 Licenses and Other Taxes 1,853*511 Current Charges 748,711 Subventions 2,736,508 Revenue from the Use of Money and Property 383*890 Transfers from Gas Department 3*250,000 Transfers from Tideland Oil Fund 419,040 Oil Sales and Royalties 1,619,750 Transfers from Bond Interest and Redemption Fund3, 1,413,012 Other and Unallocable 80,773 Total $18,789* 201 Source: The figures are those estimated in the 1954- 55 budget. It is necessary to use these estimates rather than the actual figures for prior years because of numerous changes in the Charter restrictions on the use of oil revenues which were first effective in the fiscal year 1954-55* City of Long Beach, The Budget: Fiscal Year 1954-55* PP* 9-20. ^his Is a non-recurrent item. The city had accumu lated sufficient money In the Bond Interest and Redemption Fund to meet all its general obligation debt. Because monies in the Public Improvement Fund are unavailable pend ing a legal decision, a charter amendment permitting this transfer was approved, enabling the city to proceed imme diately with the purchase of additional land. 304 i activities of the City of Long Beach with the exception of capital outlays. The bulk of capital outlay is scheduled j :to be made directly from the Tideland Gil Fund and the |Public Improvement Fund; this latter fund is also supported !from oil revenues.^ For the fiscal year 1954-55, the city’s budget showed the figures shown in Tables XXX and :XXXI. j 1 Property Tax Revenues The Charter of the City of Long Beach states that ; i the property tax levy shall not exceed $1.00 on each $100 ! j TO I of assessed valuation. However, exempt from this limita- |tion are whatever levy is necessary to meet the cost of no iI l 15 bond service, J a recreation program, a municipal band, and the library.^ A property tax rate very near to this ■^The monies in the Public Improvement Fund for most of the approved projects cannot be expended pending settle ment of litigation. Samuel M. Roberts, Director of Finance, City of Long Beach, felt certain that the court's decision will be favorable to the city, and that the monies will be available for the specified purposes. 12Charter of the City of Long Beach, 1941, Section 2 5 6. 1^Loc. cit. ■^At least $ .0 5 on each $100 of assessed value must be levied for recreation, ibid., Section 202. ^Ibid., Section 262. l6Ibid.. Section 2 6 3. 305 TABLE XXX PUBLIC IMPROVEMENT FUND, CITY OF LONG BEACH: 1954-55 Total Funds Available for Expenditure $90,985,600 jCapital Projects Approved by the Electorate 43,097,000 • i Appropriated for Land Subsistence Remedial ! j Work 1,950,000 j Closing Surplus 45,938,600 Source: City of Long Beach. The Budget: Fiscal Year 1954-55. p. 175- 306 TABLE XXXI TIDELAND OIL POND, CITY OF LONG BEACH: 1954-55 Total Funds Available for Expenditure $16.881.042 ' ! Capital Projects Approved by the Electorates 13,2 6 7 ,0 8 3 1 Maintenance and Operational Expenditures 1 Estimated for 1954-55 859,666 Closing Surplus 2,75^,293 Source: City of Long Beach, The Budget: Fiscal Year 195»-55. p. 175. 307 ! limit was levied until the fiscal year 1938-1939; in that I iyear income from the sale of natural gas began accruing to j jthe city, and the property tax rate was reduced 15 pen ! I ! 'cent, or $.24 on each $100 of assessed value. i . In the past fifteen years, the city’s tax rate has ! j : jalways been relatively low, but it has not been uniform. jThus, the citizens of Long Beach have become accustomed to i ja low property tax, but not a stable one; in eight of the I jpast fifteen years, the rate has been raised or lowered by i at least 10 per cent. j The City of Long Beach’s tax rate cannot properly be j I compared with that of surrounding municipalities unless it ! is adjusted for the variation in the assessment ratio.^ i In recent years, the valuation set by the city’s assessor has been approximately 10 per cent above that set by the 18 county. However, even with this 10 per cent adjustment, ^Long Beach is one of the three municipalities in Los Angeles County which does not contract its assessment and property tax collection functions to the county; the other two are Arcadia and Pasadena. Until 1938-39, Long Beach could not afford to accept the county assessment because under the $1.00 tax limit which prevailed, the county assessment was not high enough to produce the necessary revenue. Now that the maximum rate is no longer necessary, Long Beach continues to do its own assessing for political reasons. Part-time employment as an assessor has become a strongly entrenched political plum. ■^City of Long Beach, Annual Report of the City Accountant, 1953, p. 89. TABLE XXXII | i PROPERTY TAXES IN THE CITY OF | i LONG BEACH: 1939-53 Fiscal Year Assessed Value (000 omitted) Tax Rate 1939 $215,164 $1.2232 1940 233,876 1.0897 1941 323,849 1.1778 1942 225,8 9 6 1 .2 36 6 1943 237,857 1.1224 1944 240,828 .9674 1945 245,906 1.1051 1946 253,127 1.2015 1947 267,298 1.2390 1948 308,231 -1.2574 1949 349,©88 1.0892 1950 362,521 .9988 1951 361,496 1 .0 0 5 8 1952 379,429 .9553 1953 379,126 1.0959 Source: The City of Long Beach, City Accountant's Office, unpublished report. 309 ;the property taxes in the City of Long Beach are signifi- | cantly lower than those of the City of Los Angeles or other neighboring municipalities. ! Within the charter limitation, the property tax could be increased sufficiently to produce approximately i 'one million dollars more than the 1952-53 revenue from this ; source. If oil and gas revenues continue to decline, the property tax: rate will undoubtedly be raised to the $1.00 maximum. Because of the tradition of a low rate, and the long-standing of the present charter limitation, the I property tax is unlikely to become of much greater impor- ,tance in the revenue structure of the City of Long Beach. Other Locally Controlled Revenues Of a total of approximately three million dollars estimated to be collected from locally levied, non-property taxes, licenses, permits, and service charges in 1954-55, the following are the major sources: An additional million dollars is anticipated from a great variety of sources, ranging from parking meters with estimated revenues of $125,000 to bicycle licenses with an estimated revenue of $2 5 0. Pines and Forfeits Utility Franchise Taxes Business and Professional $786,659 423,512 Licenses Building Permits 542,000 205,175 310 t i j Obviously, the City of Long Beach has not found it i i |necessary to make extensive use of non-property tax revenuej i sources. These sources account for only 16 per cent of j I the revenues of the Operating Funds, whereas they account j i j for 26 per cent of the total revenues of all cities in the j | United States, and 3 2 per cent of the total revenue of the |neighboring City of Los Angeles. If Long Beach should need |additional revenues in the future, both a city sales tax and additional service charges are available, although 1 [ |they are certain to be politically difficult to institute j in a community which has escaped them for so long. j 1 ■ j j 1 Revenues Received from Other Governments i As is the case of all California cities, the major portion of the subventions received by the City of Long Beach are tied to taxes paid by the owners of motor vehicles. Of the total estimated revenue from other gov ernments for 195^-55, $2,736,508> almost 50 per cent, is from the state-collected in lieu property tax on motor vehicles, and an additional 37 per cent is dependent upon the state's collections from the tax on gasoline. If these subventions are allocated to their basic revenue sources, the income of the Operating Funds is dis tributed as shown in Table XXXIII. Thus, the property tax and the income from oil and gas contribute, in almost equal TABLE XXXIII REVENUE OP OPERATING FUNDS BY ADJUSTED SERVICE, CITY OP LONG BEACH: 1954-55 Property Taxes $7>197,494 Sales and Gross Receipts 1,457,662 Other Locally Controlled Sources 2,602,222 Oil and Gas Income 7 , 085,652 Unallocable 446,171 Total $18,789,201 Source: This figure includes the monies transferred from the Bond Interest and Redemption Fund since the sur plus in that fund had been accumulated from oil and gas revenues. 312 shares, 76 per cent of the Operating Funds' revenues. » 1 ! ! I Natural Gas and Oil Revenues i The Long Beach Gas Department is a municipally- ! owned utility responsible for the distribution of natural j I gas throughout the city. Its major source of supply is j jmunicipally owned wells, and the utility makes only a token j t i 'payment for this supply. Consequently, the Gas Department ' .regularly operates, despite low consumer rates, at a sub- : i , stantial profit. After provision has been made for the J department's expenses, both current and long range, the City Council can by a two-thirds vote transfer monies from ; the Gas Revenue Fund to the General Purpose Fund.^ This I transfer Is estimated to be $3,250,000 In 195^-55. Revenue from the sale of oil Is distributed among three funds: the General Purpose Fund, the Tideland Oil Fund, and the Harbor Revenue Fund. The basis of this dis tribution is the location of the producing well. If the well is located on city-owned property outside the tidelands, the revenue accrues to the General Purpose Fund without restriction. The estimated revenue from this source in 1 9 54 .55 iS anticipated to be $1,619,750. ^This transfer is possible provided that the Gas Reserve Fund has a balance of at least $700,000. Charter of City of Long Beach, Section 215a, as amended June 1, 313 The tideland area, including most of the Harbor i District, was granted to the city by the State of California and revenue from the tideland area: J i i I ... shall be used exclusively for the purpose i of establishing, construction, maintaining and I i improving public parks, parkways, highways, play- j grounds, and the construction, maintenance and j operation of wharves, docks, piers, ships, quays, J i and other utilities, structures and appliances | necessary or convenient for the promotion and 1 accommodation of commerce and navigation. . . ,20 j Oil revenues from wells located in the tideland area, but i | | outside the Harbor District, flow into the Tideland Oil ( Fund. With three exceptions these monies can be spent only 1 | iif the electorate approves an expenditure which falls within the above legally defined purposes.21 The exceptions referred to give the City Council direct control of at least $750*000 annually. Each year, the Council may spend $250,000 for purposes authorized in the Charter without popular approval,22 and each year up to $500,000 of the fund's interest earnings may be spent for the operation and on Ibid.. Section 260.6 as amended June 1, 195^. p *j An amendment approved June 1, 195^ stipulates that 25 per cent of the Tideland Oil Fund revenues received after July, 1956 must be used to build an endowment. Ibid., Section 2o0.6a. 22This $250,000 is cumulative; if nothing is spent the first year, the Council may authorize a $500,000 expenditure in the second year, etc. Ibid., Section 260.6c. : 314 i ! maintenance of improvements originally constructed from j ■ jTideland monies. ^ Finally, popular approval is not ' .required for expenditures necessitated by subsidence or in ; I | jan emergency created by fire, flood, storm, or earth- ; ! 24 ;quake. Under these powers, the Council is expected to ;authorize the expenditure of $859,000 of Tideland Oil Fund ( Jmonies in 1954-55* ! The oil income from wells within the Harbor District | is paid into the Harbor Revenue Fund.^ This fund is i j 'required to transfer a substantial portion of its oil and | i J igas revenues to the city's Public Improvement Fund, but it j i !does not contribute directly to the so-called "Operating j Funds. : i , The total oil and gas revenues which are estimated to be available to help defray the City of Long Beach's operating expenditures in 1954-55 is $5>l6 9>7 5 0* ln addi tion, this same source of revenue supplies the majority of funds which the city anticipates spending for capital out lay. | 23ibid., Section 260.6d. 2^Ibid.. Section 260.6b. 2f>The boundaries of this District are defined in the Charter, Section 229t. 26 The role of the Public Improvement Fund is dis cussed more fully in a subsequent section of this chapter. Infra, pp. 322 ff. 315 Response of Municipal Revenues to Business Fluctuations 1 The unique revenue structure which supports the City of Long Beach should provide that city with an enviable t i (degree of financial stability. This structure consists of three major segments: property taxes; oil and gas revenues; and all other revenue sources, half of which are subven tions. The oil and gas revenues, subventions, and property |taxes revenues can all be expected to demonstrate a high I degree of financial stability.^ In case of a sustained depression, the yield of the ^property tax would undoubtedly fall. However, the 'depression of the 1 9 3 0's was by no means disastrous for the City of Long Beach. In 1933-34, assessed valuation reached a low of $192,842,000, only 15 per cent below the previous maximum assessed valuation, and for a three year period, 1932-33 until 1935* “ 36, the delinquency rate stood at about 10 per cent. These figures are of limited value now, since the economy of Long Beach area has changed so drastically in the past two decades. Nevertheless, the extremely small percentage of the city's revenue produced by cyclically- sensitive taxes and the substantial percentage produced by ^The exhaustion of the Long Beach oil field would be ruinous to the city's finances, but this is a contin gency which is independent of the business cycle. 316 |the gas utility indicate a much higher degree of financial |stability than is found in the average municipality. i ; I III. CAPITAL OUTLAYS AND DEBT OF THE i j ! ! CITY OF LONG BEACH j I i j | The pattern of capital outlay made by the City of :Long Beach is an erratic one. The pattern reflects the i I effect of the depression during the 1930‘s and the effect I I of World War II in the early 1940's, but in neither case j ;has the effect been extreme. ! t I Expenditures for Capital Outlay I ! | The decade of the 1920's was one of rapid growth fori the City of Long Beach, and the city's capital facilities had to be expended to serve the greater population. In addition, the city purchased the existing gas distribution system of the Southern Counties Gas Company, and began the operation and expansion of this new municipal utility in 1924. The city's average, annual, non-utility capital expenditures for this decade was $ .5 6 million, and the pO average for all outlay was $1.43 million. 0 oft California, Office of the State Controller, Annual Report of Financial Transaction of Municipalities and Counties. 1921-1929. 1 The effect of the depression on the city’s capital outlays is evident in the diagram on the following page. It is to be noted that total capital outlay continued to i irise until 1932. This delayed reaction to the general ! Ibusiness downturn is attributable to the fact that the ! citizens had authorized large bond issues in 1929 for the jWater Department, the Harbor Department, and for public parks and playgrounds. At the end of fiscal 1929-30# there 'were still $4.9 million in bonds authorized and unissued.29 All except $100,000 of these bonds were sold during 1930, ;1931, and 1932, and the authorized programs were completed i 'in those years. When the 1928 bond authorization had been exhausted, the level of capital expenditures fell drastically; in 1933# capital outlay for streets was less than $1,000. There was an upsurge in 1936, due largely to street outlays and a small expansion of utilities. It was not until after World War II, 1949 to be more precise, that the City of Long Beach began spending for capital outlays at a rate sufficient to maintain and replace existing facilities. As was the case in other cities studied, the invest ments made by the municipal utilities were responsible for 29City of Long Beach, Annual Report of the City Auditor, 1934. p. 32. 318 i 319 !the delayed reaction to the downturn of the depression. 1 : The brief business downturn of 1937 did not interrupt the 'growth of investment in the city's utilities, but the ' 1 I ! j ;already low level of investment in non-utility outlays was , ;cut almost 70 per cent, from $19 1,0 00 in 1937 to $7 1 ,0 0 0 in 1938. ! ; During World War II, limited utility investments | 1 1 |were possible because of Long Beach's strategic military | 1 position in the economy. The non-utility expenditures were j ;largely suspended from 1941 through 1945. Since 1948, the , ; j ;city has been attempting to overcome the inadequacies which 'a fifteen year dirth of capital investment had created. In| ,the two years 1949 and 1950, Long Beach spent more for capital equipment in both the utility and non-utility areas than it spent for that purpose in the entire decade of the 1930's. In 1953, the investment in each of these fields exceeded that made in the five year period 1932-1936 inclusive. The Use of Debt A review of the purposes for which the City of Long Beach has issued bonds indicates that debt has been used 3°The delayed expenditures of the 1929 park and recreation bond proceeds did create a belated bulge in the non-utility category in 1931* 320 i extensively to finance the city’s capital improvements. I Included in that list are: city hall, hospital, incinera tor, parks and playgrounds, fire department improvements, I I stadium, storm drains, and the three municipally owned ;utilities.31 | Despite this variety of projects, the debt policy j :of the City of Long Beach has been a conservative one. i !The city's maximum debt of $18,098,466 was reported in >1932, but this represented only 7 per cent of the city's !assessed value.Three years later, when the city's i assessed value had reached its low point of $194 million, the city's outstanding debt was only slightly in excess of ; i j8 per cent of the assessed value. I There have been two reasons for this conservative debt policy. The first, which stood alone until relatively recently, is the State of California's requirement that a ,general obligation bond issue must be approved by a two- thirds majority at the polls. No bond issue was able to satisfy this requirement from 1928 until 1945* By the latter year, the City of Long Beach had only $11 million ^California, Office of the Controller, Annual Report of the Financial Transactions of Cities and Counties, 1953, P. 8F7" ^2City of Long Beach, Annual Report of City Accountant. 1932, p. 28. 321 of bonded debt outstanding. The other* factor dictating a conservative debt policy has been the lack of necessity; the revenues from the city owned natural resources have given rise to this unique condition. In 1952, the city had sufficient monies in its General Bond Redemption and Interest Fund to meet principal and interest requirements until maturity on all its non-utility indebtedness.^ Similarly, both the Harbor and Gas Departments are free of net indebtedness. The recent charter amendments removing some of the restric tions on the use of tideland oil revenues should make it possible for the City of Long Beach to operate on a strict pay-as-you-go basis.^ IV. CAPITAL BUDGETING IN THE CITY OF LONG BEACH Unlike the other cities surveyed in this study, the City of Long Beach has had only recent experience with long-range planning. A City Planning Commission was first appointed in compliance with a new charter in 1921, and a 33city of Long Beach. The Budget: Fiscal Year 1952-53, P. 156. 34 Because of the fund structure utilized by munici pal governments, the Water Department will be an exception to the pay-as-you-go rule. Department of City Planning was created in the same year. However, the Department remained in existence just long ; enough to prepare a city zoning ordinance. i i ! From 1923 until 19^0, the Planning Commission con tinued to act without staff assistance, hut confined its 1 i I activities to zoning. In 19^0, a Department of City Plan- ining was recreated, but the only employee of the department |was a secretary. On September 1, '19^4, the City of Long Beach employed its first professional planner; gradually, !additional staff was employed so that by 19^6 the city had • ia planning staff of five technicians and four clerical ! ! iemployees. Thus, the city's experience with planning did not really begin until after World War II. The Post-Victory Expansion Commission The first real effort to prepare a long range plan for capital outlay was begun in 19^ by a Post-Victory Expansion Committee. This citizens' committee was spon sored by the City Planning Commission but had the coopera tion of all city departments. The final program presented by the Committee suggested $56,000,000 of immediate needs to be provided in first six to ten years following the war. It was estimated that the city would have available $26,000,000 for the program. The Post-Victory Expansion Committee also played a 323 part in the adoption of a charter amendment creating a Public Improvement Reserve Fund in 1945* The City Council may, from time to time, appro priate or transfer moneys to a special fund to be designated as the ’Public Improvement Reserve Fund,' which said fund is hereby created and established; provided, that the balance in said fund shall not at anytime exceed Two Million Five Hundred Thousand Dollars ($2,500,000.00). Such fund shall be a continuing fund and not subject to transfer at the close of the fiscal year. The moneys appropriated or transferred to and placed in the Public Improvement Fund shall be used exclusively for payment of costs and expenses of construction or reconstruction of public improve ments, including the purchase of such land, rights and properties as may be necessary therefor, and as shall not have been provided for in the budget of the City. Moneys appropriated or transferred to and placed in said Public Improvement Reserve Fund shall be kept separate and apart from all other moneys of the City. Upon receiving consent of the City Council, by vote of two-thirds (2/3) of its members, expressed by resolution, the City Manager, subject to all provisions of this Charter other than the provisions thereof relating to the budget of the City, shall have the power to order and contract for the expenditure of moneys from said Public Improvement Reserve Fund, but only for purposes for which said moneys may be used, as herein set forth. . . . Moneys may be invested but earnings to into the Fund.35 Noteworthy Is the provision that expenditures of the Public Improvement Fund are specifically excluded from the normal budgeting procedures. 35charter of the City of Long Beach, Section 260.5 (as amended, May 2, 1945). 324 Neither the program of the Post-Victory Expansion Committee nor the existence of a Public Improvement Fund ; produced the desired goal of a rational approach to capital i !expenditures. In their report of 1949# Kroeger and Asso- !ciates commented on the City of Long Beach's 1949-50 budget To list over $22,000,000 in projects and to pro pose that a total of $2,500,000 be appropriated to finance an unspecified combination of them is hardly an example of careful planning. It puts 20^ of the^proposed expenditures in a miscellaneous grab-bag.36 It should be added that the right to draw from the "grab- i bag” was retained as the exclusive prerogative of the • legislative body.37 The Committee for Public Improvements The need for an over-all program of capital expendi tures was re-emphasized when the state legislature in 1951 relaxed the restrictions on the use of 50 per cent of tideland oil revenues.This meant that the city would ^6 J Louis J. Kroeger and Associates, Administrative Survey. City of Long Beach. California (second special report; San Francisco: L. J. Kroeger and Associates, 1949), P. 9. ^'However, with very limited exceptions, the monies which have been paid into the Public Improvements Fund have been oil revenues, the expenditure of which must be approved by the electorate. Infra, p. 3 2 6. ^Assembly Bill 3400, First Regular Session of the Legislature, 1951* 325 j soon be in a position to spend large sums of money for a i |variety of capital improvements outside the tideland iarea.^ In August of 1951, the Mayor and City Councils* An Committee for Public Improvement™ was appointed and 'charged with the following duties: 1. Prepare a program of long range public improve- : raents specifying the order of priority and j showing estimated cost of maintenance and j operation. j 2. Relate the various projects in the program to a ! total over-all plan of public improvement. 3. Relate the various projects to the expenditure of tideland and submerged land oil revenues.^1 i The Citizens Committee solicited and received !capital project recommendations from the general public and from the city departments. The size of the committee, and the diversity of interests represented proved to be so great that agreement could not be reached on a definitive capital outlay program.^ However, the Citizens Committee 3%he charter had to be amended before the city could take advantage of this change. 4 0 Hereafter referred to as the Citizens Committee. in ^Summarized from the introductory letter accompany ing the Citizens Committee1s Report on Policy for Expendl- ture of Tideland and Submerged Land Oil Revenues, June, 1952. ^2The Citizens Committee was made up of twenty- three members and was deliberately chosen to represent a diversity of interests. ’ 326: did agree on general policy regarding the use of tideland oil revenues. ; i 1. The Harbor Bond Redemption and Interest Fund and ; all Harbor District subsidence remedial work | should be the first charge against these revenues, j i 2. That all monies in excess of amounts needed in item 1 above be used for capital improvements and in rare instances, the operation and main tenance of improvements so constructed. 3. That none of the tideland revenues be expended for purposes other than those found in item 1 except upon a majority vote of the electors voting at a regular City or State election. 4. In case of a major city disaster, the City Council may use uncommitted tideland revenue i for emergency needs without a vote of the people.43 A series of charter amendments based on this policy ! were Introduced and approved. Items 1 and 4 were substan- ! tlally unchanged, but the amendments enlarged the City lllL Council's powers beyond those suggested in items 2 and 3- Under the amendments, the Council is authorized to spend up to $2 5 0 ,0 0 0 annually for capital improvements in the tideland area without prior popular approval. J Following the failure of the Citizens Committee to 43 Ibid., p. If. Summarized by the author. ^ Charter of the City of Long Beach. Sections 260.6(a)(bj(c), and (d) and 2 6 0 .8 as amended June 1, 1954. ^Supra, pp. 312 f. !agree on a definitive capital outlay program, the Planning f Department assumed the role of a collector of projects. Each project requested Is received by the planners and classified as either urgent, desirable, or reserve. The i |project is then forwarded to the Citizens Committee which iagain reviews the request. If the Committee feels that a jproject is urgent, it will suggest directly to the City ! t [Council that this project be added to the ballot. Thus each project is subject to review by the planning agency, the Citizens Committee, the City Council and the people. Unfortunately the above procedure is not universal. The City Council has placed projects on the ballot directly without review by either the planning department or the 46 Citizens Committee. In two cases in the past two years, projects added by the Council have received popular approval. The Lack of a Capital Budget To date, the City of Long Beach does not have a capital budget. It does not have a unified program of 46 One such project was the Recreation and Exhibit Hall, a $2,750,000 project, approved in April, 1953* Because of inadequate review the omissions, such as parking facilities, were so numerous that it was necessary to get approval of an additional $1,575*000 for the same project in January of 1954. 328 i , ^capital improvements. It does not have any formal procedure; t ; I i requiring that the individual projects considered by the j I i jCouncil be subject to the review and comments of either the j 1 - {Director of Finance or the City Manager. j ' The continuation of the "grab bag" approach is not ; i {easily explained. Administrative officials in the City jManager's office, the Department of Finance, and the ‘ : I [Department of Planning all expressed a desire to adopt some j [more orderly approach. When asked why improved procedures j ^ i 'were not being currently introduced, the universal reply j j {was that they did not have the time. While there is 1 j I undoubtedly some validity to this response, it does not j fully explain the lack of a capital budget. One factor which has certainly contributed to this neglect of long range physical and financial planning is the city's oil revenues. The existence of large reserves from this source has created an unwillingness on the part of the i citizens and the administrators to take the time and I trouble to analyze and plan for the city's development. There is a general feeling that the oil revenues, when free of legal entanglements, will solve all problems; as one city official aptly stated: "For the past fifteen years, the city has been waiting for its rich uncle to die." Another factor which has impeded orderly planning 329 Is the lack of a homogeneous population. There have been strongly opposed political factions in the city since its founding, and the rapid growth since 19^0 has added a new i element which is still in the process of absorption. The l inability of the Citizens Committee to reach an agreement i on a public improvement program is illustrative of the I problem to which the diversity of population gives rise. I I Along somewhat similar lines, the city's lack of a ibackground in physical planning is a handicap. Long Beach ! has had an active planning department for less than a ,decade, so that even unified physical programming is a ■ novelty. Neither the citizens nor the administration has had the opportunity to witness the advantages accruing from a well-integrated, long range program of public improvements. Also, change has taken place so rapidly in the City of Long Beach that many persons doubt the value of any long range planning. In a three year period in the early 19^0*s, the city's population increased more than 50 per cent; in 1953 and 195^* annexations increased the city's population by 15 per cent; and three times in the past four years the allocation of the tideland oil revenues has been changed, once by the State of California and twice by the people of Long Beach. 330 i V. CONCLUSIONS f i The City of Long Beach has changed both in character land size in the past twenty years. In that time its char acter has become much more industrial, and its size has j i idoubled. Since the discovery of oil in 1921, revenues from |this source have given the city a unique financial charac- I ter. Income from natural resources has enabled the city |to function with a relatively low property tax and without employing other widely used sources of municipal revenues, :such as the sales tax. This has not been an unmixed bless-! iing. The citizens have become accustomed to their low taxes, and justifications of tax increases sire met with the reply, "Use the oil revenues for that.” Legally, adminis tratively, and economically, the City of Long Beach defi nitely possesses unexploited sources of revenue* politi cally, a critical situation will have to be apparent before the citizens are likely to approve additional taxes. The capital expenditure record of the City of Long Beach is typical of municipalities, being moderately high during the 1920‘s, falling to extremely low levels during the 1930‘s and early years of the 19^0*s, and rising to unprecedented heights since 19^8. However, unlike the 331 other cities studied, Long Beach has not yet adopted administrative procedures designed to insure a more orderly and more rational capital expenditure program. CHAPTER X CONCLUSIONS From the title of this study, it might be antici pated that the conclusions would logically fall into two j i categories: economics and administration. The author has j found it necessary to add a third classification which has | been entitled "Primary Conclusions." j 1 I. PRIMARY CONCLUSIONS The adjective, primary, was selected for this cate gory of the conclusions since it deals with two questions which had to be answered affirmatively before the remainder of the study could be assumed to be of real value. Briefly, these two questions are: 1. Are the two viewpoints to be considered, that of the economist and that of the public administrator, so fundamentally different that any attempt to apply them jointly to a problem is predestined to failure? 2. Are there external factors, factors beyond the influence or control of the local municipality, that make a rational approach to capital expenditures impossible for 333 t a . single municipality? ! i i ! The Compatibility of the Economic and Administrative j ! Approach In order to establish the feasibility of the study i combining the economic and administrative approaches to the problem of municipal capital expenditures, the literature |of both fields was reviewed. The result of the review was j ■ reassuring. | i The economist's more abstract approach to public ‘ expenditure policy involved the application of marginalism to this special area. The allocation of a public jurisdie-J tion's limited funds among expenditure alternatives is studied by using incremental analysis applied at the margin, i.e., marginalism. The purpose of such study is to deter mine which of a limitless variety of expenditure patterns is an optimum; the optimum is in turn defined as the pattern which will maximize social welfare. Would a little more here and a little less there increase social welfare? The budgeting literature found in the field of public administration is addressed to this identical problem. However, the administrator, recognizing that choices must be made each year by legislative bodies throughout the nation, has concentrated his study on the development of techniques which will insure more informed legislative 33^ jchoices. Unfortunately, the budgeteer often becomes lost |in his techniques and does not explicitly define his goals I i or the criteria by which he measures improvement. Careful j study, however, reveals that he too is using increased i j social welfare as hi^s ultimate criterion. 1 I Clearly, the two approaches are not in conflict,; I both - with achieving the best allocation of a i ! public jurisdiction* slimited resources, and both employ the same criterion, increased social welfare, to measure progress. However, since neither school has a generally accepted definition for the necessarily subjective criter- l :ion of social welfare, there is Still ample room for dis- | ^ 1 ' I agreement on specific applications. The matter of capitalj expenditure policy is worthy of detailed investigation as one specific application. External Factors Limiting Capital Expenditure Policy The external limiting factors which are common to all municipalities are of two types: financial factors and physical factors. ■^In economics, considerable effort has been devoted to the development of the so-called "new welfare economics" which its adherents claim to be non-normative. In the literature of public administration, the whole issue is generally avoided by declaring the question to be one of policy and so subject to legislative rather than adminis trative determination. 335 i | Financial factors and capital expenditure policy, — ; (The pro-cyclical capital expenditure policy of municlpali- j ! i l ; .ties has frequently been excused on the basis that local (governments have no choice; they must follow this pro cyclical pattern because they have no financial flexibility, lit cannot be denied that the tax structure of these govern ments is limited by legal, economic, administrative, and j i ! (political forces beyond the control of the individual city. I jHowever, there is more freedom within these limits than is i ; generally recognized. j In the postwar years, municipal governments have been successful in the collection of revenue from an j ! ! (increasing variety of sources. In California, the majority j I of cities now levy and collect a municipal sales tax. In cities throughout the nation, other new revenue sources include: income taxes, truck and motor vehicle licenses, service charges for sewage and garbage disposal, extended business license taxes, parking eharges, inspection fees, and amusement taxes. i Since the cities are creatures of the state, most of I these new sources of revenue are subject to legal limita tions. Nevertheless, each additional source allows greater freedom of action. The economic and administrative limits are also of concern with respect to many of these new 336 i sources, but in the growing field of service charges, they are a minor consideration. The all-important factor limit- !ing the adoption and use of many of these new sources is !political, and in the long-run, political limits are an Internal, rather than an external, force. i i Additional financial flexibility can be created through the use of reserve funds or by the use of debt. i Legal limitations are frequently imposed on both these i ; alternatives, but they are seldom comprehensive limits. For example, legal debt limitations almost universally apply only to general obligation debt. Again, economic and administrative limits are also of minor importance and the all-important consideration is political. Even in the relatively few instances in which the above mentioned limitations confine a municipal government to a rigid tax structure, it must be remembered that the taxes which are the foundation of that structure constitute our most stable revenue source. When properly administered, they will be a stable source of revenue which will continue to produce their normal revenues except in the case of a prolonged recession. Thus, it can be concluded that there are two signi ficant factors which may impose immediate financial limits on a municipality's capital expenditure program. Economic 337 | |forces will limit such a program in the event of a pro- i 1 ilonged recession; political limits are continuously opera- I i tive and are, in the general case, unquestionably the most I significant. Physical factors and capital expenditure policy. — (Because of its obligation to render services to the entire I community, certain of a municipality's capital expenditures must be coordinated with the cycle of private construction i jin the community. The most obvious expenditures of this type are for the expansion of municipal utilities in order j , |to service new construction. However, a study of the vol- | ! : ume of new building construction and that of new utility ! ; I i i construction revealed that the ratio of these two varied widely from year to year. Non-utility capital expenditures account for almost two-thirds of municipal capital expenditures. The timing of this two-thirds is determined as a part of the political process. It is only after the community's needs have been ignored by the political process for a number of years that p physical necessity dictates action. 2 The City of Los Angeles is in exactly that situa tion in the spring of 1955* The City Engineer has been attempting to get funds for an expansion of the sewer sys tem since 1950 without success. In April of 1955, a $60 million dollar bond issue for this construction will be 338 1 In summary, not more than one-third of municipal / capital outlays are originally dictated by physical neces- i :sity. The timing of the remainder is determined in the | i ! jpolitical process which all too frequently refuses to exer- | icise any option, but waits until physical conditions will 1 Inot permit further delay. Thus, with the exception of a j Iprolonged recession, the external factors limiting a city's j 1 capital expenditures are not in reality external; they are i ! ^ 1 Ithat city's politics.-5 j ! \ II. ADMINISTRATIVE CONCLUSIONS j | i : i 1 Capital budgeting is both an integration of long range physical and financial plans, and a means of encour aging the implementation of these plans. Its purposes are: to create a greater awareness of the recurring nature of the city's needs for capital improvements; to make possible a more Intelligent annual allocation of the city's limited resources between current and capital expenditures; and to placed on the ballot. When an official in the City Adminis-^ trative Office was asked what would happen if the bonds were not approved by the electorate, he replied: "We will ; still have to build sewers; we can't postpone it any longer. We'll get the money some way." ^The word "politics" does not have reference to political parties, but to the whole environmental situation as it affects the elected officials. 339 i insure that the eity's most pressing need within the cate- jgory of capital improvements are satisfied before funds iare devoted to less pressing needs of this type. i Prerequisites for Successful Capital Budgeting Success in terms of the purposes stated above is not iprecisely measurable. However, the author has become con vinced in the course of his investigations that there are jsome identifiable prerequisites to successful capital budg- jeting. These are listed and then discussed briefly below: I | 1. The administration must be legally required to prepare a capital budget. | 2. The legislative body must be legally required to i endorse the capital budget prior to the receipt of the proposed current budget, and to publicize the endorsed budget. 3. Capital budgeting must embody all the recognized principles of current budgeting. 4. The capital budget must have strong public support. The need for legally requiring preparation of a capital budget. — The efficient operation of any organi zation or enterprise demands careful advance planhingj in the case of a complex, multi-functional organization, such 3^0 ;as a city, careful advance planning is vital. Nevertheless, ! planning is all too frequently neglected in the face of an apparently endless stream of more immediate problems. Even ithe professional planners found in city governments have to ■ neglect their long range planning responsibilities because ' 1 of the pressure of zoning activities with which they are j !also charged. \ | 1 | The preparation of a capital budget requires that 1 the finance department, the planning department, and all city departments take time to think in long range terms ,and to crystallize their thoughts into a definite program. i ;Unless legally required to do so, most officials will be unable "to find the time" to devote to planning. The need for legal definition of the Councilfs obligations in capital budgeting. — Similarly, a city council is apt to be unable "to find the time" to consider a long range plan unless legally required to do so. The calendar of the legislative body is just as crowded as that of the administrative officials in city government, and frequently, time spent satisfying a citizen on some minor matter is more politically profitable than time spent con sidering long range plans which may not be implemented for several years. Today*s long range problems will become tomorrow's current problems, and if left to its own devices, : 3*1 |the legislature will delay consideration until they are 'current problems. A second legal obligation should be imposed on the council requiring that formal endorsement be made prior to consideration of the proposed current budget. Unless this j i ■ is done, consideration of the capital budget will be ! i |delayed until the date on which actual appropriations must !be made. At this point, capital items will be reviewed i I along with the detail on current operational expenses; i !capital improvements will remain in their customary posi- j |tion of a residual item in the budgeting process. ! I A third legal obligation should require that the : - f I council publicize the program it has endorsed. The ; endorsement is merely the formal approval of a plan which, it is hoped, will be authorized in succeeding current budgets. Without publication, this, preliminary action of endorsement will be perfunctory. To require the legisla tive body to enact capital outlay appropriations in advance > of its consideration of the current budget would destroy : the comprehensive nature of the entire budgeting process; with no compulsive force behind the preliminary action, endorsement is meaningless. The requirement that the endorsed program be publicized is a compromise between these two extremes. On the one hand, it does not ! necessitate a final commitment on capital expenditures t | prior to the review of current needs; on the other hand, the knowledge that the legislative endorsement will be pub- j licized will encourage a more careful review of the capital ! budget prior to endorsement, and public knowledge will i encourage adhesion to the endorsed program when actual j appropriations are being made. j Capital budgeting and the principles of current budgeting. — Although never legislatively enacted, the capital budget is nevertheless a budget, and the recognized i principles of budgeting are applicable. Only two of these J principles require comment. First, a capital budget must be comprehensive, but only with respect to its special province. In other words, the physical and financial plans for capital outlay must be all-inclusive. Second, the capital budget must have annuality even though its time span covers more than a single year. This does not mean that an entirely new capital budget must be constructed each year, but that it must be revised, and those revisions endorsed, each year in light of changing conditions. The need for strong public support. — Previously it was noted that the really significant forces which define a municipality’s capital expenditure program are political. | Even in the City of Long Beach where improvement reserve 1 funds are available, the public has maintained a tight con trol of the capital projects to be undertaken. Thus, if a capital expenditure program is to avoid the fate of so many I I , master plans, the public must be informed, and be in agree-j | ment with the objectives of the program. j ! Unfortunately, no categorical answer can be given to‘ i i j the question of how public approval can be secured. Both ! successes and failures have been recorded with public par- i I ticipation in the early stages of preparation* the same ‘ I ; ! statement may be made regarding public participation at all; ! I stages of preparation. Similarly some cities have been j > ; successful and others have failed with programs in which the i ■ public has had no part. The question of increasing public I i support for the capital budget can only be answered on an individual, case by case basis. t * The public’s role in the capital budgeting process will vary from city to city. The political environment of ; each city must be studied in order to determine what role | the public should play in that particular city. I Administrative Responsibilities in Capital Budgeting 1 I A capital budget must be a single, unified plan for , 5 t the long range development of the city. As such, its j I preparation necessitates the cooperative effort of all , I 344 those associated with the administration of the city. j 1 Responsibilities of the department head. — The majority of capital projects included in a capital budget originate from requests submitted by those charged with the j supervision of a single department. This is as it should J be, since it is safe to assume that each department is more ; acutely aware of its own needs than anyone else. Thus, the role of the department head is to translate the needs of his department into specific project requests. Also, in > i case the department has more than one request, the depart- j I ( ; ment head should be responsible for designating an order of j i priority or urgency. j : 1 1 Responsibilities of the planning department. — At ' , 1 : least half of the preparation of a capital budget consists of physical planning, and 'most municipalities have an agency which specializes in this function, the planning j / ■ > department. In some cities, such as San Francisco, this ; department is charged with the responsibility for prepara tion of the capital budget. This procedure seems unwise. The planningagency's role in the preparation of a : ; capital budget should be that of a consultant. It should , supply the department with its estimates of the amount and direction of the city's growth. In addition, it should , 345 review all suggested projects In order to Insure conformity with the city's master plan. Some cities have found it useful to utilize the services of the planning department as a coordinator of project requests originating from the departments in order to eliminate any duplication of effort Responsibilities of the finance department. — In a capital budget, the financial planning is as important as the physical planning; it is the integration of these two types of plans which distinguishes a capital budget from a program of public improvements. Preparation of the financial plan is the responsibility of the finance depart ment. The two plans must cover the same time span so that the finance department must project both the city's cur rent revenues and current operating expenses forward for a period of five or six years. In addition, there must be a careful analysis of the city's present debt structure and its ability to Incur further debt. In brief, the finance department has the responsibility for estimating the city's i i ability to pay for public improvements. The determination of this ability to pay can not assume merely an extension of the Jurisdiction's existing methods of financing itself; it must also include a - 4 - thorough analysis of realistic alternative approaches. j ' ' ' ' 346j i I 1 As previously stressed, there are a variety of financial { ; alternatives open to most communities, and each must he ' carefully evaluated in view of the individual community*s needs and political structure. i i i | i Responsibilities of the chief administrative I [ officer. — Much of what is embodied in a capital budget j involves basic policy decisions, final determination of | which is solely a legislative prerogative. The legislative I body of a modern city, however, depends heavily upon its i chief administrative officer to provide information and i ~ _ I j recommendations upon which its policy decisions are based. i It is apparent, then, that the final responsibility for ' I I , the preparation of the capital budget to be submitted for legislative endorsement should rest with the chief adminis- I trative officer. i j His duties in respect to the capital budget are | similar to those Imposed upon him with respect to the annual budget. He is responsible for the preparation of a I unified capital expenditure program which will make what he ; feels to be the best use of the jurisdiction's limited ' funds. In more specific terms, this means that he must coordinate all the numerous projects which have been sub- \ i j mitted, arrange them in the order of their importance to 1 the community, and suggest definite means of financing 1 those he feels should be accomplished in the next fiscal ; i ! year. i * l t | ! III. ECONOMIC CONCLUSIONS I j | | Economic Goals and the Capital Budget | The goal of all budgeting should be to achieve an optimum allocation of resources. The administrative prin ciples of budgeting which have been evolved in relation to I current budgeting are designed to achieve this end. Icon- I i ! i omists and administrators have recognized that optimum allocation can be achieved only on a basis of complete ! I knowledge of all the needs of the Jurisdiction. i I Because of the peculiarities of governmental finan- | i cial record keeping, the traditional current budget does ' 1 not include all the needs of a public Jurisdiction; it includes only those needs which must be met in cash during i , the ensuing fiscal year. The non-cash costs, the great : majority of which private enterprise identifies as depre- I elation, are omitted. An awareness of these costs must be I created through the introduction of a capital budget, 1 before it can be assumed that legislators have a complete i - 1 ' knowledge of the city's needs. Thus, capital budgeting | must be introduced if the over-all budgeting process is to : achieve the economic goal of an optimum allocation of , resources. i : Counter-Cyclical Fiscal Policy and the Capital Budget Although emphasis on counter-cyclical policy has ' played a part in the introduction of long range planning to, I municipal corporations, it has heen of minor significance I i 1 in the actual adoption of capital budgeting procedures. i j Nevertheless, it does have important implications in this \ j field. I ; The timing of municipal capital expenditures. — The economist and the public administrator agree on the j I | basic purpose of capital budgeting, but there is a differ- j i ence of opinion regarding the supplemental purposes which 1 these procedures should serve. The economist sees the i i : capital budget as an excellent device for the operation of I I , [ » a counter-cyclical'program of governmental investment. He i will, of course, admit that actual outlays must be made in accordance with the community's needs for public improve- i ments, but he feels that during periods of heavy private : investments, the interpretation of "need” must be very ! strict. In periods of low private investment, "need" i ] i ; should be liberally interpreted so that the resulting pat- : i i t ! tern of municipal expenditures for capital improvements I would, to a limited degree, run counter to that of private : .-investment.______ _____ _____ ____________________ _ I 3 4 9 j I The administrator views the supplemental purpose of i ! [a capital budget in a quite different perspective. The job! I 1 of the chief administrative officer of a municipality is to satisfy the community’s desire for a high level of service ! I at a minimum cost. In order to do this job, he must have , adequate and properly maintained capital facilities at all 1 I times. Experience has taught him that this is a difficult s ' / 1 ; condition either to attain or to retain. J j ! Even though a particular service has top priority in| \ \ the legislative mind, funds for any additional capital i i j : I 1 facilities needed to render that service are apt to be \ 1 , eliminated in the annual legislative allocation of the < city’s limited resources. The necessity of a continuing high level of service, and the difficulty of securing appropriations for capital outlay must be foremost in the ! mind of the administrator. These two considerations indicate the goal of the ( local administrator In the field of capital expenditure. That goal is a regular annual appropriation for capital expenditures.^ It can be achieved only if the legislature i ( recognizes that there are capital costs incurred each year,; ! ; i t This, of course, assumes that the administrator is operating In a relatively stable community. In an expand ing community all expenditures, including capital expend!- , tures, will have to increase. 350 ; even though the great majority may be merely accrued costs ! | not requiring an immediate outlay of cash. j J A capital budget, including a long-range plan of i | capital improvement and a plan for financing these improve-j ments, will demonstrate that capital expenditures should be i 1 a recurring charge. The administrators' aim is to get ; legislative acceptance of this fact in the hope that the ♦ acceptance will be translated into recurrent authorizations I for capital outlay. If this desired regularity is ever achieved, the administrative official will not want it disrupted by the deliberate deferral of one or more projects i ! for even a single year. I Thus, once the obvious minimum needs of the commu- i nity have been satisfied, the economist and the public i administrator are not apt to agree on the time structure of i the remainder of the projects proposed in the capital budget. The economist desires controlled variations of I I 1 governmental capital expenditures to help offset the fluc- ! tuations in private investment; the public administrator in I [ local government desires a regularized program of capital ! j improvement. i ' The economist, however, must recognize that the j objective of the administrator is valid from the operational point of view; he should also recognize that it has 351 considerable merit from the economic point of view. Regu- I larity of the capital expenditures of local governments I would be a significant improvement over the pro-cyclical I I fluctuations that these expenditures have demonstrated in j the past. ; i Grants-in-aid and the capital budget. — The estab- 1 i !lishment of an effective counter-cyclical fiscal policy ; I I requires: effective economic forecasting; legislative, J : I administrative, and popular understanding; careful timing; | 1 and coordination with all other control policies insti- j tuted.^ a federal grant-in-aid program integrated with i 1 i municipal capital budgets might easily be designed to meet j these requirements more fully than any of the existing grant-in-aid programs. A comprehensive presentation of such a program would necessitate a separate study, but the evidence already ;gathered for this study suggests a basic framework. i 1. The^nnouncad purpose of federal grants-in-aid 1 to municipalities should be to enable each city to continue its_long range program of capital improvement as scheduled, | * even-when local revenues had decreased. I — „ | ^William J. Shultz and C. Lowell Harriss, American ! Public Finance (sixth edition; New York: Prentice-Hall, Inc"l9W, P. 644. 352 | 2. Federal grants-in-aid would be available to Imunicipalities only after employment had been below a pre- ! i i .determined level for at least one calendar year. In the j recession of the 1930*s, the four cities studied were able j to continue large capital outlays for two years after the \ t beginning of the serious decline in business activity; this Iwas possible because of the stability of their tax bases and a large volume of authorized but unissued bonds. Thus, ! ja yearfs delay would not seriously upset a municipality’s , (schedule, but would give sufficient time for necessary ; i I (federal appropriations and approvals. j | 3. Federal funds would be available only on projectsj 'which were Included as high priority items in the city's I ! capital budget’ . These could easily be identified; all the !cities studied had the equivalent of an ' ‘urgent" classif ication in their capital budgets. Limiting the use of ;federal funds to such projects would insure that the grants i i .were being expended for purposes which the community itself felt were most needed. H . Federal assistance for each city would be limited to a capital outlay program, the estimated cost of i i which did not exceed the municipality's average capital outlay for the three previous years. This limitation is designed to encourage cities to adopt regularized programs I 353 I and to eliminate the budget padding which would be apt to arise in the annual review of the capital budget during a j prolonged recession. j I i 5. Federal grants-in-aid would be available on any 1 project only to the extent that the"capital budget’s ^ Recommended financing for that project was to be from cur- j |rent revenues. In other words, federal funds are not to be j j _ ; ;used to replace the proceeds of a bond sale or the expendi- ! ; ‘ture of reserve funds. , I 6. The federal government would stand ready to buy ' 1 t i 1 those municipal bonds which the private money markets would ! 1 not take at a reasonable rate of interest. Such a grant-in-aid program has the advantage of ; being capable of expression in definite terms which could be made clear to legislators, administrators, and the public. It would not solve the problems associated with either economic forecasting or timing, but the fact that in the suggested program a year delay is anticipated makes the solution of these problems less pressing. Finally, it would !encourage local governments to adopt capital budgeting ♦ 'procedures, and to maintain their capital expenditures at 1 j ■ a normal rate until such time as federal grants were forth coming or the econorpic situation improved. 354 i ! IV. THE FUTURE OF CAPITAL BUDGETING I The entire economy of the United States is both < ibenefited and troubled by growing specialization and the (increasingly complex Interrelationships which result. The i same is true of government. The problem of coordinating ;all of the minute specializations into a smoothly function ing unit necessitates the development of improved tech niques of coordination and communication. The capital i budget is one such device which is still in the develop mental stage. The importance of its role as a coordinative device within government and as a communicative device between government and the public assures that capital budgeting !will be more extensively employed in the future. This •extension can take place only very gradually, however, ;since the public, the legislators, and the administrators must all be convinced of the merits of capital budgeting before it can be successfully practiced. i BIBLIOGRAPHY I BIBLIOGRAPHY A. BOOKS 'Adams, Henry C. The Science of Finance. New York: Henry Holt and Company, 1905. 573 PP. ; Anderson, William. Federalism and Intergovernmental ! Relations. Chicago: Public Administration Service, i 1946'. 192 pp. Anderson, William H. Taxation and the American Economy. New York: Prentice-Hall, Inc., 1951* 571 pp. |Bastable, C. F. Public Finance. Third edition. New York: Macmillan and Company, Limited, 1917. 780 pp. ;Benson, George Charles Sumner. The New Centraliza11on. New York: Farrar and Rinehart, Inc., 1941. l8l pp. Breese, Gerald, and Dorothy E. Whitmore (editors). An Approach to Urban Planning. Princeton: Princeton University Press, 1953. 1^7 PP. Bollins, John C., and Stanley Scott. Local Government in California. 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Fourth edition; cHicago: International City Managers' Association, 1949. 491 pp. ! Key, Valdimer 0. The Administration of Federal Grants-to- States. Chicago: Public Administration Service, 1937. 388 pp. ; Kinder, Frank L., and Phillip Neff. Economic Survey of the I Los Angeles Area. Los Angeles: The Haynes Foundation,1 1945. 151 PP. 1 King, Clyde L. Public Finance. New York: The Macmillan Company, 1935* 602 pp. j Lewis, Harold McLean. Planning the Modern City. 2 vols. New York: John Wiley and Sons, Inc., 1949. 284 and 224 pp. Lindahl, Erik. Studies in the Theory of Money and Capital. New York: Farrar and Rinehart, Inc., 1939. 384 pp. Lindholm, Richard W. Introduction to Fiscal Policy. New York: Pitman Publishing Corporation, 1^48^ 535 PP* Macdonald, Austin F. American City Government and Administration. Fourth edition. New York: Thomas Y. Crowell Company, 1948. 657 PP* MacDonald, John H. Practical Budget Control. New York: Prentice-Hall, Inc., 1939” 326 pp. Machinery and Allied Products Institute. Capital Goods and the American Enterprise System. Chicago: Machinery and Allied Products Institute, 1939- 83 pp. Marshall, Alfred. Principles of Economics. Eighth edition. New York: The Macmillan Company, 1945. 871 PP. | Maxey, Chester C. An Outline of Municipal Government. ; New York: Doubleday, Page and Company, 1924. 3H8 pp. | ; Maxwell, James A. Federal Grants and the Business Cycle. New York: National Bureau of Economic Research, Inc., ! 1952. 122 pp. McCulloeh, J. R. The Principles of Political Economy. Fifth edition. Edinburgh:Adam and Charles Black, ! 1864. 514 pp. : Mill, John Stuart. Principles of Political Economy. London: Longmans, Green and Co., 1883. 519 PP. ' Miller, Max. Harbor of the Sun. New York: Doubleday, ! Doran and Company, Inc., 1940. 329 PP* ! 1 1 1 Morey, Lloyd, and Robert P. Hackett. Fundamentals of Gov ernmental Accounting. Second edition. New York: I John Wiley and Sons, Inc., 1951* 518 pp. 1 > National Bureau of Economic Research. Cost Behavior and 1 Price Policy. New York: National Bureau of Economic Research, 1943* 353 PP* Newcomer, Mabel. An Index of the Taxpaying Ability of j State and Local Governments. New York: Bureau of Publications, Teachers College, Columbia University, 1935* 85 PP. Nicholson, J. Shield. Principles of Political Economy. Vol. III. New York: The Macmillan Company, 1901. 46l pp. Peck, Harvey W. Taxation and Welfare. New York: The Macmillan Company, 1925* 269 pp. Pelletier, Lawrence Lee. Financing Local Government. Brunswick, Maine: The Record Press, l94y. 1'90 pp. ; Pfiffner, John M., and R. Vance Presthus. Public Admlnis- J tration. Third edition. New York: The Ronald Press, 1 1953. 626 pp. Pigou, A. C. A Study in Public Finance. Third edition. London: Macmillan and Co., Ltd.^ T949* 285 pp. I 361 I I Rautenstrauch, Walter, and Raymond Willers. Budgetary 1 Control. New York: Punk and Wagnalls Company, 1950. i 301 pp. Ricardo, David. The Works and Correspondence of David 1 ! Ricardo. Edited by Piero Sraffa. Vol. IV. j 1 Cambridge, England: The Syndics of the Cambridge 1 i University Press, 1951* 445 pp. j ' Robbins, George, and L. Deming Tilton. Los Angeles: ! Preface for a Master Plan. Los Angeles: The Haynes ! Foundation, 1941. 303 PP. 1 1 j Roos, Charles P. (ed.). Stabilization of Employment. . ! Bloomington, Ind.: The' Principla Press, 1933* 300 pp.' I Sanders, Thomas H. Effects of Taxation on Executives. j Boston: Harvard University Graduate School of Business! Administration, 1951* 229 PP. 1 I Schultz, William J., and C. Lowell Harriss. American Public Finance. Fifth edition. New York: Prentice- | Hall, Inc., 1949. 798 pp. 1 Seckler-Hudson, Catheryn (ed.). Budgeting: An Instrument of Planning. Vol. IV of Budgeting. 6 vols. j Washington: American University Press, 1945. 246 pp. ( 1 Shimp, Byron W. (ed.). Financing Public Improvements. | New York: B. F. Van Ingen and Company, Inc., 1939• 149 PP. Shlrras, G. Findlay. The Science of Public Finance. London: Macmillan and Co., Ltd., 1925* 708 pp. Small, Albion W. The Cameralists. Chicago: University of ' Chisago Press, 1909* bOb pp. , Smith, Harold D. The Management of Your Government. New York: McGraw-Hill Book Company, 1945. 179 PP. Smith, Walter Gifford. The Story of San Diego. San Diego: City Printing Company, TS92T 163 PP. 1 Spann, Othmar. The History of Economics. Translated from 1 the nineteenth edition by Eden and Cedar Paul. New York: W. W. Norton and Company, Inc., 1930. 323 PP. I 362 I Spurr, William A. Forecasts of California^ Population I and Production. Palo Alto, California: Stanford University Press, 1953* 28 pp. j , Stone, Donald. The Management of Municipal Public Works. ■ Chicago: Public AdminlstraTion Service, 1939. 344 pp. j 1 5 Tax Institute, Inc. The Limits of Taxable Capacity. ! Princeton: Tax Institute, Inc., 1954. 184 pp. J ! Tax Policy League. Tax Relations Among Governmental Units. 1 New York: Tax Policy League, Inc.7 193B* 226' pp. j , Twentieth Century Fund, Inc. Facing the Tax Problem. 1 ; Edited by Carl Shoup. New York: Twentieth Century ! Fund, Inc., 1937. 605 PP. ! Upson, Lent D. Practice of Municipal Administration. New York: The Century Company, 192b. 588 pp. [ ! Walker, Mabel L. Municipal Expenditures. Baltimore: The Johns Hopkins Press, 1930. 198 pp. ! Walker, Robert A. The Planning Function in Urban Govern ment. Chicago: University of Chicago Press, 194-1 • 376 pp. ' Whittaker, Edmund. A History of Economic Ideas. New York:, ; Longmans, Green and Company, 1940. 766 pp. 1 1 Wolman, Leo. Planning and Control of Public Works. New York: National Bureau of Economic Research, 1930. 260 pp. B. ENCYCLOPEDIA ARTICLES 1 Sommer, Louise. "Cameralism," Encyclopedia of the Social • Sciences. Ill, 159-61. New York: The Macmillan Company, 1930. ! Spoffard, A. R. "Budget," Cyclopaedia of Political Science: Political Economy, and of the Political History of the United States. I, 316-20. Chicago: Rand, McNally and Company, l88l. 363 Willoughby, W. F. "Budget,” Encyclopedia of the Social Sciences, III, 38-44. New York: Macmillan Company, 1930. C. GOVERNMENT PUBLICATIONS Black, Russell Van Nost. Criteria and Planning for Public I Works. United States National Resources Committee. Washington: Government Printing Office, 1935. 182 pp.: j ; California, Department of Employment. Employment and Payrolls in California. Sacramento: 1946 to 1953. | _______, Department of Employment. Los Angeles Labor I Market Bulletin. Sacramento: January, 1950 to March, ; 1954. ; j , Department of Employment, San Francisco Labor i Market Bulletin. January, 1950 to March, 1954. i _______, Department of Industrial Relations. California j Statistics Bulletin: Area Supplement. August, 1950, October, 1950, June, 1952, October, 1953, and March, I 1954. _______, Legislature, Senate Interim Committee on State and Local Taxation. Aggregate Property Tax Rates and 1 Their Implications with Respect to Business Location and Development in California. Sacramento: 1949. 67B pp. _______, Legislature, Senate Interim Committee on State ! and Local Taxation, The Impact of Changes in Economic : Activity on Governmental Revenues in California. Sacramento: 195°. 115 PP. ’ j _______, Legislature, Senate Interim Committee on State j and Local Taxation. State and Local Taxes in California: a Comparative Study. Sacramento: 1951. ' 524 pp. _______, Legislature, Senate Interim Committee on State and Local Taxation. State and Local Sales and Use 1 Taxes in California. Sacramento: 1953TI 140 pp. J , Legislature, Senate Interim Committee on State | j and Local Taxation. Property Assessments and Equal- i l ization in California. Sacramento: 1953. 4<5l pp. j , Legislature, Senate Interim Committee on State • and Local Taxation. Fiscal Problems of Urban Growth , in California. Sacramento: 1953• 225“pp. 1 , Office of the State Controller. Annual Report of ! Financial Transactions of Municipalities and Counties. Sacramento: 1921 to 1953• , State Board of Equalization. What * s Next in Local Sales Taxes: 2nd Supplement. Sacramento: 1951. 38 pp.| ; 1 , _______, State Board of Equalization. Revenue Laws of ; California. Compiled by Dixwell Pierce. Sacramento: i T 953: 1X20 pp. ; _______, State Reconstruction and Reemployment Commission. 1 pallfornia Reports on Planning. Sacramento: 1947* ! 64 pp. t Calkins, Robert D., and Walter E. Hoadley. An Economic | and Industrial Survey of the San Francisco Bay Area. ! California State Planning Board. Sacramento: 1941. 298 pp. 1 City and County of San Francisco. Annual Report of the Controller. San Francisco: 1932 to 1953. _______. Mayor1s Annual Message to the Board of Super visors. San Francisco: 1934-1944. . The Auditor1s Annual Report of Financial Transactions. San Francisco: 192T"to 1931. _______, Board of Supervisors. The Charter of the City and County of San Francisco. Amendments to September, 1954 added by the' Office of the Mayor. San Francisco: 1949. ; , City Planning Commission. Annual Report for the 0 Fiscal Year 1946-47* San Francisco: 5 pp. , Department of City Planning. Annual Report. San Franciseo: 1948 to 1953* 365 _______, Department of City Planning. Capital Improvement j Program. San Francisco: 1948-1954 to 1953**59. j _______, Department of City Planning. The Population of ! San Francisco. San Francisco: 1954. 27 pp. { City of Long Beach. Annual Report of the City Accountant. Long Beach: 1943 to 1953• Annual Report of the City Auditor. Long Beach: T $21 to 1935* ! i _______. Charter of the City of Long Beach. Amendments ! £o June 1954 addedby the City Clerk. Long Beach: 1941. j _______. The Budget. Long Beach: 1921 to 1954. j . City Planning Commission. Planning Progress. i “Tong Beach: 1946 to 1953. ------- --- ---- _______, Mayor and City Council's Citizen Committee for Public Improvements. Report on Policy for Expendi tures of Tidelands and Submerged Land Oil Revenues. Long Beach: 1952. 28pp. I I City of Los Angeles. . Charter of the City of Los Angeles, compiled by Ray L. Cheseboro, William H. Neal, and Bourke Jones. Los Angeles: Parker and Company, 1949. ■ _______. The Budget. Los Angeles: 1921 to 1954. _______. The Proposed Budget. Los Angeles: 1946 to 1954. _________City Planning Commission. Annual Report. Los ! Angeles: 1927 to 1938. ; I _______, City Planning Commission. Accomplishments. Los , Angeles: 1942 to 1953. ! _______, Office of the City Engineer. Report on the Advantages of Adopting a Long Range Public Works Program for"Ttie City of Los Angeles. Los Angeles: 1940. n.p. I _______, Office of the City Engineer. A Proposed Six Year : Program of Public Works Construction for the Fiscal Years 194T-42 to 1946-47 Inclusive. Los Angeles: -1941. n.p.-,_ , _______, Office of the City Engineer. A Proposed Six Year Program of Post-War Construction, compiled by Lloyd i Aldrich. Los Angeles: 1944. 86 pp. ( _______, Office of the Controller. History of Bonded Indebtedness of the City of Log Angeles: 1895-1931. Los Angeles: 1933• W pp* i City of San Diego. Annual Budget. San Diego: 1926 to 195^. Capital Budget of the City of San Diego. San Diego: 1950 to 1954. Charter of the City of San Diego, California. i San Diego: 1951. ‘ i _______. Financial Problems. San Diego: 1946. 24 pp. Long Term Program of Capital Expenditures. San 0Tego7~T93HT 45"*pfu--------------- --------- i _______. San Diego Affairs. San Diego: 1937 and 1938. j _______. Yearbook. San Diego: 1939 to 1951. | _______, City Planning Commission. Planning the Future. San Diego: 1943. 28 pp. _____ , City Planning Commission. It Happened This Way. San Diego: 1944. 46 pp. , City Planning Commission. Biennial Report: 1952- 2[. San Diego: 1953. 27 pp. | Clark, M. J. Economics of Planning Public Works. United States National Planning Board. Washington: Govern ment Printing Office, 1935. 194 pp. Clower, Hardigan. City Planning in San Diego. City of San giego. San Diego: 1938. 53 PP. Coons, Arthur G., and Arjay R. Miller. An Economic and Industrial Survey of the Los Angeles and San Diego Areas. California State Planning. Sacramento:' l$)4l. ; 4ll pp. : Galbraith, J. K. Economic Effects of the Federal Public Works Expenditures: 1933-38. United States National Resources Planning Board. Washington: Government Printing Office, 1941. 264 pp. I Los Angeles County, Department of County Engineer and Surveyor. Annual Report: 1951-52. Los Angeles: 1952.! ! 59 PP. ; I ' _______. Regional Planning Commission. Guiding Growth. Los Angeles: 1949 to 1953* ! San Diego County, County Planning Commission. San Diego ' County. California. San Diego: 1937. 43 pp. ! United States Bureau of Foreign and Domestic Commerce. ; Construction and Construction Materials, Industry j Report. Washington: Government Printing Office, 1951. i 164 pp. United States Bureau of the Census. Compendium of City Government Finances. Washington: Government Printing Office, 104b to 1953. _______. Financial Statistics of Cities. Washington: Government Printing Oiffice, 1921 to 1945* ; _______. Annual Survey of Manufacturers: 1949 and 1950. Washington: Government Printing Office, 1952. lo2 pp, _______. Seventeenth Census of the United States: 1950. Population. VolT I. Washington: Government Printing Office, 1'952. i t United States Census. Statistical View of the United I States. Washington: Senate Printer, 1854. 466 pp. ; United States Housing and Home Finance Agency. Fifth Annual Report. Washington: Government Printing Office, 1952. 483 PP. ! United States National Planning Board. Final Report: 1933-' 34. Washington: Government Printing Office, 1934. 123 PP. United States National Resources Committee. Our Cities— their Role in the National Economy. Washington: Government Printing Office, 1937* 87 pp. i 368 United States National Resources Planning Board. Federal l Aids to Local Planning. Washington: Government Printing Office, 19417 151 PP* I ;_______. Long Range Programming of Municipal Public Works. j I Washington: Government Printing Office,194l7 72 pp. [ i I ' Wolkind, Harold. Fluctuations in Capital Outlays of [ Municipalities. United States Bureau of Foreign and j l Domestic Commerce. Washington: Government Printing I ; Office, 1941. 87 pp. I D. INTERVIEWS Cope, Orin, Assistant to the City Manager, City of San Diego. | Grub, George, Assistant to the Mayor, City and County of San Francisco. Proctor, William A., Associate City Planner, City and j County of San Francisco. J Roberts, Samuel M., Director of Finance, City of Long Beach.1 Terhune, George A., Principle Analyst, Office of the Chief < Administrative Officer, City of Los Angeles. Weaver, Richard, Associate City Planner, City of Long Beach. E. MISCELLANEOUS Kroeger, L. J. and Associates. Administrative Survey of City of Long Beach. California— Final Report. San ' Francisco: Kroeger and Associates, 1952. 76 PP. ; Long Beach Chamber of Commerce. Long Beach, 1954 Annual Business Survey. Unpaged. San Diego Chamber of Commerce. San Diego. 1954 Annual Business Survey. Unpaged. 369 San Diego Chamber of Commerce. Industrial and Commercial Survey, City of San Diego and County of San Diego. 6 vols. Report prepared by Day and Zimmerman. San Diego: Day and Zimmerman, 1945. P. PAMPHLETS 1 American Municipal Association. American Taxes Shared and ' 1 Allocated—-1938. Chicago: American Municipal Asso- ; ciation, 1938. 42 pp. i '_______ . Shared Taxes. Chicago: American Municipal j Association, 1944. 26 pp. !_______ . State-Collected Municipa1ly-Shared Taxes. i Chicago: American Municipal Association, 1946. 37 PP. [ . State-Collected Municipally-Shared Taxes. i 1 1948 Supplement. Chicago: American Municipal Asso- i J ciation. 17 pp. \ Bird, Frederick. Trend of Tax Delinquency, 1930-1944. New • York: Dun and Bradstreet, Inc., 19^7. 39 PP. j , Bollens, John C., and Stanley Scott. Effects of Inflation and Growth on City Costs and Services. Berkeley: Bureau of Public Administration, University of California, 1949. 76 pp. Colean, Miles L. Stabilizing the Construction Industry. National Planning Association Pamphlet 4l. Washington: National Planning Association, 1945. 38 ppt j Kilpatrick, Wylie. State Supervision of Local Finance. Public Administration Service Pamphlet No. 70. Chicago: Public Administration Service, 1941. 65 pp. Lee, Eugene C., and Stanley Scott. Financing Local Public i / Works. Berkeley: Bureau of Public Administration, University of California, 1951. 35 pp. McKinley, John R. Local Revenue Problems and Trends. \ Berkeley: Bureau of Public Administration, University of California, 1949. 59 PP. 370 Public Administration Service. Property Tax Limitation Laws. Public Administration Service Pamphlet No. 36, cElcago: Public Administration Service, 1934. 92 pp. Rightor, C. E. The Preparation of a Long“Term Financial Program. New York: 'Municipal Administration iService, 1927. 28 pp. G. PARTS OF SERIES Agger> Eugene E. The Budget in the American Commonwealth. Studies in Economics, History and Law, Vol. £5, No. 2. New York: Columbia University Press, 1907* 218 pp. Bowen, Howard R. English Grants-in-Aid. University of | Iowa Studies, New Series, No. 375* Iowa City: University of Iowa Press, 1939* 156 pp. t ! Shattuck, Leroy A. Municipal Indebtedness. Studies in Historical and Political Science, Vol. 58, No. 2. Baltimore: Johns Hopkins Press, 1940. 140 pp. Willoughby, William F. Movement for Budgetary Reform. ; Institute for Government Research, Studies in ; Administration, Vol. 4. New York: D. Appleton and 1 Company, 1918* 254 pp. _______. The Problem of a National Budget. Institute for Government Research, Studies in Administration, Vol. 3. New York: D. Appleton and Company, 1918. 219 PP. H. PERIODICAL ARTICLES American Economic Association, Committee on Public Issues. , "The Problem of Economic Instability," American Economic Review. 40:501-38, September, 195> 0. American Society of Planning Officials Newsletter. "Survey of Public Works Program,1 ' 20:20, March, 1954. Anderson, Benjamin M. "State and Municipal Borrowing in Relation to the Business Cycle," Proceedings of the Academy of Political Science. 12:767-7^, July, 1927. j Anderson, Ronald T. "The Toledo Income Tax," Revenue Administration. 23-25, 1948. j Armstrong, Fred C. "Capital Expenditure Budgets," The American City, 64:98-99, March, 1945. Baldwin, Rober S. "Financing Municipal Public Improvements from Revenue Funds," Municipal Finance. 20:51-55, ! August, 1947. : I Banfield, Edward C. "Congress and the Budget: A Planner's Criticism." The American Political Science Review, 43:1217-1228T"T>ecember, 1 W T * 1 Bhargava, R. N. "The Theory of Federal Finance," The 1 Economic Journal. 63:84-97, March, 1953. j Bielschowskv, George. "Business Fluctuations and Public Works, Quarterly Journal of Economics, 44:286-319, February/ 1930. I Bird, Frederick L. "The Financial Problems of Cities," 1 American Economic Review, 32:323-330, March, 1942. 1 Blough, Roy. "Political and Administrative Requisites for Achieving Economic Stability," American Economic Review, Papers and Proceedings, 40:165-178, May, 1950. Bruere, Henry. "The Budget as an Administrative Program," The Annals of the American Academy of Political and Social Science, 52:176-91, November, 1915* Buchanan, James M. "A Pure Theory of Government^Finance,” Journal of Political Economy, 57:496-505, December, 1949'. Buck, A. E. "The Development of the Budget Idea in the United States," The Annals of the American Academy of Political and Social Science. 113:31-39, May, 1924. Burkhead, Jesse. "The Outlook for Federal Budget-Making," National Tax Journal, 2:289-99, December, 1949. 372 1 Chatter, Carl H. "The Economic Classification of Cities 1 and Its Fiscal Implications," National Tax Journal, ; Is 111-17, June, 1948. ; Clark, Catherine. "Debt and Tax Limits Stimulate Municipal' Fiscal Ingenuity," The American City, 66:132, February, 3.951. | Clark, Colin. "The Danger Point in Taxes," Harpers j Magazine, 201:67-69, December, 1950* Cleveland, Frederick A. "Evolution of the Budget Idea in the United States," The Annals of the American Academy of Political and Social Science, 52:15-35. November, ; 1915. | Clow, Frederick R. "A Comparative Study of the Administra-! j tion of City Finances in the United States with Special Reference to the Budget," Publications of the i American Economic Association, Third Series, 2:'56>7- 811,"" November, 190TT ! I _______. "Suggestions for the Study of Municipal Finance,"} Quarterly Journal of Economics, 10:455-66, July, 189© . i 1 1 Colm, Gerhard. "Theory of Public Expenditures," The Annals of the American Academy of Political and Social Science, 183:1-11, January, 1936. Copeland, Morris A. "Public Investments In the United States," American Economic Review, 29:27-43, March, 1939. Doubleday, Douglas. "For Debt Service: Nothing," National , Municipal Review. 27:72-76, February, 1938. Ellinwood, David M. "Use of Special Authorities to Finance School Improvements," Municipal Finance. 25:32-36, August, 1952. Finer, Herman. "The Case for Local Self-Government," Public Administration Review. 3:51-58, Winter, 1943. ' - - — - - ' Ford, Henry James. "Budget Making and the Work of Govern- : raent, The Annals of the American Academy of Political and Social Science, 62:1-14, November, 1915. 373 Ford, Robert S. "State and Local Finance," The Annals of the American Academy of Political and Social Science, I 2 6 6:15-23, November, 1949. Gill, Norman N. and Paula Lynagh. "Debt Free Idea Loses Allure," National Municipal Review, 36:240-45. May. 1947. Glander, C. Emory. "New Types of Municipal Non-Property Tax Revenues," National Tax Journal, 3:97-103, June, 1930. Griffenhagen, E. 0. "The Planning of Government Organiza- ! tion and Expenditure to Promote Business Stability— ; with Particular Reference to States and Cities," ; Proceedings of the Academy of Political Science, j 12:757-6b7July, 1927. j jGroves, Harold M. "New Sources of Light on Intergovern- ! mental Fiscal Relations," National Tax Journal, 5:234-38, September, 1952. _______, and C. Harry Kahn. "The Stability of State and Local Tax Yields," American Economic Review, 42:87- 102, March, 1952. Harrell, C. A. "How Cities Can Adopt Pay-As-You-Go Financing," Public Management, 30:66-70, March, 1948. Higgins, Benjamin. "Towards a Science of Community Plan- ^ ning," Journal of the American Institute of Planners, 15:3-13, Fall, Tf49. Howenstine, E. Jay. "Public Works Program After World War I," Journal of Political Economy, 5:523-37, December, 1943. Hoyt, Homer. "The Importance of the Economic Background in City Planning," Journal of the American Institute of Planners, 11:16-19, February, 1940. "Economic Background of Cities," Journal of Land and Public Utility Economics. 1 7:188-95, May, T94l. Jensen, Jens P. "Public Finance in Depression-Discussion," American Economic Review, 24:169-73, March, 1934. I Kilpatrick, Wylie. "Classification and Measurement of Public Expenditures," The Annals of the American J Academy of Political and Social Science, 18 3:19-26, January, 1936. IKimmel, Lewis H. "Our Tax Burdens and Taxable Capacity," ! The Annals of the American Academy of Political and Social Science, 266:152-60, November, 1949. i Kuznets, Simon. "National Income and Taxable Capacity," American Economic Review Supplement. 32:37-75. March. ; 1942. !Lazarus, Arthur. "The Budget in Business," The Annals of I the American Academy of Political and Social Science, 113:15-25, May, 1924. !Lee, Eugene C. "Use of Lease Purchase Agreements to Finance Capital Improvements," Municipal Finance, 24:78-81, November, 1951* iLeland, Simeon E. "Discussion of Papers on Stabilizing the Economy," Papers and Proceedings of the American Economic Association, 40:179-90, May^ T95cT« Lev, Lester L. "City Sales Taxes in California," Revenue Admini s tra t ion, 18-20, 1948. Lewis, Verne B. "Towards a Theory of Budgeting," Public Administration Review, 12:42-45, Winter, 1952. Lillibridge, Robert M. "Frontiers in Metropolitan Planning and Land Policy," Land Economics, 26:40-51, February, 1950. Link, George M. "Report of Committee on Long Term Planning, Municipal Finance, 13:38-44, August, 1940. Loeffler, Herman C. "Alice in Budget-Land," National Tax Journal, 4:54-64, March, 1951* Ludwig, C. C. "Procedure in Determining Municipal Poli cies," Public Management, 38:146-50, July, 1954. Lyon, Leverett S. "Economic Problems of American Cities," American Economic Review Supplement, 32:307-30, March, 1952• 375 Martin, James W. "Costs of Tax Administration: Examples of ‘ Compliance Expenses," Bulletin National Tax Asso- - ciation, 29:194-205, April, 19W _______. "The Property Tax and the Economy," The Annals ofj the American Academy of Political and Social Science, i 255:135-53, November, 1 9 W * j Maxwell, James A. "The Capital Budget," Quarterly Journal ' of Economics. 57:450-63, May, 19^3. 1 ■_______* "The Distinction Between Ordinary and Capital Expenditures in Canada," Bulletin of National Tax Association, 14:146-48, February, 193^ 1 1 Musgrave, Richard Abel. "The Nature of Budgeting Balance ! | and the Case for the Capital Budget," American | Economic Review, 24:260-71, June, 1939. i ! Myrdal, Gunnar. "Fiscal Policy and the Business Cycle," j ! American Economic Review, 29:183-93, March, 1939* ! 1 I ' Newcomb, Robinson. "Advance Planning and Timing of Local j . Public Works," The American City, 64:108, and 159- i April, 1954. I Parker, W. S. "Policies for the Control of Public Works," The American City, 68:94-95, October, 1953- Pierce, Dixwell L. "Why State and Local Sales Taxes Should be Coordinated," Revenue Administration, 20-23, 1948. Public Management, "Survey of Municipal Policy on Financing , Capital Improvements," 29:104-07, April, 1947. _______. "Backlog of Needed Public Facilities," 35:50-53, March, 1953. "To Use Oil Reserves for Public Improvements," 55:108, May, 1953* _______. "New Steps in Budgeting," 35:65, March, 1953. _______. "News Item," 3 6: 61, March, 195^« Rightor, C. E. "How Detroit’s Ten Year Financial Program 1 Was Prepared," National Municipal Review, 15:108-14, February, 1926. 376 Robbins, Ira S. "The Planning Process in Urban Development and Redevelopment," Land Economics, 28:72-75. February; 1952. Roberts, Samuel M. "Long-Term Capital Improvement Budget- ing," Public Management, 30:226-30, August, 1948, Roterus, Victor. "The Economic Background for Local 1 Planning," Planning 1946, 83-91, 1946. Scholz, Karl. "For Wise Timing of Capital Expenditures," f The American City, 69:161, February, 1952. j Shelton, J. P., and Gorin Ohlln. "A Swedish Tax Proposal ! for Stabilizing Business Investment," American Economic Review, 43:375-79, June, 1952. Slpprell, George G. "A Capital Budget Program," Municipal Finance, 21:14-20, February, 1949* j Slichter, Summer H. "The Economics of Public Works," American Economic Review, 24:174-85, March, 1934. Strayer, Paul J. "Public Expenditure Policy," American : Economic Review, 39:383-404, March, 19^9* 1 Studenski, Paul. "Federal Grants-in-Aid," National Tax ! Journal, 2:193-214, September, 1949* Sundelson, J. Wilner. "Budgeting Principles," Political Science Quarterly, 50:236-6 3* June, 1935* Tugwell, R. G. "Implementing the General Interest," Public Administration Review, 1:32-49, Autumn, 1940. Walker, Mabel L. "The New Look in City Taxes," Tax Policy, 15:3-11, December, 1948. Walker, Robert A. "The Implementation of Planning Meas- ures," Journal of the American Institute of Planners, 16:122-30, Summer, 195*57 3771 I I. PUBLICATIONS OF PROFESSIONAL ORGANIZATIONS Bird, Frederick L. "Municipal Fiscal Policy and the Business Cycle," 1945 Proceedings, National Tax Asso ciation. Washington, D.C.:~National Tax Association. 194b. Pp. 208-213. ' Blucher, Walter H. "Planning and Zoning,” The Municipal Yearbook. Chicago: International City Managers* Association, 194-5. Pp. 265-6 9. ! I Brownless, 0. H. "Interrelations Between State-Local | Public Finance and Patterns of Economic Growth," 1948 Proceedings of the National Tax Association. ; Sacramento": National Tax Association, 1949. Pp. 409- Buck, A. E. "Municipal Budgeting," The Municipal Yearbook. Chicago: International City Managers* Association, 1936. Pp. 16-21. . | ; Buehler, Alfred G. "Federal Grants-In-Aid Versus Separate ! Revenue Sources," 1949 Proceedings of the National 1 Tax Association. Sacramento: National Tax Associa tion, 1950. Pp. 374-96. Burkhead, Jesse. "Permissive Local Taxation in Pennsylvania," 1948 Proceedings of the National Tax Association. Sacramento: National *tax Association, 1949. PpT”12-25. , Chatters, Carl H. "Priorities and Balance in Municipal Finance," 1948 Proceedings of the National Tax , Association. Sacramento: National Tax Association, 1949. PpT-8-12. 1 Cohen, Henry. "What Young Planners Want," Planning 1947. Chicago: American Society of Planning Officials, 1947. Pp. 23-26. 1 ! Currie, Ralph W. "Effects on Public Finance of Marked ^Shifts in Population," 1948 Proceedings of the National Tax Association. Sacramento: National Tax ! Association, 1949. PpT"4l5-21. Domar, Evsey. "Discussion of Shere Paper," 1945 Proceed ings of the National Tax Association. Washington: National Tax Association, 194b. Pp. 200-02. Downs, Myron D., et. al. "Capital Budgets and Improvement Programs," National Conference on Planning Proceed ings. 1938. Chicago: American Society of Planning Officials, 1938. Pp. 168-94. Harrell, C. A. "The Problems of Expenditure and Debt Control at the Local Level," 1950 Proceedings of the National Tax Association. Sacramento: National Tax Association, 1951- Pp. 160-6 6. Jones, Howard P. "State Restrictions on Local Financing Powers," Tax Relations Among Governmental Units. New York: Tax Policy League, Inc., 1938. Pp. 153-61. Kilpatrick, Wylie. "Inflation and Local Governments— A Background Picture," 1951 Proceedings of the National Tax Association. Sacramento: National Tax Association 1952": Pp. 115-22. Lehman, John W. "Advance Planning of Public Works," Planning 1950. Chicago: American Society of Planning Officials, 1951. Pp. 111-16. Long, Henry F. "Effects of Federal Taxes on State and Local Governments," 195Q Proceedings of the National Tax Association. Sacramento: National Tax Association, 1950. Pp. 208-11. Rightor, C. E. "Financial Planning," The Municipal Year book. 1934. Chicago: International City Managers * Association, 1934. Pp. 4lr44. Schmelzle, William K. "The Impact of Population Changes on Tax Revenues," 1948 Proceedings of the National Tax Association. Sacramento: National Tax Association. 1949. Fp7~404-09. Schere, Louis. "Tax Reserves for State and Local Govern ment, " 1945 National Tax Association Proceedings. Washington: National Tax Association,1946. Pp. 187- 99. 379 | Studenski, Paul. "Post-war Financing of Municipalities and! New Sources of Revenue," 1946 Proceedings of the j National Tax Association. Washington: National Tax ‘ Association, 1947. Pp. 6-1 6. i Trenham, N. Bradford. "Discussion of Bird Paper," 1945 \ Proceedings of the National Tax Association. ! Washington: National Tax Association, 1946. Pp. 214- • J. UNPUBLISHED MATERIALS Alexander, Thomas A. "Reappraisal of Property Tax ! Exemptions." Unpublished Master’s thesis, The 1 University of Southern California, Los Angeles, 1950. 150 pp. I American Institute of Planners, California Chapter, "1954 Report of the Committee on Capital Improvements i Programs and Procedures." Unpublished paper, | January, 1955. 14 pp. ! Cantrell, Lang L. "Some Basic Modifications of American Property Taxation." Unpublished Doc tor' s disserta tion, The University of Southern California, Los Angeles, 1953. 559 PP. Hamner, Homer H. "Municipal Finance Problems of the City of Glendale." Unpublished Doctor’s dissertation, The : University of Southern California, Los Angeles, 194-9. 308 pp. Terhune, George A. "Financing Public Improvements in the City of Los Angeles." Bureau of Budget and Efficiency, Los Angeles, 1948. H24~pp. _______. "Advance Financial Planning in the City of Los . Angeles." Unpublished paper submitted to the School of Public 'Administration, The University of Southern California, Los Angeles, 1954. Wohlfield, William. "A Study of Governmental Budgeting." Unpublished Master's thesis, The University of Southern California, Los Angeles, 1952. 154 pp. University of Southern California CIQrary

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Creator Shirley, David Edwin (author)

Core Title Economic and administrative aspects of capital budgeting in municipalities

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest,Political Science, public administration

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Anderson, William H. (committee chair), Garis, Roy L. (committee member), Phelps, Clyde William (committee member), Phillips, E. Bryant (committee member), Pollard, Spencer D. (committee member), Sherwood, Frank P. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-252772

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Identifier DP23260.pdf (filename),usctheses-c20-252772 (legacy record id)

Legacy Identifier DP23260.pdf

Dmrecord 252772

Document Type Dissertation

Rights Shirley, David Edwin

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Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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