A 1: Operating budgets and activities are used for day-to-day expenses while capital budgeting and activities are related to the provision of “physical” public goods. Operating budget typically includes utilities, rent, wages, and purchase of items which are intended to last less than a year. Capital expenses or the purchase of assets, such as equipment, are paid for using the capital budget. A capital budget consists of goods that, compared to operating goods/services, have a relatively long lifespan, typically more than three years. In a capital budget, specific projects are non-recurring in that they do not start projects for specific types every year. Overall, capital budgets are more expensive. There are several advantages to having a separate capital budget and budgeting process for capital projects. It makes large projects more palatable and feasible, allowing municipalities to develop rapidly if needed. This also leads to the budget’s stability and predictability, allowing for greater long-term growth.Equity is improved if people who enjoy the stream of benefits from projects pay over time. This is called residential equity.Overall, having a separate capital budget and budgeting process for capital projects allows for more careful and sophisticated planning. Steps of the capital budgeting process:Assessment and documentation of capital needs to quantify the needs in different areas of capital spending. Estimation of the total cost of expenditures needed. Selection and timing of projects. Proposed capital projects are submitted as part of a Capital Improvement Plan (CIP), which is then analyzed using either Present Value (PV), or a Cost-Benefit Analysis. A review of the CIP then occurs, usually at the administrative level, including an evaluation of whether it has links to a municipality’s master plan. Once the list of projects has been finalized, projects are assessed by priority and scheduled accordingly. This evaluation also uses either a PV or Cost-Benefit Analysis. It is also specified which projects require financing in the current year of the budget.A cost-out of current-year projects and their associated operating expenditure requirements, which specifies the timing of expenditures and their total cost. The fifth step involves a financial analysis and review, which looks at the revenue and expenditure profile over time. It also identifies possible sources and funds, and determines an optimal financing package. An administrative and legislative budget review. This review determines a ranking and selection of projects, as well as financing and annual appropriation for projects.Following are the steps for developing an operating budget:Specifying spending guidelines for the upcoming fiscal year.An agency develops an initial budget for executive review. The agency budget is then submitted for executive review and negotiation. The final budget is put together and submitted with the overall budget. Once the executive budget is submitted, the legislative budget authority reports on the budget. The budget is then submitted to the legislature, at which time appropriations subcommittees hold hearings on agency budgets. Agency developers of the budget will then provide information and justifications to legislative committees on why certain budgeting decisions were made. These sub-committees will recommend funding through various appropriation acts, and submit their findings to the full appropriations committee. It is the full appropriations committee that passes the final funding acts. Based on whether or not the state governor signs these acts in to law or vetoes them, agencies will receive funding in order to manage their budgets. These are then audited and evaluated to confirm that proper budgeting practices were utilized. The Hoffmann article discusses how planners employed by the Cleveland Planning Commission changed the city’s budgeting process to a more rigorous capital budgeting process. Requests for capital spending were regrouped into functional categories that cut across department lines. Planners then worked with specialists to create an overall strategy for each functional category. In the context of these strategies, individual project proposals could be evaluated. This resulted in facilities plans that provided a basis for recommendations, in addition to more comprehensive condition assessment and replacement schedules for infrastructure like roads and bridges. As a result, the planners were able to help improve the quality of public services in a city. Through this process, the weight planners placed on the recommendations made by experts helped the experts gain leverage over line officials. As part of the city’s management reforms, specialists were expected to rationalize the situation in their areas of expertise, yet those areas cut across departmental lines. Thus, department directors had no obligation to cooperate. Technical experts then came to recognize that the capital planning process provided a prime avenue for influencing line department actions. By using a capital planning process heavily valuing expert opinions over those of line department opinions, the CPC planners were able to limit the damage of short-term political interests on effective capital spending allocations for the City of Cleveland. As a result of this, Cleveland was out of default by 1986.B 2. There are four important factors that rating agencies study to determine the rating of a local debt issue. There are four important factors that rating agencies study to determine the rating of a local debt issue. One factor is the regional economic conditions of a municipality. Variables like population, employment, income, industry mix, and employee earnings may draw the attention of credit analysts. Concentrations of employment within a particular industry or by a particular employer may make a municipality more unreliable than would a municipality with a diversified base across multiple sectors. However, depending on the size of the municipality, it might be more favorable to have one high-paying employer rather than a diversity of lower-paying groups. The budget history and conditions is another factor considered when determining the rating of a local debt issue. It has to do with the revenue received and the expenditures made for services over time. The fiscal capacity of a community depends on the size of the taxable bases. In the US, local governments most heavily rely on the property valuation, sales made, and income as their main taxable bases. Thus, the level of earnings in a municipality affects the sizes of those bases and the tax revenues they can generate. Another source of revenue for municipalities is through fees and charges, such as water, wastewater, utilities, housing, healthcare, and transportation facilities. Though some part of this revenue source can be sent to consumers outside the municipality collecting the fees, some part of the revenue generation depends upon the income and level of earnings within the municipality. Administrative performance, which is indicated by the number of intergovernmental transfers a municipality receives is also looked at. The purpose of these transfers is either to stimulate governmental activity or to share revenue. State governments often pick up part of the financing responsibility for mandate expenditure programs that the local governments have to pay for. When a municipality becomes extremely dependent on intergovernmental transfers, its credit rating can be affected in multiple ways. First, the credit rating of the government providing aid can be affected, as it is difficult for a government borrowing the money to be thought of as sounder than the government from which it gets a significant portion of its revenues. Second, if the revenue flows are of a particular kind and appropriated on an irregular basis, they can be thought of as more easily interrupted than revenue flows that are built into a formula and seen as ongoing. Also, states can affect a local municipality’s revenue raising capacity through tax and debt limits. Finally, the current debt load will also have an impact on the conditions and cost of borrowing money. The current debt load can be measured in two ways. The first involves dividing the Net Direct Debt by the Value of Taxable Property or Population. The second involves dividing the Net Overall Debt by the Value of Taxable Property or Population, which includes other jurisdictions, any special districts, or any other overlapping debt. It is possible that many local governments are part of a system of local jurisdictions. If this is the case, the debt of all overlying governments needs to be identified. Suppose a city got an AA rating, and had to pay a 4 percent coupon rate with semi-annual payments on a $15,000, 10 year term bond, while comparable bond investments yielded 3.6 percent. The formula m P = ? F x c + F i=1 (1+r)i (1+r)i was used to calculate the bond price. The coupon rate of 4% was divided in half, as payments were made semi-annually, as was the comparable market rate of 3.6%. This gave a bond price of approximately $15,500. Suppose that $15,000,000 was needed for borrowing to finance new school construction. The options are to sell 10-year term bonds with an overhead cost of $250,000 and a total interest cost of $7.55 million, or to sell 15-year term bonds with an overhead cost of $300,000 million and a total interest cost of $11.26 million. The formula Total Interest Payments + Discount (cost to underwriter)______________________________________________ Principal X Average maturitywas used to figure out which option should be chosen. We get 5.2% for the first option, and 5.1% for the second option. Thus, the first option should be selected as it will be better for minimizing net financing costs. C 1. To provide Tax Increment Financing subsidies, the government designates an area for improvement and assigns its geographical boundaries. This TIF district is usually around several acres, possibly hundreds or thousands, of real estate beyond a project site to provide for the revenue needed for the project. This borrowing capacity is provided by revenue from property taxes. In addition to all future real estate tax increases from every parcel in the TIF district, along with the anticipated tax revenue coming from the project itself. If the project is considered a public improvement does not pay any real estate taxes, all repayment of the borrowed funds will be provided by the adjacent properties in the TIF district. There may also be additional revenue when the completion of the project increases the value of adjacent real estate. It is possible that employment and sales-tax revenue will also increase, although the structure of TIF is not usually by these factors. Through all these methods, a tax increment financing district can provide new “up-front” revenues to support capital investment in the district, as a TIF structure provides funding by borrowing against the future increases in property tax revenues. The method used in TIF typically falls under one of three common financial models, according to the Weber and Goddeeris article.The first method of funding projects within a TIF district requires the developer to take risks. Also known as “pay-as-you-go,” this method forces the developer to pay for their own development expenses. The municipality reimburses the developer as the incremental taxes are generated by all of the parcels within the TIF district. Since most developers require larger sums of money than the incremental finances trickling in, they will often use a conventional lender to fill the initial financing gaps. The lender will usually expect a written commitment from the municipality stating that TIF increments will be used to make principal and interest payments. The second method requires the TIF-sponsoring municipality to issue bonds to pay for expenditures within the district. The municipality pays off the bond with the property tax increment. In other words, future TIF increments are pledged as security for current borrowing- thus, the majority of risk within this method is borne by the taxing jurisdictions implementing TIFs. The majority of TIF bonds are revenue bonds, which do not require the TIF-sponsoring government to commit its full faith and credit to repay the bond. They are secured by a dedicated stream of revenue generated by the new development and not by tax revenues. These revenue bonds are then sold through negotiated sales to experienced investors, thereby allowing municipalities to circumvent constitutional and statutory debt limitations as well as voter referenda. Tax anticipation notes are the third method used for funding for TIF projects. Instead of committing to low-interest, long-term bond issuances, municipalities can instead issue higher-interest, short-term bond issuances in anticipation of future property tax increments. Municipalities usually use this method to provide immediate funding for capital expenditures. A municipality may provide these notes to a developer, who is then responsible for selling them to the highest bidder. Banks and institutional investors often purchase the notes, taking on project completion risk and the risk of tax increases not materializing in return for promises to be paid back with interest. Proceeds from the sale will pay for the developer’s TIF-eligible expenses. Tax increment financing of capital improvements has some advantages and disadvantages. Rather than simply redistributing current tax revenues, TIF may create new taxes instead. TIF is locally administered and thus, there is freedom for state and federal intervention. TIF provides a simple way to raise revenues. On the other hand, it can also lead to conflict between jurisdictions, with the municipal government fighting school district boards for shares in local property tax. The financing structure of TIF can remove local elected officials from making decisions about the use of public funds, and may unnecessarily isolate them from the decision-making process. TIF financing cannot necessarily be implemented for all projects, as it requires a project to initially raise tax revenues in the TIF district. A TIF funding scheme may also give power to the administering board, and may create a financing mechanism which could not easily controlled by local governments, if successful. As mentioned earlier, TIF funding involves borrowing against future property tax increases. Borrowing against projected TIF revenues may be risky and can lead to financial disorder if growth does not match the anticipated return. TIF brings in new tax revenue, and does not allow that revenue to the TIF area and ths the revenue generated cannot be used for any area outside the TIF district. From the perspective of the city as a whole, different groups may view TIF as either favorable or unfavorable. Elected officials may view TIF favorably, as it allows them to raise money for development effortlessly, without having to borrow funds from general revenues. Developers may view TIF as a way for the city to commit to redevelopments through public improvements or through reduction of the cost of land. TIF can also end up benefiting the developer disproportionally as they have control over the development. Homeowners and residents are likely to view TIF as a way of funding redevelopment from taxes collected in the redevelopment district itself, without raising their taxes. Overall, I think TIF, though can backfire, is a decently reliable mechanism to fund projects.C 2.Proposal 1:This proposal proposes creating a TIF district , with an investment of $200 million, with a total financing of $236 million. After negotiations, the city will make improvements with a $200 million bond and in exchange, the developer will develop a mixed use development with 500 housing units, which is one of the guiding priorities. Overall, the incremental property taxes created for the city would be $240 million (over the first 12 years). The mixed use development also provides space for attractive streetscapes, a park and connected street grid with sidewalks and bike lanes. The net interest cost on bonds is 9.83% which is quite high.There are advantages and disadvantages associated with this proposal. If regional economic conditions are good, with a good credit score, the bonds can be issued at lower interest rates. TIF financing gives the city an opportunity to fund big infrastructure projects. Since the mechanism for financing is TIF, it is important to consider that it is a projection, and thus, there is a possibility that it may not turn out in the favor of the city, thus backfiring. Investment made by the city to make improvements to the district is at risk in case the developer does not go ahead with the project. The risk is shared with banks/institutions and thus the city is at a more vulnerable position as they are liable to pay back the borrowed fund. Also, the current debt load (if any) could cause the city to be more financially burdened. Also, the developers have a greater control over aspects and they could disproportionately benefit from the project.Proposal 2:This proposal proposes creating a TIF district , with an investment of $300 million, with a total financing of $354 million. The city will purchase land in the 60 acre site and develop a plan in alignment with all of its priorities on contrary to the first proposal where there is financial risk associated. The city will issue ground leases to the developers for 50 years, and since the city will own the land, it will have a greater control over the outcome of the development. The new interest cost on bonds in this scenario is 7.87% is is lower in comparison to the first proposal and the cost to the city is $159 million. The city also in this scenario has greater negotiating power. A major disadvantage could again be the developer backing out from the project at a later stage in the project. As mentioned in the Fainstein article, as opposed to the TIF financing mechanism, the revenue generated from the development can be invested in other parts of the city/town/neighborhood to make improvements whereas in TIF, only the specific district is benefitted. But this can also lead to the poorest neighborhoods benefitting disproportionately. Public land ownership is also a way to prevent gentrification as the land price change will not affect the developers. Also, the city has the power to modify rents as and when required. This is similar to a community land trust, in which the community organization buys and owns the land and the pay rent for the land. Since the city will have ownership of the land, they can also charge the developer linkage fee, which can be used for public purposes such as affordable housing as in the cases of Boston and San Francisco, where the commercial developers are required to pay the fee.