Panel Paper: An Empirical Analysis of Capital Assets Condition in Local Governments: The Case of Florida Counties

Saturday, November 10, 2018
Truman - Mezz Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Xiaoheng Wang, University of Illinois, Chicago and Can Chen, Florida International University

The economic competitiveness and social well-being of the United States are dependent upon the availability, accessibility, and quality of core public infrastructure systems ranging from highways, airports, drinking water, local energy production plants to public schools and healthcare facilities. In 2014, state and local governments across the country spent $400 billion in total on core public infrastructure (U.S. Census 2017). In 2018, The Trump Administration calls for the federal government to spend $200 billion to spur $1.5 trillion in infrastructure investment from state/local governments and the private sector. Given that subnational public capital outlay is relatively large and that public infrastructure is vital to the country’s socio-economic environment, understanding how public capital spending decisions are made and how the theory and lessons learned can be applied to practice is extremely important.

In current academic literature, there is a growing number of empirical studies examining the determinants of capital outlays at the state and municipal governments (Fisher & Wassmer 2015; Bates & Santerre 2015; Srithongrung 2017; Scott, Moldogaziev, & Greer 2017). However, research about capital investment on U.S. counties is lacking. To fill this void, this study is an attempt to contribute to our understanding of why some American county governments devote more resources to investment in physical capital assets than others. Drawing from classic public finance theories (the median voter model and the interest group model), this research first constructs a theoretical model to understand the political economy of public capital asset investment and then empirically investigates the economic, fiscal, political, and institutional factors underlying the decisions for capital investment across Florida county governments. Three financial indicators from the annual Comprehensive Annual Financial Reports (CAFRs) are used to measure county government investment in capital assets, including the level of the net value of total depreciable capital assets, capital asset condition ratio (accumulated depreciation divided by capital assets being depreciated), and capital asset sustainability ratio (capital expenditure on replaceable assets divided by depreciation expenses). The panel data consists of 67 Florida counties from 2003 to 2015. Data is obtained from the Florida Department of Financial Services’ Local Government Financial Reports, the Florida Department of State’s Division of Elections, and the University of Florida’s Bureau of Economic and Business Research. The methods of a panel two-way fixed effects and a dynamic panel GMM estimation are utilized.

This study contributes to the extant literature of capital finance in three key ways. First, it examines the determinants of capital asset investment in a new institutional context—American county governments, which are once considered the “forgotten governments” of local government research (Menzel et al. 1992) and play an important role in financing local capital assets. Second, this study utilizes a new approach to measure county government capital investments based on the government-wide financial statements. Third, it provides policy recommendations for county public officials who are considering to maintain and upgrade their capital asset conditions.