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December 12,1975 City Hall's Capital Spending Business forecasters have been worrying about the prospects for business plant-equipment spend ing, because of the overcapacity problems and financial woes that afflict so many corporations. But these analysts might also do well to examine governmental capital spending plans, in view of the serious problems now emerging at statehouses and city halls throughout the land. These plans are important not least because state-and-local governments nor mally account for one-fifth to onesixth of the nation's total capital spending. Gross fixed capital formation of state and local governments rough ly tripled in magnitude over the past decade and a half, to about $41 billion in 1974. (According to the Commerce Department's tally, the total includes purchases of both new and used facilities and equipment.) In current-dollar terms, spending increased contin ually throughout the period; in real terms, however, the strong uptrend peaked in 1968, and expenditures fell every year there after except 1974. The fortunes of several major industries have been closely tied to state-local capital spending over the years. Highways generally have accounted for roughly 40 percent of the total, although their share has fallen in recent years because of such factors as the impoundment of Federal grants. Educational facilities normally have accounted1 1 for 24 to 30 percent of the total, especially during the educational boom of the late 1960's. Sewertreatment and water-supply facili ties have always taken 9 to 12 percent of the total, and their share has risen in recent years with increases in Federal environmen tal grants. Finding (and using) funds The strongest increases in statelocal capital spending occurred in the 1960's, especially in the ^OSOS period. Paul Schneiderman, writing in the Survey of Current Business, attributes the gain in that period both to the rising availability of funds and to the burgeoning demand for government services. With economic growth, the state-local tax base expanded—and with tax rates also rising, an everrising flow of funds became avail able to cover both current expendi tures and debt service on a growing number of bond issues. Also, with population (especially school-age population) rapidly increasing in the 1960's, state-local governments had to provide and equip all types of new facilities, frequently in completely new suburban communities. Capital spending in the 1969-73 period moved irregularly upward in current-dollar terms—but de clined after adjustment for inflation—reflecting significant variability in funding as well as underlying demographic and economic factors. Population and income continued to grow during (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. this period, but the growth of suburban communities and of the school-age population noticea bly decelerated and thus held down the demand for new facilities. Moreover, governments began shifting their priorities toward social-welfare programs, and thereby restricted the amount of current receipts available for capital projects. More importantly, in at least several years of this period, Federal impoundments of grant funds and the tight-money impact on bond markets put an upper limit on what could be financed. Last year's 17-percent increase in spending—several times the nor mal annual increase—was atypical of the past half-decade's experi ence. Highway spending ex panded significantly, largely be cause of the release of im pounded Federal highway-aid funds. Education outlays also increased, being a major benefi ciary of the initial distribution of Federal revenue-sharing funds. Several smaller categories—healthand-hospitals and sewer-andwater facilities—increased even more, reflecting easier access to bond-market financing and (espe cially) greater availability of Feder al money. Variability in financing The recent sharp fluctuations in state-local capital spending thus can be traced to the significant shifts that have occurred in the availability of funds. Aggregate state-local government receipts from their own sources, although allocated mostly to current ex penses rather than to capital spending, have been a steady source of funds. Moreover, gov ernments have benefitted from improved asset management, with the ratio of state-local liquid assets to total expenditures falling from the range of 0.53-0.59 to the range of 0.42-0.48 over the last half decade. On the other hand, the major sources of funds for capital projects—the bond markets (rough ly 40 percent of the total) and Federal grants-in-aid (22 percent)—have varied significantly from year to year. This variability has been greatest in the long-term debt market, with the bond-financing share of capital spending ranging from a low of 33 percent (1969) to a high of 55 percent (1971). The legal or tradi tional rate ceilings governing state-local borrowing have severe ly limited their ability to borrow in tight-money periods, when mar ket interest rates soar. Some gov ernments have resorted to short term bond-anticipation notes in cases of postponement or cancel lation of long-term borrowing plans, but this approach is only a temporary expedient—as New York has so well demonstrated. Since bond funds predominantly finance highway, education, and sewer-and-water projects, those sectors of the construction indus try are hard hit whenever such long term funds dry up. In the aggregate, Federal grantsin-aid have increased more than seven-fold over the past decade and a half, but the share allocated to capital-spending projects has fallen from about 40 percent to about 20 percent of total grants. In other words, the growth of capital grants has been outpaced by that of grants for current expendi tures, especially for public welfare, education and health. Over time, Federal aid has been most conspi cuous in the highway field, finan cing roughly 40 percent of all highway projects. But the rise of the revenue-sharing program in the last several years has shifted the emphasis somewhat, since revenue sharing funds allocated to capital projects have gone mostly to non-highway purposes. Recession and after After last year's upsurge, capital spending by state and local gov ernments has increased only modestly in 1975, perhaps to about $43 billion. The recession caused a slackening of own-source receipts, as well as a disproportionate decline in the share of such receipts earmarked for capital projects. Federal capital-grant programs generally showed little increase, and capital projects received a smaller proportion of revenue sharing funds as state-local govern ments reverted to a more tradi tional allocation of such funds. The bond market in contrast pro vided record amounts of funds— but it did so at record high rates, and it provided little if anything for the worst-hit communities. Capital-spending prospects will remain uncertain in 1976, as state and local governments continue to work their way out from under the fiscal crisis caused by the double impact of recession and inflation. Their own-source revenues should improve as the economy im proves, but many capital-spending plans will still remain mothballed. For example, California's current budget calls for sharp reductions in highway spending and person nel, reflecting Governor Brown's comment, "There are matters of higher priority than pouring con crete," and New York City's tight budget has forced cessation of work on 46 construction projects already underway. In addition, the Federal government's own fiscal problems will probably mean only a modest gain in Federal capital grants. The bond market meanwhile may be hard-put to supply funds at recent levels, considering the heavy demands on the market expected from other borrowers, especially the Treasury. For that matter, the rejection of a number of large bond issues on the ballot this November indicates a strong preference by voters for a slowdown in capital spending. William Burke 3 uoiSinijseM • i|Bin • uoSaJO • epBAON . oijEpi |! G M B H • B I U J 0 p |B 3 . BUOZU V • *I!|B3 'o a sp u B Jj ucs Z£L ON llWU3d aivd HDVISOd s n 1IVW SSV1D 1SUIJ BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Amount Outstanding 11/26/75 Change from 11/19/75 + + + + Loans (gross, adjusted) and investments* Loans (gross, adjusted)—total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)—total* Demand deposits (adjusted) U.S. Government deposits Time deposits—total* States and political subdivisions Savings deposits O ther time deposits! Large negotiable CD's 86,630 65,185 1,412 23,249 19,625 10,099 8,758 12,687 87,022 23,627 403 61,213 5,887 21,705 30,057 15,953 Weekly Averages of Daily Figures W eek ended 11/26/75 Member Bank Reserve Position Excess Reserves Borrowings Net free (+) / Net borrowed (-) Federal Funds—Seven Large Banks Interbank Federal fund transactions Net purchases (+) / Net sales (-) Transactions of U.S. security dealers Net loans (+) / Net borrowings (-) - + + - + + + + + 513 427 34 315 13 17 148 62 293 765 71 499 70 104 159 384 Change from year ago Dollar Percent + + 2,435 1,658 10 940 355 + 290 + 4,105 12 + 6,009 + 366 39 + 5,277 + 192 + 3,642 + 1,163 + 353 - - W eek ended 19/12/75 - + + - + + - + + + + + 2.89 2.43 0.70 3.89 1.78 2.96 88.22 0.09 7.42 1.57 8.82 9.43 3.37 20.16 4.03 2.26 Comparable year-ago period + 29 3 26 - 61 275 214 1,384 + 1,531 + 1,241 544 + 544 + 521 + 39 1 38 + + + ♦Includes items not shown separately. ^Individuals, partnerships and corporations. Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 397-1137. B ))S B |V
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