How to Make ‘Pay As You Go’ Work for Large Capital Projects

From Governing

For those of us raised in the pre-Internet era, nothing conjures up holiday nostalgia like the old Sears Wish Book. The Wish Book was to holiday shopping what is today. In picture after beautiful, glossy picture, it showed us all the hottest holiday toys and gadgets we couldn’t live without.

Many local governments’ capital improvement plans are a lot like the Wish Book. They’re full of plans for shiny new stuff like playgrounds, fire trucks and eco-friendly public buildings. They make it easy for citizens and elected officials to make their own wish list of must-have toys. But like our dreams of holidays past, local capital improvement plans leave much to the imagination, namely who will pick up the tab. Local governments used to count on the federal government and new local taxes for help. That holiday magic is probably gone forever.

As a result, some local governments have started to dabble with “pay as you go” capital finance. The premise of “paygo” is simple: Pay for capital projects not with borrowed money or new revenues, but by saving or freeing up money from existing sources. This approach seems obvious and is in keeping with pre-credit card days, but it suffers from several problems—both financial and political—that, until now, have made it a poor fit for larger local governments.

The main barrier to paygo is that it only works when line managers allow unspent funds to remain unspent. Most sizable capital projects require more money than can be set aside in a year or two. And yet, saving money over time defies the old “spend it or lose it” axiom of public budgeting.

That doesn’t mean paygo can’t be made to pay off. Maricopa County, Ariz., is a case in point. It has found a way to use paygo as the focal point of its roughly $500 million annual program of capital improvements. It has done this by building unique technical features into its budget. For instance, most general fund money unspent at year end is swept into a countywide capital projects fund. All departments can access this fund if they can make a strong business case for a particular capital project.

To encourage departments to plan and save accordingly, budget procedures make clear that projects with dedicated funding in agencies’ proposed budgets are far more likely to receive the requisite capital projects money. Moreover, once a project is approved, a department can earmark and carry forward the funds needed to see that project to completion. Because of these features, money drives the long-term capital budget and not the other way around as in most local governments.