Capital Budgeting Paper
Team B: Hana Bubshait, Kim Owens, Marla Conner
University of Phoenix
Professor John Hullar, MPA
September 7, 2009
Capital Budgeting Paper
The paper discusses how the debt capacity of a governmental entity is determined. The paper after that evaluates the impact of refunding existing debt obligations. The paper after that analyzes the various funding alternatives which can be used to support debt obligations followed by a description of how rating agencies evaluate governmental risks. The conclusion comes in the last section of the paper to summarize the findings of the paper.
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4, ¶4). These indicators measure a community’s debt burden (McCartan, 1995).
Effect of Refunding Debt Obligations
Refunding debt obligations “means borrowing new money to pay existing creditors.” (Rosen, 2004. Pg. 461) Reorganizing debt is the affliction which is left by a generation to the generation after. Borrowing new money is usually with new interest rate. If the new interest rate is lower, the percent of the pure debt will decrease while the actual money will increase. This is going to be in the benefit of both the country and the future generation since the pure debt is going to be reduced. One of the impacts of such a change in the debt will be considered inflationary. Future taxpayers will be relieved from the extra tax of this part of the debt and such a refunding is in the benefit of the country and encouraged.
Another type of refunding debt is the opposite situation when the interest charge of the debt is increased. Such a case means that the pure debt is going to be increased and the burden of the debt on the future generation is going to be increased. This process is called deflationary and result in increasing the tax on future generations. Governments in such cases promise to increase income with specific percentage for the future generation. Increase in income though is usually not for the benefit of the individual since the money is weaker and the buying power of the money is affected because of the continuous of inflation. The weakness of the money comes from changing the debt from countries to individuals since some governments change the debt to bonds and sell it to individuals to be paid in the future with specific interest or be paid as installments for specific period. “Determining the optimum time to refund an outstanding bond issue is a special case in economic capital theory and can be compared to the problem of determining the optimum time to sell an appreciating asset.” (Sibley, 1972, pg. 52) Governments have to measure the different impacts to ensure that the least harm is imposed on either the current generation or the future generation.
Funding Alternatives Used to Support Debt Obligation
In looking to alternative funding sources used to support debt obligation, the City of Oasis raised funds through collecting toll tax for the Bridge Fund. The city has also transferred funds through an Interfund transfer line item from the general fund where 8 million in property taxes and 4.5 million in license and permits. According to (Samuel et al., 2007),
“Instead of making marginal improvements to our transportation system when funds occasionally become available, we can use toll financing to prioritize projects and build new highways and bridges. Toll financing allows projects to be built more quickly today and then to be paid for directly by the users who derive the benefits of the roads” (¶4).