Running Head: CAPITAL BUDGETING

Capital Budgeting
Glenda Reese
Government Budgeting PPA 603
Dr. Ron Fitzgerald
July 21, 2013

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Capital Budgeting
At a time when governmental bodies need to labor for high quality, public administrators
need to ensure the appropriate used of allotted capital funds. The capital budgeting procedure
can be very time engrossing and costly. When using Governmental Accounting Standards, firms
have a homogenous way of precisely recording the use of the allotted funds. How debt capacity
is determined, the effect of refunding or reorganizing existing debt obligations, and various
funding alternatives that can be used to support debt obligation will be discussed concerning the
Arkansas Department of Corrections. The conclusion will reaffirm the opening and provide a
final comment from the author.
Debt Financing
To meet money needs that exceed a facilitys budget, many go into debt, either long-term
or short-term. According to McElravy and Leo (2004), many areas fund major money projects
by acquiring debt (para.1). If debt is used correctly, it can be an effective policy instrument by
pairing streams of costs and benefits related to a capital asset throughout its useful life (para.1).
The drawback is that excessive dependency on debt, especially if used for operating expenses, is
often the first sign of financial strain. Therefore, an understanding of the entitys existing debt
burden and how any future debts will affect the organizations financial condition allows for more
effective project prioritization during the planning and budgeting process, plus better long-term
financial planning (para.2).
Debt Capacity Determination

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Debt capacity defined means the assessment of the amount of debt an individual or firm
can repay in a timely manner (from available means or resources) without jeopardizing its
financial viability. Hence, the debt capacity for the Arkansas Department of Corrects is
determined with the use of temporary loans, which would mean that the facilities have a small
debt capacity. According to the Arkansas Department of Finance and Administration (2011), the
ACA 19-5-101, et seq. provides for temporary loans to be made to certain funds from the Budget
Stabilization Trust Fund. Generally, those funds that are eligible to obtain these loans under
certain circumstances include the Department of Correction Farm Fund for farm production
purposes and the Department of Correction Industry Fund (para.54).
Refunding or Reorganizing
The debt obligations for the Arkansas Department of Corrections (ADC) are done
through the pay back process of the temporary loans. The procedure for this payback consists of
selling the produce raised in farming and materials produced in the industry division (J.Reese,
personal communication, July 20, 2013). Reese further commented that the facilities sell
everything and buy back the products needed to run the facilities. Not only does the ADC refund
money borrowed, the facilities also reorganize debt by means of having different agencies bid
services needed at the facilities. For example, the Arkansas Department of Corrections Health
Services (2012) reviews the current medical service provider(s) on a yearly basis via bids for the
opportunity to provide the service for the organizations (p.7).
Various Funding Alternatives
There are many ways to finance other than state and federal general obligation bonds,
which has been the traditional method for prison financing (Brown & Wood, LLP, 1999, para.3).

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One alternate method is tax-exempt financing, which has a lower cost than other means of
financing. Brown &Wood, LLP (1999) stated it is necessary to understand and comply with the
numerous regulations issued under the Internal Revenue Code (para.7). A second alternative,
according to Brown & Wood, LLP is private financing (para.9). The third alternative provided
by Brown & Wood is the use of certificates of participation (COPs) (para. 30). As with revenue
bonds, COPs are issued under a variety of structures that are very similar to revenue bond
structure (para.31). Lastly, is leasing. Brown & Wood commented that while state authority
normally issues revenue bonds for prison construction, in recent years several states have secured
the use of prison facilities through leasing or other arrangements with county or other local
authorities (para.37). A different type of funding other than the ones from Brown and Wood is
the products other than farm and industry the inmates produce.
To Conclude
At a time when the government needs to strive for high quality, the use of government
funds needs alternatives. Knowing the debt capacity, the effect or refunds and reorganization of
existing debt, and the alternatives available will help the Arkansas Department of Corrections to
become an improved state organization that will not drain state and federal funds. It may still be
possible to need some state and/or federal assistance, but using alternatives will lower the
amount necessary from state and federal funds. Prisons are necessary facilities and figuring out
ways to finance besides the use of any type of government (local, state, or federal) should be an
important issue of consideration. Some of the individuals in these facilities are capable of being
rehabilitated and giving back to society, but some will remain incarcerated indefinitely and cost
huge amounts of money. When people in the community around a prison are asked about paying
their tax dollars for prison purposes, many replied that the inmates should be put into positions to

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raise funds so the tax- payers money can be used for other purposes. Regardless of how the
prisons are financed, these facilities need to understand what their debt capacity is and work on
ways to obtain funds other than government funding.

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References
Arkansas Department of Corrections Office of Health Services (2012). Arkansas Department of
Correction and Arkansas Department of Community Correction request and proposal:
NO 2013-C8494 comprehensive inmate/offender health care services. Retrieved July 20,
2013 from http://www.adc.arkansas.gov/Documents/rfp-final022613.pdf
Arkansas Department of Finance and Administration (2011). Revenue stabilization law.
Retrieved July 20, 2013 from
http://www.dfa.arkansas.gov/offices/accounting/financialmanagementguide/Pages/Title19Chapte
r1Subchapter1.aspx
Brown & Wood, LLP (1999). Alternatives for financing prison facilities. Retrieved July 18,
2013 from

http://www.asca.net/system/assets/attachments/1598/Alternatives_For_Financing_Prison_Faciliti
es.pdf
McElravy, J. & Leo, Y.L. (2004). Debt capacity analysis for local governments. Government
Finance Review, 20(5), 41. Retrieved July 19, 2013 from http
http:// search.proquest.com/docview/229689336?accountid=32521

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