ABSTRACT
Capital budgeting is the backbone of private-sector finance. It is concerned with all decisions that have future consequences. This chapter examines that municipal finance may be more like corporate finance than is usually appreciated. It uses a model to examine that under fairly general conditions municipal borrowing does not matter, that it neither helps nor harms the individuals who live in the municipality. This means that benefits to citizens from community-provided services will be the same regardless of whether they are financed by debt or taxes. The capital-asset pricing model could help to integrate a variety of topics—discount rates, borrowing costs, cash management, and the like. The chapter demonstrates the "contingent" part of the contingent irrelevancy of municipal debt. It also demonstrates that a municipality can increase utility to the ith individual under a flat-rate income tax (t) by borrowing instead of taxing, when interest on private debt is taxable as revenue but is not deductible as expense.
