Construction Grants Program: Capital Budgeting

Abstract

State project priority lists pursuant to the Federal Wastewater Construction Grants Program are examined from the viewpoint of cost‐effective capital budgeting. Integer programming (IP) or, alternatively, ranking on the basis of the priority‐to‐cost ratio (PCR) is found to be more cost‐effective in project selection than the current “funding line” approach. The IP is structured to select a project set that optimizes the total priority points gained under a fixed budget. The method is applied to the actual project priority lists of four states (New York, Arkansas, North Carolina, and Ohio). The number of projects to be funded in the first year, as determined by the IP approach, is 112% more than the number found by the conventional approach, and the total sum of priority points (effectiveness) is 86.0% more. The IP approach funds 63.6% of the eligible projects in the first year, while the conventional approach funds only 30.0%. Improvements to multiyear funding plans should approximate these figures under conditions of limited funding and constant project replenishment.