Artificial Intelligence (AI) is gradually becoming an integral part of the digital strategy of organizations. Yet, the use of AI in public organizations in still lagging significantly compared to private organizations. Prior literature looking into aspects that facilitate adoption and use of AI has concentrated on challenges concerning technical aspects of AI technologies, providing little insight regarding the organizational deployment of AI, particularly in public organizations. Building on this gap, this study seeks to examine what aspects enable public organizations to develop AI capabilities. To answer this question, we built an integrated and extended model from the Technology-Organization-Environment framework (TOE) and asked high-level technology managers from municipalities in Europe about factors that influence their development of AI capabilities. We collected data from 91 municipalities from three European countries (i.e., Germany, Norway, and Finland) and analyzed responses by means of structural equation modeling. Our findings indicate that five factors – i.e. perceived financial costs, organizational innovativeness, perceived governmental pressure, government incentives, regulatory support – have an impact on the development of AI capabilities. We also find that perceived citizen pressure and perceived value of AI solutions are not important determinants of AI capability formation. Our findings bear the potential to stimulate a more reflected adoption of AI supporting managers in public organizations to develop AI capabilities.