Capital Budgets: The Building Blocks for Government Infrastructure

By Pagano, Michael A.; Shock, David R. | Government Finance Review, June 2007 | Go to article overview

Capital Budgets: The Building Blocks for Government Infrastructure


Pagano, Michael A., Shock, David R., Government Finance Review


Capital budgets are used to allocate funds for physical assets that are to be acquired, constructed, renovated, and rehabilitated. In order to develop a capital budget, a jurisdiction must assess its infrastructure needs, prioritize among projects, integrate long-term capital plans into the service-delivery responsibilities of the government, evaluate a range of funding options, and schedule the regular repair and replacement of the capital stock. (1) This is most often achieved through the adoption of a formal capital improvement program (CIP), which sets forth a jurisdiction's construction and maintenance plans over a five- or six-year period. The National Advisory Council on State and Local Budgeting (NACSLB) recommends that state and local governments undertake a series of steps to manage their capital assets. (2)

A government's goals of providing efficient and effective services to its citizens for an equitable price can be enhanced by separating its budget into at least two parts: the operating budget and the capital budget. A dual budget system allows for a balanced operating budget and for the possibility of borrowing funds for a financed capital budget. (3) It also enhances awareness of the capital budgeting process and, therefore, leads to closer managerial control over the implementation of the capital budget. While operating budgets provide funds for a host of expenses, such as salaries and police uniforms, capital budgets are restricted in scope to provide funding for only physical projects or fixed assets. The revenue sources for capital budgets include own-source revenues (taxes and fees), debt, and intergovernmental revenues. The feature that makes a capital budget's revenue structure different from an operating budget's is the use of long-term debt. State and local governments can borrow funds from investors and use those funds in a capital budget to cover the costs of construction, rehabilitation, and major repair. Although local government policies vary on items or projects that are eligible for funding in the capital budget, typically a facility or structure is expected to be consumed or used up over a period of time that minimally exceeds one year or for many governments exceeds three or five years. Governments may also have dollar thresholds for items to be included in the capital budget, and the threshold depends on the size of the government's budget.

This article provides an overview of the capital budgeting process. More specifically, it addresses:

* The role of capital budget managers in coordinating the CIP and preparing the annual capital budget

* The capital budgeting cycle

* The principles of financing capital facilities

* The relationship between the capital budget and the operating budget

MANAGING THE CAPITAL BUDGET

The locus of capital budgeting frequently is found in the finance department, the budget office, or the planning and development department. The capital budget process is most often housed in the budget office with close consultation with the planning and engineering agencies. An important decision is whether the capital budget approval process will be done concurrently with the operating budget or separately Coordination of the two budgeting processes permits policymakers to analyze the total operating, maintenance, and construction costs of capital projects. Since monies from the operating budget are generally used to fund the ongoing maintenance of capital assets, it is crucial to coordinate the operating and capital budgeting processes to ensure that new capital asset construction will not overburden the operating budget in the future.

THE CAPITAL BUDGETING CYCLE IN STATE AND LOCAL GOVERNMENTS

In general the capital budgeting cycle incorporates six important stages: 1) asset inventory, infrastructure needs assessment, and cost analysis; 2) project prioritization; 3) financing plan development; 4) CIP and capital budget preparation and adoption; 5) capital budget execution; and 6) CIP evaluation and updating. …

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