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Capital-Budgeting ProcessCapital-Budgeting Process

• The process is designed to help policy makers:– In the selection of a few capital projects from many

alternatives• From an inventory of capital projects to a capital budget

– In the timing of the expenditure to be incurred by the projects selected

– In fitting the selected capital projects into the overall financial program of the government unit

• (1) Capital asset inventory (2) capital improvement plan (3) long-term financial analysis (4) capital budget

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(1) Capital Asset Inventory(1) Capital Asset Inventory

• An inventory and assessment of the existing capital facilities includes its:– Age– Condition– Degree of use– Capacity / LOS– Replacement cost

• The inventory of capital facilities helps to determine whether the existing facilities are to be:– Renewed, replaced, expanded, or retired

• It also helps to determine repair and maintenance needs and estimated costs

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(2) The Capital Improvement Plan(2) The Capital Improvement Plan

• A rolling, multi-year inventory of proposed projects and financing resources– The capital budget is the first year of the CIP– It provides detailed information on the design, cost,

and financing of improvements recommended for the forthcoming year

– The CIP is the foundation of the capital budget process

– The CIP is updated yearly• Revenue and expenditure estimates are revised• A “new year” is added to the CIP as part of updating

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CIP ElementsCIP Elements

• Projects are proposed by:– Agencies, private organizations, citizens– The projects are screened by a planning department

• a preliminary list is drafted– includes project costs– Relationship to master plan (or long-term plan) – initial priority is established– Scheduling and coordination

• Build sewers before streets are resurfaced

– Final list is included in the CIP• Includes time schedule and estimated costs

– Sewers in Year 19X8; streets in Year 19X9; …

– The CIP is revised annually

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(3) Long-term Financial Analysis(3) Long-term Financial Analysis

• Can the government unit afford the proposed capital budget?• The analysis should include:

– any recurring expenditures resulting from the building of new capital facilities

– The present and anticipated revenue-and-expenditure profile• Existing debt issues

– When are issues due?– Capacity to meet debt service

• Estimated growth profile of the tax base• Potential for new revenue sources

• The financial analysis is related to the multi-year CIP• Financing options are considered

– Borrowing?– Capital reserve funds?– Current sources?

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(4) The Capital Budget(4) The Capital Budget

• The proposed capital budget corresponds to the first year of the CIP– Greater financial detail and precision of

project cost estimates– Justifications– The financial analysis is used to determine

financing structure of the various projects– A final priority ranking is proposed

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Prioritizing Capital ProjectsPrioritizing Capital Projects

• Priorities based on:– Functional areas

• Higher education, transportation, etc.

– Problem severity• Health and safety of the population; critically needed maintenance

work; etc.

– Status of political support• Governor’s priorities, agency priorities, legal or federal mandates,

etc.

– Formal scoring system according to ranked criteria

• In addition to prioritizing, deciding on some projects could benefit from cost-benefit analysis– Important when evaluating a project against an alternative action

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Putting it all together…Putting it all together…

• The multi-year capital improvement plan, the current capital budget, and the operating budget are linked into a comprehensive expenditure program for the government unit

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Capital Improvement Programming Capital Improvement Programming and Budgetingand Budgeting

Capital Improvement ProgramProjects ($000s)

Year Fire Station Library Sewer Expansion Park1990 185 0 15 151991 10 0 20 01992 0 20 30 01993 0 100 50 01994 0 0 75 01995 0 0 40 0

Capital Budget Operating BudgetProjects for 1990 ($000s) ($000s)Fire Station 185 Personnel Costs 640Sewer Expansion 15 Supplies & Equipment 140Park 15 Other 20

800

Capital Expenditures Operating Expenditures$215,000 $800,000

Total Expenditures$1,015,000

Source: Mikesell, p. 238

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Organization of the Total Budget: Organization of the Total Budget: Dallas--2002-03 Dallas--2002-03

Total Budget$1,717,075,871Total Budget

$1,717,075,871

Operating Budget$1,449,667,579

84.4%

Operating Budget$1,449,667,579

84.4%

Capital Budget$267,408,292

$15.6%

Capital Budget$267,408,292

$15.6%

General Fund$814,625,514

56.2%

General Fund$814,625,514

56.2%

Debt Service130,221,006

9.0%

Debt Service130,221,006

9.0%

Enterprise Fund504,821,059

34.8%

Enterprise Fund504,821,059

34.8%

General Purpose51,359,913

19.2%

General Purpose51,359,913

19.2%

Enterprise Fund$216,048,379

80.8%

Enterprise Fund$216,048,379

80.8%

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Problems with Capital Problems with Capital BudgetingBudgeting

• Capital improvement programs– Project ranking does not change despite real world

changes– The longer a project has been on the CIP, the

higher the ranking

• Capital project designation not always clear• Earmarked funds skew the rankings• Encourages unnecessary borrowing• Decision-making tools used to get projects

into the capital budget are not fully rational– Cost-benefit analysis