Capital-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

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

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 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

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

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 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

Governors 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

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 and Budgeting

Year 1990 1991 1992 1993 1994 1995 Capital Budget Projects for 1990 Fire Station Sewer Expansion Park Fire Station 185 10 0 0 0 0 Capital Improvement Program Projects ($000s) Library Sewer Expansion 0 15 0 20 20 30 100 50 0 75 0 40 Operating Budget ($000s) 185 15 15 Personnel Costs Supplies & Equipment Other ($000s) 640 140 20 800 Park 15 0 0 0 0 0

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: Dallas--2002-03

Total Budget $1,717,075,871 Operating Budget $1,449,667,579 84.4% General Fund $814,625,514 56.2% Enterprise Fund 504,821,059 34.8% Debt Service 130,221,006 9.0% Capital Budget $267,408,292 $15.6% General Purpose 51,359,913 19.2% Enterprise Fund $216,048,379 80.8%

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Problems with Capital Budgeting

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
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