Once a government has adopted a multi-year capital plan, the next step is to incorporate the capital budget into the budget document. Capital projects are different from other programs adopted in the operating budget, often representing very large financial obligations that may span two or more fiscal years. Because of the unique nature of capital projects, the presentation may differ from other items within the budget document.
GFOA recommends that governments prepare and adopt a formal capital budget as part of their annual or biennial budget process. The capital budget should be directly linked to the multi-year capital improvement plan. Presentation of the capital budget should include a summary of the multi-year capital plan as well as detailed information related to the budget year (or both budget years for biennial budgets). Each government will need to establish the appropriate balance between summary-level and detailed information. To avoid placing excessive detail in the capital section of the budget document, consideration may be given to placing the additional information on the web or in a separate capital document.
Governments should use the following guidelines when incorporating information on the capital budget within the budget document.
- Definition. A definition of capital expenditures should be included in the budget document. The definition of a capital project can be designed in a way that is broad enough to encompass a variety of different situations. Governments frequently refer to asset life and dollar threshold in the capital expenditures definition.
- Placement. The capital budget should be in a distinct section of the budget document. It is very difficult to follow the various elements of the capital program if information is scattered throughout the document. Having the capital budget and multi-year capital plan within the same or adjacent sections of the document makes it easier to follow that relationship.
- Sources and Uses. The capital presentation should focus on both sources and uses. The government should indicate the total dollar amount of capital expenditures for the budget year (or both budget years for biennial budgets), for each year in the multi-year plan and the total plan. The capital plan sources and uses summary should include all projects (regardless of fund) that fit within the government’s definition of capital expenditures. Funding sources should be identified for all aspects of the project, clearly noting those sources with financing requirements (i.e. debt service). Estimate costs of each project, based on recent and accurate sources of information, recognizing project costs may inflate if multi-year. This information can be presented by department, fund, category, priority, strategic goal, or geographic location.
- Process. The following items help to communicate major steps within the capital budget decision making process.
- Calendar. A calendar showing key dates in the capital budget process should be presented along with text describing the process. The calendar could be juxtaposed with the operating budget calendar. Responsible parties (departments) and statutory deadlines are useful in describing the process.
- Prioritization. Information on how capital projects are evaluated and prioritized is critical. The criteria for evaluating capital projects could include such items as public safety, risk, location, return on investment, net payback, public need, connection to strategic planning documents or other projects, and available funding. Changes in priority should also be addressed and explained (i.e., emergency needs, increases/decreases in available funding).
- Reporting. A description of the process should identify when regular reports are or will be issued to review status and provide expected completion dates of new and ongoing capital projects.
- Identification. Capital projects should be noted as recurring or non-recurring in nature. Recurring capital projects are those that (1) are included in almost every budget, (2) have a regular replacement cycle, and (3) may have no significant impact on the operating budget. Governments should provide a greater level of detail and information for non-routine capital projects than for routine projects. For example, a major new wastewater treatment plant or civic center will have greater service and cost implications than a recurring project to resurface roads or maintain water lines.
- Capital Project Detail. The budget document should include the following capital project detail for each major project:
- Description and Cost. Each project should be described concisely (i.e., indicate the project’s purpose and funding sources). Indicate the total project costs and the amount appropriated for the project during either the budget year or in biennial budgets.
- Timetable. Showing a timetable for different phases of a project is very informative, and including individual schedules for major capital projects may be useful.
- Graphics. Legible graphic illustrations (pictures or maps) can add value to a capital project presentation.
- Links to Other Plans. Governments may consider indicating on the individual capital project detail what specific goals that the capital project is fulfilling.
- Operating Impacts. The operating impact of the project should be both quantified and described.
- GFOA best practice, “The Impact of Capital Projects on the Operating Budget,” 2015.
- GFOA best practice, “Asset Maintenance and Replacement,” 2010.
- GFOA best practice, “Capital Planning Policies,” 2013.
- GFOA best practice, “Capital Project Monitoring and Reporting,” 2007.
- GFOA best practice, “Multi-Year Capital Planning,” 2006.