Distinguishing Capital Projects from Maintenance Needs
This article was originally published May 17, 2016 and updated with new information.
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Last week, I introduced a blog series on Capital Improvement Planning that will highlight some best and promising practices for the following phases of capital budgeting:
- Identification of capital and maintenance expenditures
- Capital planning
- Capital budgeting development and execution
- Capital financing
- Asset management
Last week’s post answered the following questions:
- What is a Capital Improvement Plan (CIP)?
- What are the benefits of developing a Capital Improvement Plan?
- What are the features of a Capital Improvement Plan?
- What is the process in developing a Capital Improvement Plan?
Today we are going to examine four tips that can help you distinguish between a capital project to be included in the CIP and an ordinary maintenance to be included in the operating budget. We’ll also help identify differences between capital and maintenance expenditures.
Tip 1 – Define a capital project in writing. Each city I worked in during my career had its own definition of a capital project. Typically, the definitions were broad in scope, and included a range of items such as land acquisition, construction, equipment purchases, technology infrastructure and major systems (such as an ERP), major renovations, and special studies such as new Infrastructure Master Plans. Frequently there are additional criteria such as minimum expenditure thresholds, minimum useful life (in years), non-recurring nature or other requirements.
It is very important that definitions of the capital projects included in the CIP are clearly and specifically spelled out. Depending on what is best suited for your entity, include this definition in the municipal code, in adopted financial policies, or in the CIP instruction manual.
For example, Pittsburgh has the following definition:
“Any project funded by public monies, or proposed to be funded by public monies, to build restore, retain, or purchase any equipment, property, facilities, programs or other items, including buildings, park facilities, infrastructure, information technology systems, or other equipment, that is funded on a necessarily non-repeating, or non-indefinite, basis and that is to be used as a public asset, or for the public benefit. Any and all funds used for a Capital Project shall be used in accordance with the rules and regulation of the fund source.
A Capital project is further defined as a project with a budget larger than $50,000 and whose contract is approved by the City Council. Projects within the Capital program are multi-year projects, and are supported by various funding sources such as Community Development Block Grant (CDBG), Capital bond, City (PAYGO) funds, grants, and Federal and State support.”
See GFOA Best Practices: Establishing Capitalization Thresholds for Capital Assets
Tip 2 – Define maintenance expenditures and designate maintenance funding sources. It is critical to define major infrastructure maintenance expenditures and establish policies designating the funding sources for maintenance expenditures. This lets you emphasize the importance of preserving existing facilities and relieve some competition between maintenance needs and new capital projects.
If the definition developed in Tip 1 includes major maintenance and asset preservation projects, then these maintenance expenditures are considered, funded, and included in the capital budget process. Otherwise, maintenance expenditures should be included in the operating budget.
Tip 3 – Identify capital projects not included in the CIP. The CIP often does not include projects from the government’s enterprise fund. This can be confusing to elected officials and citizens when assessing infrastructure investments’ overall impacts. Accordingly, governments should prepare an annual capital budget document, or use web-based transparency visualizations to share the entity’s capital projects.
Tip 4 – Develop a comprehensive inventory and infrastructure rating system. This tends to be the most commonly left out item in Capital Improvement Planning. However, a formal inventory of all properties and assets, complete with deferred maintenance needs across the entity and a condition assessment to help decision-makers develop priorities, is essential for elected officials and appointed executives.
The inventory should include documentation on the need for renewal, replacement, expansion, or retirement of all physical assets. The inventory should also have information on the year the facility was built or acquired, the date of last improvement, its condition, the extent of use, and the scheduled date for rebuilding or expansion.
Hint: Your government’s insurance carrier has a list of insured assets that can serve as a basis for the inventory.
Next week, we will delve into tips for organizing the Capital Improvement Planning process.
To learn more about Capital Planning, best practices, and how digital tools can make CIP easier, more collaborative, and transparent, download our eBook “Capital Planning in the Digital Era.”
Charlie Francis is a municipal finance expert. He has more than forty years of local government financial management experience in both the public and private sector, including twenty years of experience as a Chief Financial Officer. Most recently, he served as the Director of Administrative Services and Treasurer for the City of Sausalito where he earned the unofficial title of “OpenGov super user”. He has also served as a finance manager for the Town of Colma, CA and as CFO and acting City Manager for the Cities of Indian Wells, CA and Tracy, CA.