October 22, 1998
Summary
Most States have a capital budget, which consists of capital spendingthat is planned, analyzed, presented, enacted , or financed separatelyto some degree from other State spending. The nature of the capital planningprocess, the form of the Governor's capital budget proposal, the way legislaturesenact capital spending, the coverage of the capital budget, and the methodof financing vary widely among States.
Although there is no standard definition of a State capital budget,the following may be a good working definition:
- A State capital budget is the prioritized list of capital improvementprojects, adopted by the governing body along with the operating budgetfor the next fiscal year. It includes projects financed by various revenuesources.(1)
Capital is defined by many States to be construction, major renovation,land, and major equipment above a minimum threshold. In many States, however,significant amounts of capital expenditures, such as those for transportation(mainly highways) or special authorities (e.g., university systems, hospitals,or toll roads), or aid to localities, are not included in the State capitalbudget, or perhaps even in the State budget generally.
An important part of many State capital budgets is a long term planningprocess, or capital improvement program. This plan prioritizes projectsover a multi-year period, such as five years, and as projects move closerto the budget year they must undergo increasing scrutiny in order to befunded.
Capital projects can be financed by general purpose revenues, dedicatedrevenues, Federal grants, or borrowing. If financed by borrowing, the borrowingis usually designated for specific projects or groups of projects, andthe amount, type, and purpose of borrowing is constrained by the State'slaws or constitution and the credit market's assessment of the risk associatedwith the debt.
No State records depreciation in its budget. In addition, States donot record depreciation in their financial accounting statements for governmentalfunds.
Current information about State capital budgets is available in a publicationby the National Association of State Budget Officers, Capital Budgetingin the States, published most recently in September 1997.
The following sections provide more information on State capital budgets.The sections discuss:
- a history of State capital budgets;
- an overview of State budgeting in general, and budgeting by funds;
- the number and variety of State capital budgets; and
- a description of State capital budgets, including coverage, planning, budgeting,and financing.
Comprehensive State and local budgetary processes appeared in the earlypart of this century as the result of encouragement by civic reformers,businessmen, and public administration scholars. In the early 1920s somecities began a comprehensive approach to capital planning with the developmentof local Master Plans, and by the end of the decade capital budgets emergedto link the planning process to realistic assessments of the community'swillingness to pay for what was being planned. This process continued intothe 1930s. Bozeman(2)identifies four factors that led to the development of public sector capitalbudgets:
- 1) The emergence of official planning commissions in the 1920s resultedin Master Plans for physical development of communities.
2) In the field of public administration increased attention was paidto budgeting in general and the improvement of administrative practicesand their policy implications.
3) The Great Depression caused communities to learn that massive publicworks projects could lead to fiscal crises and bankruptcies if the limitsto resources were not recognized.
4) World War II caused communities to plan for the return of soldiersand the need for new roads, schools, water and sewer lines, and other infrastructure.
Overview of State Budgeting: Budgeting by Funds
All States budget differently. Their budgeting systems are the resultof traditions and preferences that have developed, for some States, overmore than 200 years. There are differences in the relative authority ofthe governor and the legislature, in the frequency in which the legislaturemeets, in the State's relations to local governments, in traditions aboutborrowing, and many other aspects of budgeting, including budgeting forcapital. As a result, it is difficult to identify a typical State budgetingsystem.
Despite these differences, an understanding of State budgets, and especiallyState capital budgets, requires an understanding of budgeting by funds,because most States budget by the use of different funds. Most States havemost of their spending in a general fund. Receipts to the generalfund can come from general purpose and miscellaneous taxes. Spending inthis fund can be for State operations, aid to localities, capital projectsnot in the capital fund, debt service (principal and interest) on generalobligations bonds, and transfers to other funds. For most States, spendingin the general fund cannot exceed annual revenues plus beginning year balances,although the stringency of this requirement to balance the general funddiffers widely.(5)Borrowing is not permitted except for short-term purposes to smooth outseasonality in tax collections.
In addition to the general fund, most States also have special revenuefunds, although different States give this category different names,such as special funds, or non general funds. Spending in these funds isgenerally financed by earmarked revenues, such as highway taxes (if notin the capital fund); grants from the Federal Government; State lotteryreceipts; or fees for motor vehicle licenses, parks and recreation, fishand game licenses, or business regulation. Some of these funds can be verysmall, and some States may have a large number of special revenue funds.As with the general fund, spending in special funds generally cannot exceedannual revenues plus the beginning year balance.
Many States also have a capital projects fund, which is oftencalled the "capital budget." In some States the fund may cover only capitalprojects financed by borrowing, while in other States it may include projectsfinanced by Federal grants, earmarked revenues from a State's own sources,or transfers from the general fund. The method of appropriation for theseprojects also differs among the States. In some States this fund may havea separate capital appropriations bill, in some it may have several capitalappropriations bills, and in other States capital projects may be appropriatedin bills that include operating expenditures, with the amounts for thecapital projects fund identified separately in the bill.
States that borrow may also have a debt service fund, which receivespayments from the general fund to pay interest and principal on bonds soldto finance capital projects. The bonds are generally linked to a specificproject or group of projects, and the maturity of the bonds may in somecases match roughly the expected life of the projects. The timing of paymentsfrom the general fund to the debt service fund can vary.
In addition to these funds, some States may have other funds, such asan exchange stabilization fund, highway fund, Federal grants fund, bondfund, public enterprise funds, or retirement funds.
The Number and Variety of State Capital Budgets
Because there is no standard definition of what is and is not a Statecapital budget, it is difficult to identify how many States have a separatecapital budget. The National Association of State Budget Officers (NASBO)publishes a survey of good practices in capital budgeting, which focuseson how States plan, budget for, and finance capital. This survey indicatesthat only South Dakota does not have a capital budget.(6)Other efforts to count the number of State capital budgets using differentcriteria indicate that 29 States had a capital budget (c. 1962)(7),31 States had a capital budget (1963)(8); 42 States had a capital budget (1986)(9); and 37 States (of the 45 that responded to a GAO survey) had a capitalbudget (1986)(10). This suggests that since the early 1960s an increasing number of Stateshave developed separate capital budgets.
A Description of State Capital Budgets
Coverage of State capital budgets and definition of capital.--Capitalis defined by many States to be construction, major renovation, land, andmajor equipment above a minimum threshold. In many States, however, significantamounts of capital expenditures, such as those for transportation (mainlyhighways) or special authorities (e.g., university systems, hospitals,or toll roads), are not included in the State capital budget, or even inthe State budget generally. In addition, State grants to localities forcertain capital projects may also not be in the State capital budget.
Planning for capital.-Capital projects that are candidates forthe capital budget are often part of an extensive planning process thattakes place prior to the inclusion of a project in the list of projectsthat is the State capital budget. This planning process is often calleda capital improvement program (CIP) and ranks projects over a 5-10 yearperiod.(1) As projects move closerto the budget year, the required degree of analysis and justification increasesbefore they can appear in the Governor's budget and be approved for fundingby the legislature. For many States, an important part of this plan isan inventory and assessment of the condition of existing capital assets.
In Virginia(11)the capital outlay plan is for six years, and the current plan for 1998-2004covers three bienniums (1998-2000, 2000-2002, and 2002-2004). The six-yearplan addresses three major areas:
- how projects would be financed, focusing largely on the relative use ofcurrent revenues (pay-as-you-go) and debt financing (pay-as-you-use), andthe Commonwealth's debt capacity;
- emerging needs of the Commonwealth, assessing such issues as the age ofthe current assets, demographic changes, and environmental standards; and
- recommendations for specific capital projects for each of the three bienniums.
The Governor's capital budget proposal to the legislature normally beginswith the State budget office preparing guidelines for State agencies tosubmit proposals. Some States permit nonprofit agencies, boards and commissions,public authorities, and elected officials to make requests for capitalprojects. About half the States have a separate capital budget documentand about half combine capital and operating expenditures in one document.
Many States have joint boards that include executive and legislativeofficials that inform the budgeting process in the legislature. In somecases the capital budget is a separate capital appropriations bill, insome cases it is several bills, and in others the capital projects areparts of appropriations bills that include operating expenditures.
No State records depreciation in its budget. In addition, States donot record depreciation in their financial accounting statements for governmentalfunds. They record it only for proprietary funds (commercial-type fundsthat sell goods or services to the public or other units of the government)and for nonexpendable trust funds (those trust funds where net income,expense, or capital maintenance is measured).(12)Under a proposed change in financial reporting standards, however, depreciationon general capital assets would be recognized as an expense in entity-widefinancial statements.(13)This would not affect the State budget.
Financing capital projects.--Capital projects can be financedby transfers from the general fund, dedicated revenues, Federal grants,or borrowing.
- The availability of general funds for capital projects depends inpart on other demands from the general fund and on the economic conditionof the State. When growth in revenues is strong there is more likely tobe general revenues available to finance capital projects.
- The most prevalent example of a State dedicated revenue is the Stategasoline tax. Other examples can include tolls or fees from bridges orother facilities, or dedicated revenues for construction of higher educationfacilities.
- Federal grants to States make a significant contribution to Statecapital spending. The largest grant of this type is for highway construction,financed by the Federal tax on gasoline.
- State borrowing can be in the form of general obligation bonds orrevenue bonds, and is subject to constitutional or legal restrictions onthe State debt limit, the judgment of the financial markets regarding therisk associated with the debt, the desire of the State to maintain itscredit rating, and other factors. Revenue bonds are bonds backed by a dedicatedrevenue stream, such as tolls or other fees.
1/ Linda Hollis, AICP,Tischler and Associates, Inc, on behalf of the American Planning Association,in testimony before the Subcommittee on Economic Development, Committeeon Public Works and Transportation, House of Representatives, June 16,1993. It should be understood that capital improvements would not includeroutine maintenance. It should also be understood that capital budgetsare not always enacted with the operating budget, and a capital budgetis often for mutli-year projects, not just for spending for the next fiscalyear.
2/ J. Lisle Bozeman,"The Capital Budget: History and Future Directions," Public Budgeting& Finance 4 (Autumn 1984).
3/ National Associationof State Budget Officers, Capital Budgeting in the States, September1997, p. 10.
4/ National AdvisoryCouncil on State and Local Budgeting, "A Framework for Improved State andLocal Government Budgeting and Recommended Budget Practices" (December15, 1997).
5/ Steven D. Gold, "StateGovernment Experience with Balanced Budget Requirements: Relevance to FederalProposals," Statement to the Budget Committee, U.S. House of Representatives,May 13, 1992; and Richard Briffault, Balancing Acts: The Reality BehindState Balanced Budget Requirements, New York: Twentieth Century Fund,1996.
6/ National Associationof State Budget Officers, Capital Budgeting in the States, September1997, Table 6: Organization of the Capital Budget. Massachusetts and Nevadadid not respond to the survey.
7/ James M. Poterba,"Capital Budgets, Borrowing Rules, and State Capital Spending," NationalBureau of Economic Research, Inc. Working Paper No. 4235, December 1992.
8/ Albert M. Hillhouseand S. Kenneth Howard, State Capital Budgeting, Chicago: Councilof State Governments, 1963, p. 4.
9/ Lawrence W. Hush andKathleen Peroff, "The Variety of State Capital Budgets: A Survey," PublicBudgeting and Finance (Summer 1988), pp 67-79.
10/ General AccountingOffice, "Budget Issues: Capital Budgeting Practices in the States," GAO/AFMD-86-63FS,July 1986.
11/ Ronald L. Tillett,Secretary of Finance, Commonwealth of Virginia, testimony before the President'sCommission to Study Capital Budgeting, May 8, 1998; and "Six-Year CapitalOutlay Plan: 1998-2004" for the Commonwealth of Virginia.
12/ GovernmentalAccountingStandards Board (GASB), Codification of Governmental Accounting andFinancial Reporting Standards as of June 30, 1996, sections 1100.107and 1400.114-1400.118.
13/ GovernmentalAccountingStandard Board, Exposure Draft, Basic Financial Statements -- and Management'sDiscussion and Analysis -- for State and Local Governments (January31, 1997), paragraphs 33-37 and 273-81.
