Capital improvement planning is a tool that helps localities establish budgetary goals and objectives for capital expenditures to be implemented over time. A planning document for future budgets, the Capital Improvement Plan (CIP) does not commit funding or create appropriations. As part of the CIP process, the locality examines current resources, considers what resources it will require in the future, and determines how much funding will be needed and when. The first year of the CIP normally forms the basis for the upcoming year’s capital budget.
Orange County’s CIP for fiscal years 2016 through 2020 incorporated a number of new measures to enhance the county’s financial stability and resiliency. First, the Board of Supervisors wanted to consider capital and debt service expenditures in their totality as part of the CIP process. Previously, the county’s budget process had not given a great deal of consideration to the relationship between debt service and capital outlay as components of the annual operating budget, or to optimal funding levels for each. Funding sources for proposed projects—including donations, categorical aid, general fund transfers, and debt proceeds—had always been considered; now, as part of the CIP, the Board would also consider the decline of existing debt service payments, the addition of new debt service payments (for proposed capital projects), and the estimated impact on the operating budget. The new format enables the Board to consider the total financial impact of projects prior to approval.
Second, the Board wanted to stabilize annual general fund transfers for capital outlay and debt service at a level consistent with current annual revenue and capital equipment replacement cycles. Previously, and especially during the recession, levels of annual capital funding had fluctuated fairly dramatically, as capital investments were only funded when they could not be deferred any longer. After reviewing replacement cycles for various types of equipment, the county’s past levels of capital and debt funding, and the need for future funding, the Board established a target for annual combined capital and debt service expenditures of approximately $10 million. Then, the Board added an additional five years to the CIP so the impact of additional debt could be considered over a longer period. Over the 10-year horizon, it became apparent that there were a few large capital projects that might require an additional financial commitment beyond the targeted $10 million baseline. Taking the longer view, the Board discovered the possible future need for an incremental tax increase and began to consider its timing. This process has effectively “firewalled” the county’s capital investment discussions from operating budget discussions and is intended to prevent the county from deferring its ongoing capital needs in order to fund operational expenses each year.
Finally, the Board sought to identify avenues of funding for the Capital Projects Fund beyond the annual budgeted general fund transfer. These included unspent prior-year operating funds, user fees, debt proceeds, grants, donations, reserves in excess of the Board’s adopted policy, and unbudgeted revenue. Since adopting the policy, the county has transferred approximately $1.5 million in tax revenue to the Capital Projects fund. The county has also transferred funds received from surplus property sales and insurance settlements to establish a reserve for project development, creating additional flexibility and the ability to incur initial project costs, such as studies and design work, in the early stages of planning capital projects. By establishing an appropriate minimum annual level of combined capital and debt funding, and a reserve balance specifically for capital, the county can consider capital needs separately from its operational budget, and will be better insulated and more resilient in times of economic stress.
Glenda Bradley is the Assistant County Administrator for Finance & Management Services in Orange County, Virginia. With over 25 years of experience in local government, she has also served as Finance Director for Northampton County, Virginia; the Cities of Kinston and Sanford, North Carolina; and the Town of Wake Forest, North Carolina. Bradley is a member of the Virginia Government Finance Officers Association and the Government Finance Officers Association of the United States and Canada, which has awarded her its Certificate of Achievement for Excellence in Financial Reporting and its Distinguished Budget Presentation Award. Contact her at firstname.lastname@example.org.