Capital Budget

Framework

The core function of the capital budget is to help control expenditures. Spending limits are set by the University through the adoption of the capital budget and through the authorization for individual capital projects. Just like an annual operating budget, a multi-year capital budget can require difficult decisions and involves the balancing of scarce resources with apparently unlimited demands. All the preliminary work will make decisions easier, and not everything has to be accomplished and paid for in a single year. Within fiscal constraints, the nature and importance of individual projects will dictate which ones will be accomplished in year one and which ones will be accomplished in years two, three, four, and beyond.

The capital budget is, in general, adopted at the same time as the University's annual operating budget and may either be a section of that budget or attached as a separate document. The capital budget's financial overview lists the capital projects to be funded in the current year and the funding source, as well as expenditure projections.

A detailed description of each project should be listed in the capital budget, along with a statement of purpose, the method of financing, and a schedule.

Funding

Capital projects and acquisitions can consume large amounts of financial resources. A multi-year capital plan helps manage this consumption by scheduling expenditures over a number of years and by creating a financial plan to meet those expenditures. A long-term schedule of capital projects gives organizers time to arrange for sufficient financing.

A financing strategy should balance expected project requirements with good fiscal practices. Adhering to established financial policies, establishing accurate cash flow projections, and considering various funding alternatives are just some ways to achieve this balance.

There are a number of options for financing capital projects and purchases. Several years of advanced planning will allow leadership to examine each of these funding options and pursue the combination that works best for the University.

Option I - University Resources

State Appropriations & Tuition Fees

The first option a state university should examine when considering capital project financing is funding of all or some of the project by appropriations from the annual operating budget, which is a large component of what is sometimes called pay-as-you-go financing. The most common sources of this funding are state appropriations and tuition fees.

Each year's budget may contain provisions for partial or total funding for chosen assets. For example, it could provide funding for a certain number of new work trucks in each year's budget, to be paid for out of current appropriations. Advantages of pay-as-you-go financing include improving the University’s overall financial condition by increasing flexibility to adapt to future circumstances and preserving the ability to borrow for other needs. It can also expedite small or recurring projects.

For those capital items that are replaced regularly, pay-as-you-go practices can provide an equitable and cost-effective financing option. The benefit of receiving new equipment every year is matched with the annual payments.

The major disadvantage of using current appropriations is a potential need to implement a fee increase. Besides being administratively unpopular, increasing fees are notcommon at this time. Opportunity costs can occur, if resources that could be used for other purposes are tied up in funding capital projects

Fund Balances (Reserve)

The University needs to maintain a reasonable fund balance as insurance against unanticipated expenditures or revenue shortfalls. The portion of the fund balance that is allowed for capital financing is the unreserved fund balance.

The University’s fund balance cannot exceed 4 months of the budget year’s operating revenues.

The danger in relying on fund balances for capital financing is that they may decrease or become unavailable in future budget years; therefore, it is important to establish reasonable projections and maintain other financing options.

Trust Funds

To ensure that the money is available when needed for capital purposes, the University should consider establishing reserve funds. Through proper determination, the University can establish reserve funds earmarking resources for the future acquisition of essential capital assets. For example, reserve funds may be funded through an available fund balance or appropriations. The use of such reserve funds would then be listed as a funding source, where applicable, in a multi-year capital plan.

Enterprise Program Funds

Enterprise programs/activities/fund sources include those that furnish facilities, goods or services to students, faculty, staff, or incidentally to the general public. An enterprise typically charges a user fee, rent or other fee directly related to, although not necessarily equal to, the cost of the facilities, goods or services. These funds consist of all revenues received from operations of dormitories, housing facilities, health facilities, student union or activity facilities, parking facilities acquired or
constructed by the Trustees, and Self-support instructional programs. Through proper determination, the University Enterprise can establish reserve funds (construction earmarking resources for the future acquisition of essential capital assets. For example, reserve funds may be funded through an available fund balance or appropriations. The use of such reserve funds would be listed as a funding source, where applicable, in a multi-year capital plan.

Option II - State and Federal Assistance

State and federal assistance may come in the form of grants and/or low-interest or zero-interest loans for qualified projects. A good source for updated information on grants offered by the state of California is Grants.gov (www.grants.gov/web/grants/search-grants.html), which lists funding administered by state agencies.

Additional useful Online resources include the following:

  • For information on state contracts, which can allow a local government substantial savings on the purchase of equipment, see http://www.dgs.ca.gov.
  • For details regarding federal assistance, visit the Catalog of Federal Domestic Assistance (CFDA) at: www.cfda.gov. CFDA is a government-wide compilation of federal programs, projects, services and activities that provide benefits to the public. It contains financial and non-financial assistance programs administered by departments of the federal government.
  • An option allowing visitors to search for programs administered under the American Recovery and Rehabilitation Act (ARRA) is available at: http://www.recovery.gov/arra/.The major portion of funding, according to the site, is shifting to long-term economic opportunities in transportation, energy and community development.

Option III - Private Funding

Donations and grants (DON/GRA) are at the head of any financing wish list. The University should examine financing from federal and state sources and take advantage of any private gifts or services available to help acquire equipment or to reduce a project's cost. CSU/UC cooperative arrangements may also be possible, depending on the particular terms and conditions, often subject to negotiation.

There also may be instances when private firms or individuals can provide funding for capital projects or acquisitions, and funding source that should not be overlooked. Public-Private Partnerships (PPP) work best for large-scale projects in which the private entity receives a tangible (or, sometimes, intangible) benefit. For example, corporations may bid on naming rights to an athletics stadium or performing arts venue, providing the University with significant funds. Philanthropic organizations may be the source of grants or gifts. A community or fraternal organization may contribute money or labor to a project that will enhance the community as a whole.

Option IV - Financed Funding

Issuing debt allows a university to pay for capital infrastructure and equipment that it might not otherwise be able to afford. Below is a brief overview of types of debt that can be issued for capital projects:

California General Bond Obligation (GO) — When you buy a GO bond issued by the state of California, you make a loan to the state. The state uses your money to build schools, university buildings, hospitals, housing, roads, mass transit facilities, parks, water delivery systems, and other projects. The bond you receive in return for your money is, in effect, an IOU — the state’s promise to repay the amount of money borrowed (the principal), plus interest, in a specified period of time. GO bonds are backed by the full faith and credit of the state. The principal and interest on all GO bonds are paid out of the state’s general fund.

State Revenue Bond (SRB) — SRBs are a form of long-term borrowing the state uses to finance public improvements, including state office buildings, state universities, prisons, and food and agricultural facilities. Like a GO bond, a SRB is, in effect, an IOU. Unlike GO bonds, however, SRBs are not backed by the full faith and credit of the state or its taxing authority, and may be authorized by law without voter approval. Revenue bonds are a form of long-term borrowing state agencies use to finance an income-generating project, such as water projects, higher education facilities, or other public facilities built with the proceeds of the financing. Income generated by the project goes first toward meeting debt service on the bonds (i.e., paying interest to bondholders) and retiring the bonds at maturity.

California Revenue Anticipation’s Notes (RAN) — RANs are short-term notes that fund the state’s cash management needs during a fiscal year. Each note is a promise by the state to repay investors the amount of money borrowed (the principal), plus interest, from the state’s available monies at the end of that fiscal year.

Commercial Paper - is an unsecured form of promissory note that pays a fixed rate of interest. It is typically issued by large banks or corporations to cover short-term receivables and meet short-term financial obligations, such as funding for a new project.

Lease-Purchases (also known as Installment Purchases) — Typically secured by the property or equipment being financed, these are purchases with payments occurring over time.
Regardless of the type of debt used to finance a capital project, the principal and interest payments to retire the debt must be planned for in each year's budget for the life of the obligation. Similarly, periodic lease-purchase payments must be accounted for in the capital plan.