Every city divides its budget into two parts--operating expenses
and capital improvements. Operating expenses, which include items
like salaries and supplies, are the cost of items (like time or
paper or space) which are consumed during the span of the budget.
They are used up in operating the city's government. Capital
improvements, which include streets and buildings, are items whose
costs are incurred all at once but whose useful life extends beyond
the span of a single budget. The remaining useful life of a capital
improvement is an asset and is calculated as part of the net worth
of a locality. Capital improvements may be either new acquisitions
or the replacement of existing capital assets which have outlived
their useful life. In principle, the distinction is simple.
In practice, it can get confusing.
Because these long-lived investments also tend to be big-ticket
items, it is very important for local managers to plan ahead to
insure that they will be able to afford them when the time comes.
This is, in fact, one of the two principal functions of a capital
improvement plan: it controls the sequence and timing of large
expenses that the city can foresee. These decisions have implications
for the city's ability to maintain or improve the service which
it offers its citizens, and that has political implications (more
than one local council campaign has been waged over the issue
of potholes).
The second principal function of a capital improvement plan is
to serve as one of the major tools for controlling local development.
The cost for providing public capital services (sewers, streets,
utilities) is estimated at $10,000 to $15,000 per residential
lot (depending on local standards and local price structures).
It is obviously to a developer's advantage to wait until the
city supplies those services, rather than having to build them
her/himself (and have to add that cost to the cost of the unit).
In the Minneapolis/St. Paul area, the Metropolitan Council has
controlled the location and timing of suburban development through
its capital plan for extending sewer lines. Developers are free
to build in areas which are not yet served by public sewer lines,
but in most cases the cost of providing septic fields or private
sewers is prohibitive.
Since capital improvement planning has such significant political
effects, the process itself involves political considerations.
The first issue is to decide how to generate capital projects.
The simplest solution is to ask the department heads to submit
a list. But what should be on the list? Should it be a wish
list or a bare-bones request? What strategy shall the department
heads adopt? Should they include throw-aways for negotiating
purposes, or risk sending forward only items that are really needed?
And do the department heads really know what they will need?
Aren't there unforeseen changes that might affect their requests
(new technology, a fresh disaster, etc.)?
The second issue is to decide the best way to rank the projects.
Who should decide which projects are more important than others?
On what basis should someone (or some group) make such a decision?
What are the important criteria for evaluating capital projects?
How should each project be rated on each of those criteria?
The third issue deals with allocating available funds once the
capital improvement projects are ranked among each other. Resources
are limited (or, as the philosopher put it, "you can't always
get what you want"); how shall one decide to allocate those
limited resources? Do you fund all of the projects that you can
afford each year, or do you leave some unused capacity to allow
for contingencies? Cities operate with several funds; do you
fund a low-priority project because there is still money in that
fund, even though higher-priority projects are postponed because
their fund is exhausted?
There is a fourth issue which is not, strictly speaking, a political
issue. Capital assets depreciate each year; accounting principles
and simple prudence dictate a capital reserves account. You should
transfer the value of each year's depreciation to a capital reserves
account so there will be funds available for replacement when
the asset is exhausted. However, political principles will often
dictate that the budget should be kept as low as possible (so
taxes can be kept down). The capital reserves account is a very
easy account to raid.
There are no easy answers to these questions. What follows is a technical tool which makes it easier to account for the results of one's answers to such questions. The tool will not answer those questions. In fact, it will make the political questions all the more salient, since the technical issues are taken care of by demanding an answer to the various political questions.