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Capital planning and budgeting in the Commonwealth of Virginia
A presentation to the President's Commission to Study Capital Budgeting May 8, 1998
Ronald L. Tillett
Secretary of Finance
Commonwealth of Virginia
Characteristics of exemplary capital budgeting
Limitation on debt financing
Measure of debt affordability consistent with financial goals and capital
Control of tax-supported debt is one of the key factors affecting the issuer's
overall credit quality.
Up-to-date and comprehensive information systems including inventory of
assets and their condition.
Life-to-date information on all active capital projects.
Helps assess current capabilities and identify gaps.
Integration of capital budgeting with strategic planning
Links organizational goals and priorities to capital needs.
Strategic plans should be the basis for identifying capital requirements.
Comprehensive master plans should flow from the strategic plans. Finally,
the agency's six-year capital plan should be based on its comprehensive
master plan and the strategic plan.
Allows limited funds to be targeted to greatest needs.
Good internal communications so that all levels of an organization can
be familiar with the agency's mission and strategic goals.
Good communications between line and central agencies to quickly resolve
questions or problems.
Central clearinghouse to disseminate state-of-the-art techniques.
Characteristics of exemplary capital budgeting
Long-range planning horizon
A six- to ten-year planning horizon to assist in making informed choices,
manage debt requirements, assess options, and minimize the unnecessary
expenditure of public funds.
Helps prioritize long-term needs.
Monitoring of performance
Systematic way to monitor projects after approval and to assess their performance.
For example, performance measures can be used to assess projection completion
targets and project cost estimates.
Hold agencies accountable for results.
Source of feedback to consider for future projects.
Definition of capital outlay
Virginia's Appropriation Act contains two types of budgets -- an operating
budget and a capital budget.
The operating budget shows those expenditures for activities and programs
provided by state agencies and institutions of higher education.
The capital budget deals with large, non-recurring expenditures such as
the construction of a building, renovations to a water supply system, or
the installation of a new sprinkler system.
There are four categories of capital projects acquisition, new construction,
improvements, and equipment. (See Appendix 1)
The cost, size, and scope of a project determines whether it is included
in the operating or capital budget. In general, Virginia defines a capital
project as a tangible asset costing more than $250,000 to construct or
Commonwealth's capital funding program
The Commonwealth uses both "pay-as-you-go" and
financing techniques for capital expenses
Prior to 1990, the Commonwealth had a consistent practice of constructing
and maintaining state facilities from current revenues (cash).
The financing of capital project from cash is advantageous because: (1)
costs are not passed on to future residents and generations, and (2) projects
cost less since there are no interest charges or expenses to issue debt.
Biennial cash appropriations for capital projects averaged about two percent
of general fund revenues between 1980 and 1990. Since 1990, biennial cash
appropriations for capital projects have averaged over 2.5 percent of general
fund revenues. (See Appendix 2)
A significant pay-as-you-go capital program is recommended for the 1998-00
biennium. This funding strategy reflects, in part, the desire of the Commonwealth
to continue limitations on new authorizations of tax-supported debt and
to take advantage of Virginia's economic growth to fund necessary investments
in the state's infrastructure.
Commonwealth's capital funding program
Pay-as-you-use (debt) financing
In response to lower construction costs, a reduction in long-term interest
rates, and increased capital requirements, the Commonwealth in the early
1990s began to rely more on debt.
On November 3, 1992, Virginia voters approved approximately $613 million
in general obligation bonds to fund 128 projects.
"Pay-as-you-use" financing has subsided in an effort to preserve the Commonwealth's
debt capacity. This helps to ensure that the Commonwealth maintains its
"triple AAA" bond rating.
At the request of the Governor, the 1997 General Assembly placed a moratorium
on the approval or authorization for any new tax-supported debt. The 1997
Session actually saw a reduction in the amount of authorized tax-supported
This action was in response to several years of increasing debt. It allowed
Virginia to "take a breather" from new authorizations and to maintain its
historical low overall outstanding levels of tax-supported debt.
What is debt capacity?
The amount of debt that may be prudently authorized
and issued in a given period of time without negatively affecting the credit
rating of the issuer.
The concept of debt capacity recognizes that a governmental unit has a
finite capacity to issue debt at a given credit level.
Can be measured and compared, generally, across governmental units.
Issuance beyond a prescribed level can cause an erosion in credit ratings.
Striking the proper balance between capital needs and the ability and willingness
to repay debt issued to finance these needs.
Rating agencies view control of tax-supported debt as
one of four key factors affecting credit quality.
Control of debt burden
Economic vitality and diversity
Fiscal performance and flexibility
Administrative capabilities of government
Debt capacity management in Virginia
What is tax-supported debt?
Constitutional and/or statutory requirements that obligate tax revenues
of the Commonwealth for repayment of debt.
Debt service payments made or ultimately pledged to be made from general
Corresponds with rating agency definition.
Debt Capacity Management has allowed the Commonwealth
to manage its debt burden during times of increasing pressure to use debt
The Debt Capacity Model has been used to determine how much capital may
be debt financed.
Virginia has managed its debt "on the way up."
This has forced constructive debate about the priority of various categories
of capital programs.
General Assembly members understand the policy and fiscal implication of
debt capacity models.
Commonwealth debt financing programs
General Obligation Bonds
Bonds for revenue-producing capital projects with legislative approval.
Bonds for any type of capital projects with legislative and voter
Virginia Public Building Authority
Used primarily for projects with general government purpose, primarily
Repaid with general fund appropriations.
Virginia College Building Authority
Short-term equipment program for public institutions (primarily general
21st Century program for education projects (general fund supported).
Pooled Bond program for public institutions (supported by institutions
with state credit enhancement).
Private College bond financing program (pure conduit financings).
Commonwealth Transportation Board
Bonds for road construction projects (supported by highway funds, with
pledge of general fund appropriations).
Alternative financing methods
Master Equipment Leasing Program.
"Alternative Finance" projects for Higher Education.
Long-range planning process
Beginning with the 1974-1976 biennium, the Appropriation Act has required
the Governor to determine whether a capital project conforms to an approved
site or master plan.
Currently, agencies must submit comprehensive master site plans to the
Department of General Services (DGS). These plans depict current and future
land use and guide future growth of the physical plant.
The DGS Director approves the master plans on behalf of the Governor. DGS
seeks input from the Department of Planning and Budget (DPB) and the State
Council of Higher Education for Virginia (SCHEV) on the programmatic content
of the plans.
Each master plan must contain site and utility drawings that depict the
current condition of the physical plant. Drawings are updated every two
The Commonwealth's performance budgeting process requires agencies to formulate
six-year strategic plans that identify goals, objectives, and strategies
and indicate how the agencies intend to fulfill their mission and address
The state's six-year capital planning process
Agencies first prepared six-year capital plans in the 1992-94 biennium.
The genesis of the six-year capital planning process was An Assessment
of Debt Management in Virginia, a 1990 report by the Secretary of Finance,
that resulted from language included in the 1990 Appropriation Act. This
language directed the Secretary of Finance to review the use of debt and
to recommend a plan to maintain the Commonwealth's high credit rating.
The report also led to the creation of a debt advisory committee and the
implementation of a debt capacity model.
These steps demonstrate to the rating agencies Virginia's intention to
conservatively manage the debt financing of capital projects. This helps
Virginia maintain its superior bond rating, which reduces the overall cost
Overview of the capital outlay process
Phase one: budget development
Agencies work with two central agencies, the Department of Planning and
Budget and the Department of General Services, to define and refine the
project budget and scope. The Governor includes the highest priority capital
projects in the Executive Budget.
The state's biennial budget process limits capital requests to even numbered
years. By statute, only the following can be considered in odd numbered
-- Supplements to projects that have been bid and determined to have insufficient
-- Funding for projects declared by the Governor to be of an emergency
required for the continued use of existing facilities.
Phase two: legislative review
The General Assembly reviews and evaluates the Governor's capital budget.
The legislature may modify or delete projects or add new projects.
Phase three: execution
Once funds are appropriated, the Governor must grant authorization to proceed
before any planning or construction can begin.
Once initiated, DGS and a number of other state agencies review and approve
the project designs.
It may take from as little as 18 months to as much as five or more years
from the initial project proposal to completion of the project.
Central review of agency six-year capital requests
DPB and the Cabinet Secretaries review the programmatic need for the requested
projects. Agencies prepare detailed narrative information and design schematic
for the highest priority projects requested for the first two years of
the six-year plan.
DPB, in consultation with the Secretaries, conducts another screen to determine
which of these high priority projects should go to the next phase, review
by a project team.
The project teams have interagency participation, consisting of representatives
from DPB, DGS, the requesting agency, legislative money committees, and,
if applicable, SCHEV.
The project teams determine:
-- How much space is needed;
-- Project budget; and,
-- Length of time to design and construct the facility.
The project teams provide (1) an excellent forum to convey and discuss
the project's construction characteristics, and (2) a much quicker way
to resolve questions or problems than written correspondence which was
the primary means of communications used before the inception of project
The project teams discuss and evaluate options.
The project teams are designed to continue throughout the life of the project.
Measuring the impact of capital development on operating budget
Important component of central agency review
Agencies provide estimates of the start-up and on-going costs necessary
to run and maintain the facility as well as any costs for new or expanded
programs and activities that will be housed in the additional or renovated
Revenue bond projects must undergo a financial feasibility study and be
certified by the Governor prior to their appropriation and issuance of
Virginia's statewide six-year plan
The review of the agency six-year capital plans culminates with the development
of the statewide six-year capital plan.
The plan shows the reader how the Commonwealth is investing in capital
projects, why it is doing so, and what lies ahead.
The current six-year plan is the third such plan produced -- the first
was published in 1992. These six-year plans represent a major component
of the Commonwealth's efforts to integrate long-range planning into fiscal
The current capital plan for 1998-2004 includes all capital projects recommended
in the executive budget for the 1998-2000 biennium and identifies higher
priority projects for the remaining four years.
The number of projects is limited to hold dollar requirements to a reasonable
level consistent with the Commonwealth debt capacity.
Agencies must explain major modifications to their plans, such as why an
unfunded high priority project in one plan is not included in the next
six-year plan, or why a high priority project has been shifted to a lower
Inventory of assets
Ongoing requirement to identify and assess
The Department of Accounts or, in some cases, individual agencies maintain
a fixed asset accounting and control system (FAACS) for all land, buildings
and equipment valued at more than $5,000. These systems are updated as
assets are added or deleted and, in all cases, inventories are current
as of June 30 for financial reporting purposes.
DGS collects data on the gross square footage, overall functional use,
general type of construction, and age of structure.
Since the 1960s, SCHEV and Virginia's colleges and universities have maintained
a room-by-room and building-by-building inventory of space. This includes
building replacement value and a general evaluation of building quality.
VDOT maintains a comprehensive inventory of highway system assets including
roads, bridges, culverts, tunnels, signs, and signals.
Monitoring of performance
After the Governor approves project initiation, the central budget agency
employs several techniques to monitor and control the expenditure of capital
First, DPB limits agency access to appropriated funds. Initially, DPB allots
about 75 percent of the amount budgeted for architectural and engineering
fees to allow the preparation of plans from which bids can be prepared.
Once the construction contract is awarded, DPB allots up to the bid amount
and adds usually no more than five percent of the construction contract
for contingencies. To access the remaining appropriated funds, the agency
must justify the need for additional dollars.
Second, as part of year-end close activities, DPB reviews the status of
existing projects to identify any unexpended or unobligated funds that
can revert. A similar review is conducted in the fall during budget development.
Central agency approval is required at various project design and construction
DGS monitors project performance to assess adherence to project cost estimates
and the elapsed time from project approval to building occupancy.
Categories of Capital Projects
Virginia breaks its capital projects into four categories:
Definition. Acquisition of any interest in land, including improvements
of any kind located on the acquired land, except certain utility easements.
Criteria. All acquisitions of real property are subject to the
capital project proposal process. This includes capital leases as defined
earlier in the instructions. Donations of real property are addressed in
the Department of General Services' Directive No. 1 Revised, Real Property
Management, dated June 20, 1984.
Definition. A new construction project is a single undertaking
involving construction of one or more facilities. Included in the project
are: all work necessary to accomplish a specific purpose and produce a
complete and usable new structure; the associated architectural and other
technical services; the equipment installed and made part of the facility;
and site development and improvements. New construction includes:
Construction of or site work for a new plant, including the erection, installation,
or assembly of a new building, structure, or utility system.
Any addition, expansion, or extension to a structure that adds to its overall
Complete replacement of a facility that, because of age, hazardous conditions,
obsolescence, structural and building safety conditions or other causes,
is beyond the point where it may be economically repaired or renovated
and can no longer be used for its designated purpose.
Criteria. If a new construction project meets one or more of the
following criteria, it is subject to the capital project proposal process:
It creates additional building space of 5,000 square feet or greater (this
does not apply to site development or building systems projects);
It has a total project cost of $250,000 or greater; or
It is acquired through a lease with options to purchase or any other alternative
Definition. An improvement is defined as all work necessary to
produce a complete and usable change to an existing facility or structure,
including the associated architectural and other technical services, the
fixed equipment installed and made part of the facility or structure, and
site development. Improvements include:
Alteration of interior space arrangement and other physical characteristics,
such as utilities, so that the structure may be more effectively used for
its present designated functional purpose.
Conversion of interior arrangement and other physical characteristics,
such as utilities and fixed equipment installed on and made a part of the
facility or structure, so that an existing structure may be effectively
utilized for a new functional purpose.
Renovation of most or all of a facility or structure or an existing mechanical
system to comply with current code requirements or to modernize it so that
it may be more effectively used for its designated functional purpose.
Restoration of a facility or structure to the maximum extent possible to
its former or original state (historic property).
Relocation from one site to another of a facility or structure either by
moving it intact or by disassembling it and subsequently reassembling it.
Major repair to restore a facility, mechanical system, or utility system
to a condition that allows it to continue to be appropriately used, including
the reprocessing or replacement of parts or materials that have deteriorated
by action of the elements or "wear and tear" in use.
Criteria. If an improvement to an existing facility or structure
has a cost of $250,000 or greater, it is subject to the capital project
Definition. Equipment is a tangible resource of a permanent or
long-term nature used in an operation or activity.
Criteria. No precise criteria exist for the funding of equipment
purchases as a stand-alone capital project. Consult with your DPB analyst
to determine whether an equipment purchase should be requested in the capital
budget. All equipment associated with projects defined as new construction
or improvements must be included in the capital budget for these projects.
If the equipment is to be financed by revenue bonds, it must be requested
in the capital budget.
Funding for capital expendituressummarized by funding option
$ in millions
$ in millions
$ in millions
1. Figures may not add due to rounding.
2. Current revenues consist of general fund dollars,
special funds, higher education operating
funds, Commonwealth transportation
funds, trust & agency funds, dedicated special funds,
federal trust funds, internal
services fund, and enterprise funds.
3. Represents tax-supported debt authorized during
Source: Department of Planning and Budget and the Department of the
Biennial Budgeting: Key dates for the six-year capital
April Odd # Years
Agencies notified of which high priority projects in existing
six-year plan to prepare detailed narrative justifications and schematic
May to August Odd # Years
Agencies conduct issue assessments and revise strategic plans.
May Odd # Years
Agencies submit six-year capital requirements including maintenance
reserve requests and capital leases.
June Odd # Years
Agencies submit detailed information for high priority projects authorized
July Odd # Years
Agencies (1) notified of other projects in their May six-year plan
to prepare detailed narrative justifications and schematic information
and (2) submit information on existing capital leases.
August Odd # Years
DPB validates maintenance reserve subprojects that meet criteria.
Sept. Odd # Years
Agencies submit (1) detailed information for projects authorized in
July, (2) annual maintenance reserve plan, and (3) financial feasibility
studies for revenue bond projects.
Dec Odd # Years
Governor submits executive budget to the General Assembly.
April Even # Years
Biennial Budget enacted, effective July 1.
Fall Even # Years
Agencies submit capital requests for emergency projects or to supplement
projects that have been bid but have insufficient funds.
Dec Even # Years
Governor submits executive budget amendments to the General Assembly.
March Odd # Years
Amendments to biennial budget enacted, effective upon passage.