The Impact of Capital Projects on the Operating Budget Background. The operating impact of a capital project is an essential factor to consider when making an informed decision about proceeding with the project. Capital projects can impose significant consequences upon the operating budget. While this is typically an additional operating budget burden, these impacts can also represent a positive impact on the operating budget. Presenting operating impacts may be required by law or by the government’s own financial policies.1 The analysis of operating impacts from capital is often deficient in practice (i.e., in Budget Awards Program – many “not proficient” ratings). This is an indicator that practitioners are (1) failing to understand the need, (2) not effectively making the argument within their jurisdictions to include it, or (3) lacking the tools and methodologies for calculating or showing the costs. Recommendation. GFOA recommends that governments discuss and quantify the operating impact of capital projects in the budget document. The impacts should be identified on an individual project basis, but may be summarized. The following steps should be taken to ensure that operating impacts are identified. 1. A specific policy on operating impacts should be included under the capital section in the financial policies of the government. A rule might be established that the capital improvement program may not be submitted/approved until impacts are noted.2 2. In order to accurately reflect and describe these impacts, assumptions should be noted. Staff involved with estimating operating impacts should be trained on how to set up the methodology. Items to consider when making assumptions include: a. Timeframe to determine when costs, savings or revenue will start. For example, first-year startup
costs will likely differ from costs in successive years when savings may be realized. b. Various anticipated phases of the project. c. In-house or external operations. d. Type of work being done. e. Whether the costs, savings, or revenues are recurring or non-recurring. For example, replacement and maintenance costs may occur on alternating or periodic years rather than annually over the life of a capital asset. A government should analyze the cycles for such up-keep costs and plan accordingly. f. Defined cost structures, when applicable (see Example 1). Example 1: Improvement Neighborhood Parks Community Parks Regional Parks Linear Parks Open Space Parks Special Use Parks Road Widening/New Roads New Police Station New School Building Traffic Signal Improvement
Annual Maintenance Cost $x,xxx/acre $x,xxx/acre $x,xxx/acre $x,xxx/acre $x,xxx/acre $x,xxx/acre $xx,xxx/mile $xx,xxx/square feet $xx,xxx/square feet $x,xxx/each
3. Operating impacts can be classified into one of three elements or a combination of the three. These include increased revenues, increased expenditures or additional cost savings (see Example 2). a. Increased revenues may be the result of additional volume, like opening a new train line, a new swimming pool, or a sports facility. b. Increased expenditures are often the result of a new facility, like a school building, fire station, etc. This would result in additional headcount and associated expenditures. Expenditures can be broken out by component.
Example 2: Project
Year 1, Including Start-up Costs
Recurring Salary & Benefits
Recurring Other Operating Costs
Recurring Annual Revenues
Library A Library B Hangar Animal Shelter Addition Total
$xx,xxx $xx,xxx $x,xxx $x,xxx $xx,xxx
$xx,xxx $xx,xxx N/A N/A $xx,xxx
$xx,xxx $xx,xxx $x,xxx $x,xxx $xx,xxx
N/A N/A $xx,xxx N/A $xx,xxx
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SOUTH DAKOTA MUNICIPALITIES
