Into the Weeds: Operating and Capital Budgets
Posted by Mary
In the most recent Into the Weeds post, I provided an analogy to help you understand the difference between Funds and Departments in municipal accounting. That concept will be important now, as we discuss the differences between Operating and Capital budgets; and even more so once we begin discussing Revenues, Allocations, and Transfers. As a reminder, I am keeping permanent links to all of the Into the Weeds series on a separate page, so you can easily go back and reread old posts when necessary.
Operating Budgets are developed and accounted for at the Department level. They are designed to pay for the anticipated costs associated with conducting a Department’s routine business. These budgets are similar to your household budget, in that you have a pretty good idea what your annual expenses will be, based both on past experience and expectations for the coming year.
The City separates its Operating Budgets into several Categories (Salaries & Benefits, Materials & Supplies, Other Expenses, etc.), which are then separated into Line Items (Salaries – Overtime, Office Expense, Training, etc.). Here is an example of what an Operating Budget looks like: Sample Operating Budget
Some Departments have Operating Budgets in more than one Fund. A good example of this would be the Community Development Department (CDD). Because CDD conducts some of its business on private projects for which a fee is charged, those costs are budgeted in the Private Development Fund (Fund 862). CDD also conducts some operations on a time-and-materials basis, primarily large developer projects such as subdivisions or development agreements; those operating costs are budgeted in the Subdivision Fund (Fund 863). Most of the City’s residual Housing operations are grant funded, so CDD has a budget in the Community Development Block Grant Fund (Fund 201). Finally, some CDD operations are conducted in a General Fund (Fund 001) budget, specifically non-project related activities that benefit the community as a whole, generally at the direction of Council or mandated by another agency.
When you look at the published City budget, you will not see the Line Item detail provided above. Instead, you will see an Operating Summary Report, which totals up all of the Department’s Operating Budgets by Category and then breaks them out by Fund totals.
While I would like to show you what Community Development’s Operating Summary Report looks like, this fiscal year’s budget ignored the new organizational structure altogether. So instead, I will show you what the Planning Division’s Operating Summary Report looks like, since it includes three of the four Funds mentioned above.
The top section shows Category totals for the entire Department, across all Funds in which it operates. The bottom section shows Fund totals, without any detail. (What you originally saw is an internal budget page. It includes Line Item details for all Department expenses, with separate budget pages for each Fund in which it operates.)
Capital Budgets are created to fund special projects rather than ongoing operations. There is generally a beginning and ending to a project, defined by creation of a specific, tangible asset.
Most Capital Budgets fund one-time infrastructure improvements (such as the Water Pollution Control Plant Expansion), although they are also sometimes used to fund consultant studies (such as the General Plan Update), if the cost exceeds $20,000 and/or multiple Funds are being used to pay for them. Expenses frequently cross fiscal years, so the City budget looks 10 years out to capture the entirety of the project.
Although some projects do have a fixed annual Capital Budget, work generally occurs at different locations each year. A good example of a project like this is the Annual Pedestrian Improvements. A fixed amount of money is budgeted for citywide improvements, and work is prioritized based on need.
Unlike Operating Budgets, City Capital Budgets are developed and accounted for at the Fund level. While each project is assigned to a certain Department for management purposes, all staff work on the project is charged to one budget account number without regard for departmental lines. Also, whereas Operating Budgets are developed using annual expense Categories (Salaries & Benefits, Materials & Supplies, Other Expenses, etc.), Capital Budgets are developed based solely on the total cost of the project.
Separation of project costs in a Capital Budget occurs after the expenses are incurred and is based solely on Activity Codes. In other words, staff salaries and postage and consultant costs and construction materials and contractor payments are all lumped together, separated only by whether the expenses were related to Property Acquisition, Project Design, Environmental Review, Construction, Inspection, etc. This is a critical concept that will tie into our future discussion of how the Capital Projects Fund (Fund 400) works.
In the City’s published budget, there are a couple of ways to look at Capital Budgets, but the simplest way is the Capital Improvement Program detail pages. Since Quené recently corrected some of the Public Works Director’s funding misstatements about the West Trunk Line Improvements project, and its funding and activities are clean and simple, we’ll just use that as our example.
Here is the detail page for the project: 16016_West Trunk Line Improvements
Notice the heading in the upper left corner – it assigns this project to Building & Development Services (which no longer exists). As I mentioned above, that assignment is for project management only. The Actuals column includes cumulative costs incurred, from project inception through the previous fiscal year, regardless of what Department incurred them.
Below the heading, the far left column shows Activity Codes 4110 (Preliminary Design / Study) and 4140 (Design) with expenses that have already been incurred. Beneath those, you will find Activity Code 4998 (Project Budget) with all projected costs for the current and future fiscal years. The final Activity Code, 4999 (Overhead), includes actual costs incurred as well as a budget in the out years, estimated at 15% of project costs. (Budgeted overhead rates vary from project to project, depending on a variety of factors. This particular project qualifies for a 15% rate.)
The second column indicates that the project is paid for solely by Fund 320 dollars, which is why you only see each Activity Code once. If there were two funding sources, you would see each Activity Code twice – once for Fund 320 and again for the second Fund.
Just so you can see what a more complicated project looks like, here is the project detail page for the SR 99 / Eaton Road Interchange project. The only thing I need you to see is that some of the Activity Codes are repeated for different Funds. This is what I meant when I wrote that Capital Budgets are developed and accounted for at the Fund level.
So, that’s plenty for one day. If you have questions about anything I’ve covered, please, please let me know. As we move forward with this series of posts, it is important that you grasp the concepts. I don’t want to lose you in the weeds!
Next up will be a discussion of Revenues, Allocations, and Transfers. Once we get through that, we can start looking at some of the issues currently being thrown around as political hot potatoes. That’s when the REAL fun begins. Whee…
Thank you for your continued readership. There are serious matters moving through the City bureaucracy, and it won’t be long before they come forward to the Council. Every Chico citizen and taxpayer should be concerned, so please continue to share our posts with your family, friends, and neighbors.