Capital Planning and Budgeting
Training Manual
Rebecca Prather and Mike Wilson II
11/21/2008
The manual will provide you with necessary information to plan, prepare, and submit a Capital budget.
Table of Contents
What is capital?
Operating Budget vs. Capital Budget
Capital Planning
Capital Policy
Program Planning
Approval Process
Illinois Board of Higher Education Decision Making Process
Developing the Capital Priority List
Life Health and Safety
Master Plan
Performance Contracting
Leadership in Energy and Environmental Design
Selling the Capital Budget
Auxiliary Buildings
Capital Renewal
Funding Sources
Federal Funds
State Funds
Local Funds
Private Donations
What is capital?
Capital is the repair, renovation, improvement or, acquisition of land, roads, buildings, and equipment to support program activities. Capital ranges from buying a plot of land to repairing roads and buildings, to constructing new buildings and buying equipment. A capital expenditure may consist of expenditures from all aspects of the capital budget; financial and physical planning, land acquisition, architecture and engineering, construction, and durable equipment purchases, grants and loans to other entities for capital purposes. Capital budgeting is the process of evaluating and maintaining the permanent assets of the State. A capital budget is a spending blueprint that identifies capital projects that generate assets with a long economic life, such as roads and bridges, transit facilities, schools, economic development projects, environmental infrastructure, energy programs and state facilities.
Operating Budget vs. Capital Budget
A capital budget is different from the operating budget in that the capital budget is a multi year budget that is in a constant state of development. (GOMB, 2009)The capital budget can include permanent improvements grants. These grants go tocities or counties fire districts for repairs for major capital improvements. An example could be designing and contrasting a new sewer system. The capital budget can be funded through bonds and a pay as you go system which simply means that you must have cash in hand in order to proceed with a project. An example would be paying monthly bills instead of issuing debt to cover expenses like leasing the lottery, increasing gaming or increasing income taxes. In contrast the operating budget is a one year budget that funds operating costs such as salaries, grants, operating expenses, and may also include capital grants for basic maintenance and repairs. The operating budget is funded based on pay as you go system. (GOMB, 2009)
Capital Planning
Building a capital plan is important to maintaining a capital budget. Planning should be done to survey the current conditions of the facilities and assess repair needs in order to prioritize new growth, renovations, replacement and matching fund projects. Then the plan develops into a budget based on affordability. A master plan evolves from the strategic plans of your capital budget. It should include short term plans which are between 2 and 6 six years, mid-termplans which are 7-12 years and a long term plan which is 13-20 years. A university needs to make sure it is constantly evaluating its master plan and making the necessary changes when needed. An example of a long term plan could be the increase popularity in online and hybrid courses.
Capital Policy
Universities should have a capital policy that the University should be able to us as they complete their capital plan. The plan should conclude that all buildings should be constructed as high quality buildings. The policy should also allow the university to have the flexibility to respond to changing program needs of various departments. This policy should keep any of facilities from deteriorating to the point where it cannot be used and eliminate any temporary structures on main campuses. A way to keep up with the maintenance of the University building is to perform a facility condition survey. These can either be done internally or by an outside firm. The State of Illinois has just completed one for the State own assets; unfortunately, university properties were not included in this survey. The universities should either invest in an outside firm to perform a survey for them or conduct the survey themselves. This survey should then be updated regularly. This survey will tell the university which building are the worst and what needs to be done.
The capital policy should focus on renovating and replacing the worst buildings first, so that they do not deteriorate to the point that they become a health/life/safety issue. The capital policy should also make allowances for health/life/safety issue or emergencies. Sometimes emergencies are not planned and come out of the blue, such as natural disasters. It is important that the university have a policy that incorporates the contingencies for emergency.
Program Planning
Capital planning also has to incorporate programmatic planning. It is important that the university have a plan of want their future program needs. These needs will drive new construction projects. As programs grow or new programs are created they will need to additional space. This should also be balanced with new technology and increased popularity of on-line courses. This planning should be done at the administrative level as they will be able to see the whole picture, where as individual departments can be short-sighted in only caring about their own space needs. The administration can coordinate the space needs of all the departments.
Approval Process
The approval process includes several steps. The University submits a capital budget request to the Illinois Board of Higher Education (IBHE). The IBHE makes an annual budget recommendation to the Governor and General Assembly. In developing its recommendations, the IBHE works with the Capital Development Board(CDB),the Governor’s office of Management and Budget(GOMB) and the Governor’s Office. They also meetwith each university and reviewtheir detailed budget requests, the materials submitted via RAMP documents and Board of Trustees meeting materials. The IBHE board’s annual budget is a prioritized list of capital projects for each University.
The ranked projects are then presented to the Governor’s Office and the Governor’s Office of Management and Budget. GOMB and the Governor’s Office then take that ranked list and goes down the list to include the projects that they deem affordable along the ranked list. The Governor then submits a capital budget to the General Assembly which includes the Higher Education Budget.
The General Assembly then must pass two pieces of legislation; an appropriation bill and a bond authorization bill. The appropriation bill is the legal authority to spend public funds. The bond authorization bill is the legal authority to issue bonds on the State’s behalf. The appropriation bill needs only a simple majority in both the State House of Representatives and the State Senate of the General Assembly and must be signed by the Governor to become law. The appropriation bill must be reappropriated, or passed again annually to continue spending on a project. On the other hand, the bond authorization bill needs a 3/5 majority and must be signed by the Governor to become law. This bond authorization only needs to be passed once. Annual reauthorization is not necessary.
It has been several years since the State has passed a major capital bill. This passed session was the closest the State has come since the last major capital bill. There was a committee convened by the Governor, head by former Congressmen Glenn Poshard and Dennis Hasert. The committee was created to build a major capital plan and build bi-partisan support. The committee did great job of building a capital plan and building bi-partisan support. The plan was endorsed by the Governor. The capital bill along with all the other revenue bills passed the Illinois Senate with overwhelming support on the last day of session. Later that day, many senators and the Governor came to the House floor, and pleaded with the Speaker of the House to call the capital bill for a vote. Instead of the Speaker calling the bills for a vote, he sent the bills to committees for discussion. The revenue bills were voted down in committee, and de facto killing the capital bill. The capital bill was not called for a vote without the revenue bills to pay for them.
IllinoisBoard of Higher Education Decision Making Process
In making its budget recommendations to the Governor and the General Assembly, the IBHE uses a set of facility policy guidelines adopted by the Board in April 2004 to determine the priority order of projects.The following excerpt is taken from the Higher Education Statewide Capital Policies and Priorities (April 13, 2004).(Personal Communication1, 11, 14, 2008)
Developing the Capital Priority List
- The Illinois Board of Higher Education shall develop annually a priority list of capital projects recommended for funding. In developing the priority list, consideration shall be given to whether:
The project addresses necessary life, health, and safety and emergency infrastructure improvements. An “emergency project” is one wherein failure to respond could endanger people or could significantly impede the daily operation of the institution.
The project helps ensure that the State’s prior years capital investments are protected and helps ensure that existing facilities meet current academic requirements.
The project is necessary to complete an on-going project recommended previously by the Board, and the status of the on-going project is such that the completion funds are necessary to complete the work in a timely manner.
The project provides space necessary to accomplish the institution’s core mission and promotes the statewide goals of higher education as articulated in the Illinois Commitment or other policy documents.
The project provides state matching funds for donations from other state agencies, the federal government, corporate donors, and private contributions.
The priority assigned the project by the respective institution, public university governing board, the Illinois Community College Board, or the Illinois Mathematics and ScienceAcademy.
The priority placement of the project on the prior year’s priority list developed by the Illinois Board of Higher Education.
- The Board shall support a project it has not recommended previously when the Governor and General Assembly make a commitment to the project as evidenced by an appropriation or authorization.
Life Health and Safety
Health, life, safety issues tend to be the easiest projects to sell. They are the highest priority projects. These projects address necessary life, health, and safety and emergency infrastructure improvements. A “health, life, safety project” is one wherein failure to respond could endanger people or could significantly impede the daily operation of the institution. Examples include fire alarms, removal of hazardous materials and repairing dangerousconditions.
Master Plan
Creating a Master Plan is vital to the success of any capital plan. A master plan is a comprehensive capital plan for a university. A Master Plan is developed to establish a framework for both improvements and growth of the physical campus of a university. The plan should make recommendations for future improvements and expansion of facilities to better support evolving academic and research programs. The plan should also include the recommendation for improving the living experience for the whole university community. The Master Plan should be developed by a team consisting of staff, students, faculty, and administrators. The team should learn about campus life and the character of the campus thoroughly. Then they should attempt to foster that environment in the Master Plan. The bullets below outline how to classify your projects based on the years it will take to complete them and items that help supportive the universities Master Plan.
- Classifying projects based on completion
- Short term2-6 years
- Mid-term7-12 years
- Long range13-20 years
- Supporting Document for the Master Plan
- 10 year plan
- Facility Condition Survey (maintenance)
Performance Contracting
Performance Contracting is another route Universities can pursue to help with their capital needs. Performance contracting is an agreement with an Energy Service Company (ESCO) who will evaluate the potential improvements that would produce a cost savings to the University. (ESCO, 2008) These savings would then be used to pay for the work that needs to be done. The ESCO guarantees that the savings would be at least as much as the cost of the required work. The ESCO pays the difference if the savings do not exceed the savings. These upgrades would include projects such as windows, lighting and heat and cooling. This is a rather new alternative; it was started in the 1970's, and has yet to yield the reliable results that would make this a staple of all capital plans. Ultimately, this could prove to be very useful tool as in theory this budget neutral, and can reduce long-term maintenance cost. (ESCO,2008)
Leadership in Energy and Environmental Design
Universities should serve as leaders in producing and maintaining an environmental friendly campus. In accordance with that, the Leadership in Energy and Environmental Design (LEED) is process of evaluating a building's "greenness." The Green Building Rating System was developed by the U.S. Green Building Council (USGBC), to provide leadership and standards to the construction industry for environmentally sustainable construction. (LEED, 2008) The rating system addresses six major construction areas: sustainable; water efficiency; energy and atmosphere; materials and resources; indoor environmental quality and; innovation and design process. There are four possible levels that can be obtained: certified; silver; gold and; platinum. (LEED, 2008) Universities should strive to meet platinum certification for any new construction, as the budget allows. Because university campuses are so large and complex, it is important that buildings are built to sustain a long lifetime. Building on University campuses tend to be utilized for many years, so it is important that the future maintenance cost are considered and minimized with a good sustainability design. (LEED,2008)
Selling the Capital Budget
When presented a capital budget to the powers that be; the Governor; the General Assembly, it is important to sell the capital plan. It is important to show what the problem is and how it is being solved with the capital plan. The benefits to the students, the University, the community, and the State should be clearly indentified and addressed. If there is a bigger issue that is driving the need for capital investment, it should also be presented. It should also be demonstrated how the capital projects are preserving the environment and the architectural integrity of the campus. The program aspect of capital is also important. Is this need for a new program? Is it to expand an existing program? Is this program area a priority of the State? These are important questions that need to be asked and answered. Also to these programs add value to the economic development of the State. How many jobs would be created with going forward with this project?
Auxiliary Buildings
Auxiliary Buildings are not normally funded by the State. Auxiliary buildings include athletic facilities, parking structures, residence halls, recreation facilities, bookstores, etc.; Universities use revenue bonds, certificates of participation that are retired through revenue bonds that are supported with student fees. They also rely heavily on private denotations to fund these projects. Because these building serve no academic purpose, the State is not interested in directly funding their capital project needs. (Personal Communication 2, 11-14-2008)
Capital Renewal
Statewide Capital renewal funding has been the number one priority included in the IBHE capital budget recommendation for the past several years. Each year, institutions submit a request which includes a list of regular capital projects and a list of capital renewal needs/projects. In recent years, institutions have been using operating funds from state appropriations and income funds to fund capital renewal projects due to the lack of state capital funding. (Personal Communication 2, 11-14-2008)
Funding Sources
There are several sources that fund Higher Education Capital. There are two types of funding; bonded and non-bonded. Bonded financing is issuing bonds to pay for projects. Non-bonded financing includes all other sources. These sources include: local funds, state funds, federal funds, and private donations. (Personal Communication 2, 11-14-2008)
Federal Funds
Universities can also receive federal funds for their capital needs. The funds can come by way of competitive grants or by earmarks. These funds normally are not bonded funded. They do, on the other hand, tend to be matching grants. They will give the university so much for a project, but the university must come up with the remaining portion for the completion of the project. (Personal Communication 2, 11-14-2008)