Understanding the difference between the capital budget
and the operating budget
by Bill Lynn, Fifth Ward Alderman

We often are told by members of the city council that we cannot compare spending in the capital budget to spending in the operating budget. Thus, not buying new cars for the police will not give us more money for police.

Let me explain the difference between the two. Operating budget items are recurring items that must be paid on a periodic basis. For instance if I hire an employee I must pay them every month. That is an operating budget item. An analogy is your food budget. You must buy food every week or two on an ongoing basis. No matter what happens you must eat.

Capital budget items are items that when purchased do not need to be repurchased for some time. For instance we are going to build a new police station. This will not need to be repurchased again for many years. An example of a capital budget item for you is a house or a car.

Let me explain what is not made clear. The issue is not so much what we purchase, but how we pay for it. We will borrow money to pay for the police station. It will be paid over many years. That means that the cost of the building will be spread over many years and will create a payment for many years. Thus, we do not pay out the entire price of about $20,000,000 but we pay out a portion each year. This is very much like your house payment.

On the other hand when we make a capital budget purchase we also increase the operating budget. This is not often made clear. That means when we purchase capital assets we may need to buy fuel, pay labor, and make debt payments. These items will increase the operating budget. Therefore, it is not completely true they are unrelated. For instance, if you purchase a new home you will need to make payments that will increase your ‘operating budget' or operating expenditures. Therefore, when we are told the two have nothing to do with each other it is not really true. (In some rare cases a capital budget expenditure can reduce operating expenditures, but that is rare in the city.)