Understanding the difference between the capital budget and the operating budget
by Bill Lynn, Fifth Ward Alderman
Operating Budget consists of recurring items (like employee salaries) that must be paid on a periodic basis.
Capital Budget consists of items that will not need to be repurchased for some time (i.e., new police station).
Capital budget purchases also increase the operating budget.
About 40% of your Property Taxes are allocated to the city as operating and debt tax levies that pay the Operating and Capital Budgets.
Operating tax levy is as high as allowed by state law.
Debt tax levy (pays for borrowing) can be raised to an unlimited level.
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 policeman.
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 recently built 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 borrowed money to pay for the police station. The loan 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 plus interest. 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 capital budget expenditure can reduce operating expenditures, but that is rare in the city.)
A good question is: "How is this related to your taxes?" Your city property tax (which is about 40% of your total property tax bill) is made up of an operating tax levy and a debt tax levy. The tax for operations is currently as high as it can be according to state law. On the other hand the debt levy, which pays for borrowing, can be raised to an unlimited level. We can also use local option sales tax to pay for capital expenditures.
This is the reason that we must not only control our operating costs, but our capital expenditures also. The good news is that we have done a good job. We have one of the best credit ratings of any city in Iowa. This gives us a very good interest rate (about 4%).
