Limitation on debt financing

• Measure of debt affordability consistent with financial goals and capital needs.

• Control of tax-supported debt is one of the key factors affecting the issuer's overall credit quality.

• Up-to-date and comprehensive information systems including inventory of assets and their condition.

• Life-to-date information on all active capital projects.

• Helps assess current capabilities and identify gaps.

• Links organizational goals and priorities to capital needs.

• Strategic plans should be the basis for identifying capital requirements. Comprehensive master plans should flow from the strategic plans. Finally, the agency's six-year capital plan should be based on its comprehensive master plan and the strategic plan.

• Allows limited funds to be targeted to greatest needs.

• Good internal communications so that all levels of an organization can be familiar with the agency's mission and strategic goals.

• Good communications between line and central agencies to quickly resolve questions or problems.

• Central clearinghouse to disseminate state-of-the-art techniques.

Long-range planning horizon

• A six- to ten-year planning horizon to assist in making informed choices, manage debt requirements, assess options, and minimize the unnecessary expenditure of public funds.

• Helps prioritize long-term needs.

• Systematic way to monitor projects after approval and to assess their performance. For example, performance measures can be used to assess projection completion targets and project cost estimates.

• Hold agencies accountable for results.

• Source of feedback to consider for future projects.

• Virginia's Appropriation Act contains two types of budgets -- an operating budget and a capital budget.

• The operating budget shows those expenditures for activities and programs provided by state agencies and institutions of higher education.

• The capital budget deals with large, non-recurring expenditures such as the construction of a building, renovations to a water supply system, or the installation of a new sprinkler system.

• There are four categories of capital projects ­ acquisition, new construction, improvements, and equipment. (See Appendix 1)

• The cost, size, and scope of a project determines whether it is included in the operating or capital budget. In general, Virginia defines a capital project as a tangible asset costing more than $250,000 to construct or improve.

The Commonwealth uses both "pay-as-you-go" and "pay-as-you-use" financing techniques for capital expenses

Pay-as-you-go financing

• Prior to 1990, the Commonwealth had a consistent practice of constructing and maintaining state facilities from current revenues (cash).

• The financing of capital project from cash is advantageous because: (1) costs are not passed on to future residents and generations, and (2) projects cost less since there are no interest charges or expenses to issue debt.

• Biennial cash appropriations for capital projects averaged about two percent of general fund revenues between 1980 and 1990. Since 1990, biennial cash appropriations for capital projects have averaged over 2.5 percent of general fund revenues. (See Appendix 2)

• A significant pay-as-you-go capital program is recommended for the 1998-00 biennium. This funding strategy reflects, in part, the desire of the Commonwealth to continue limitations on new authorizations of tax-supported debt and to take advantage of Virginia's economic growth to fund necessary investments in the state's infrastructure.

Pay-as-you-use (debt) financing

• In response to lower construction costs, a reduction in long-term interest rates, and increased capital requirements, the Commonwealth in the early 1990s began to rely more on debt.

• On November 3, 1992, Virginia voters approved approximately $613 million in general obligation bonds to fund 128 projects.

• "Pay-as-you-use" financing has subsided in an effort to preserve the Commonwealth's debt capacity. This helps to ensure that the Commonwealth maintains its "triple AAA" bond rating.

• At the request of the Governor, the 1997 General Assembly placed a moratorium on the approval or authorization for any new tax-supported debt. The 1997 Session actually saw a reduction in the amount of authorized tax-supported debt.

• This action was in response to several years of increasing debt. It allowed Virginia to "take a breather" from new authorizations and to maintain its historical low overall outstanding levels of tax-supported debt.

The amount of debt that may be prudently authorized and issued in a given period of time without negatively affecting the credit rating of the issuer.

• The concept of debt capacity recognizes that a governmental unit has a finite capacity to issue debt at a given credit level.

• Can be measured and compared, generally, across governmental units.

• Issuance beyond a prescribed level can cause an erosion in credit ratings.

• Striking the proper balance between capital needs and the ability and willingness to repay debt issued to finance these needs.

• Control of debt burden

• Economic vitality and diversity

• Fiscal performance and flexibility

• Administrative capabilities of government

What is tax-supported debt?

• Constitutional and/or statutory requirements that obligate tax revenues of the Commonwealth for repayment of debt.

• Debt service payments made or ultimately pledged to be made from general government funds.

• Corresponds with rating agency definition.

• The Debt Capacity Model has been used to determine how much capital may be debt financed.

• Virginia has managed its debt "on the way up."

• This has forced constructive debate about the priority of various categories of capital programs.

• General Assembly members understand the policy and fiscal implication of debt capacity models.

General Obligation Bonds

• Bonds for revenue-producing capital projects with legislative approval.
• Bonds for any type of capital projects with legislative and voter approval.

• Used primarily for projects with general government purpose, primarily public safety.
• Repaid with general fund appropriations.

• Short-term equipment program for public institutions (primarily general fund supported).
• 21st Century program for education projects (general fund supported).
• Pooled Bond program for public institutions (supported by institutions with state credit enhancement).
• Private College bond financing program (pure conduit financings).

• Bonds for road construction projects (supported by highway funds, with pledge of general fund appropriations).

• State/Local Partnerships.
• State/Private Partnerships.
• Master Equipment Leasing Program.
• "Alternative Finance" projects for Higher Education.

Master planning

• Beginning with the 1974-1976 biennium, the Appropriation Act has required the Governor to determine whether a capital project conforms to an approved site or master plan.

• Currently, agencies must submit comprehensive master site plans to the Department of General Services (DGS). These plans depict current and future land use and guide future growth of the physical plant.

• The DGS Director approves the master plans on behalf of the Governor. DGS seeks input from the Department of Planning and Budget (DPB) and the State Council of Higher Education for Virginia (SCHEV) on the programmatic content of the plans.

• Each master plan must contain site and utility drawings that depict the current condition of the physical plant. Drawings are updated every two years.

• The Commonwealth's performance budgeting process requires agencies to formulate six-year strategic plans that identify goals, objectives, and strategies and indicate how the agencies intend to fulfill their mission and address critical issues.

• Agencies first prepared six-year capital plans in the 1992-94 biennium.

• The genesis of the six-year capital planning process was An Assessment of Debt Management in Virginia, a 1990 report by the Secretary of Finance, that resulted from language included in the 1990 Appropriation Act. This language directed the Secretary of Finance to review the use of debt and to recommend a plan to maintain the Commonwealth's high credit rating.

• The report also led to the creation of a debt advisory committee and the implementation of a debt capacity model.

• These steps demonstrate to the rating agencies Virginia's intention to conservatively manage the debt financing of capital projects. This helps Virginia maintain its superior bond rating, which reduces the overall cost of borrowing.

Phase one: budget development

• Agencies work with two central agencies, the Department of Planning and Budget and the Department of General Services, to define and refine the project budget and scope. The Governor includes the highest priority capital projects in the Executive Budget.

• The state's biennial budget process limits capital requests to even numbered years. By statute, only the following can be considered in odd numbered years:

            &nb sp;   -- Funding for projects declared by the Governor to be of an emergency nature and/or
            & nbsp;       required for the continued use of existing facilities.

Phase two: legislative review

• The General Assembly reviews and evaluates the Governor's capital budget. The legislature may modify or delete projects or add new projects.

• Once funds are appropriated, the Governor must grant authorization to proceed before any planning or construction can begin.

• Once initiated, DGS and a number of other state agencies review and approve the project designs.

• It may take from as little as 18 months to as much as five or more years from the initial project proposal to completion of the project.

• DPB and the Cabinet Secretaries review the programmatic need for the requested projects. Agencies prepare detailed narrative information and design schematic for the highest priority projects requested for the first two years of the six-year plan.

• DPB, in consultation with the Secretaries, conducts another screen to determine which of these high priority projects should go to the next phase, review by a project team.

• The project teams have interagency participation, consisting of representatives from DPB, DGS, the requesting agency, legislative money committees, and, if applicable, SCHEV.

• The project teams determine:

• The project teams provide (1) an excellent forum to convey and discuss the project's construction characteristics, and (2) a much quicker way to resolve questions or problems than written correspondence which was the primary means of communications used before the inception of project teams.

• The project teams discuss and evaluate options.

• The project teams are designed to continue throughout the life of the project.

• Important component of central agency review

• Agencies provide estimates of the start-up and on-going costs necessary to run and maintain the facility as well as any costs for new or expanded programs and activities that will be housed in the additional or renovated space.

• Revenue bond projects must undergo a financial feasibility study and be certified by the Governor prior to their appropriation and issuance of debt.

• The review of the agency six-year capital plans culminates with the development of the statewide six-year capital plan.

• The plan shows the reader how the Commonwealth is investing in capital projects, why it is doing so, and what lies ahead.

• The current six-year plan is the third such plan produced -- the first was published in 1992. These six-year plans represent a major component of the Commonwealth's efforts to integrate long-range planning into fiscal decisions.

• The current capital plan for 1998-2004 includes all capital projects recommended in the executive budget for the 1998-2000 biennium and identifies higher priority projects for the remaining four years.

• The number of projects is limited to hold dollar requirements to a reasonable level consistent with the Commonwealth debt capacity.

• Agencies must explain major modifications to their plans, such as why an unfunded high priority project in one plan is not included in the next six-year plan, or why a high priority project has been shifted to a lower priority.

Ongoing requirement to identify and assess capabilities

• The Department of Accounts or, in some cases, individual agencies maintain a fixed asset accounting and control system (FAACS) for all land, buildings and equipment valued at more than $5,000. These systems are updated as assets are added or deleted and, in all cases, inventories are current as of June 30 for financial reporting purposes.

• DGS collects data on the gross square footage, overall functional use, general type of construction, and age of structure.

• Since the 1960s, SCHEV and Virginia's colleges and universities have maintained a room-by-room and building-by-building inventory of space. This includes building replacement value and a general evaluation of building quality.

• VDOT maintains a comprehensive inventory of highway system assets including roads, bridges, culverts, tunnels, signs, and signals.

• After the Governor approves project initiation, the central budget agency employs several techniques to monitor and control the expenditure of capital funds.

• First, DPB limits agency access to appropriated funds. Initially, DPB allots about 75 percent of the amount budgeted for architectural and engineering fees to allow the preparation of plans from which bids can be prepared. Once the construction contract is awarded, DPB allots up to the bid amount and adds usually no more than five percent of the construction contract for contingencies. To access the remaining appropriated funds, the agency must justify the need for additional dollars.

• Second, as part of year-end close activities, DPB reviews the status of existing projects to identify any unexpended or unobligated funds that can revert. A similar review is conducted in the fall during budget development.

• Central agency approval is required at various project design and construction milestones.

• DGS monitors project performance to assess adherence to project cost estimates and the elapsed time from project approval to building occupancy.

Categories of Capital Projects
 

Virginia breaks its capital projects into four categories:

• Acquiring property
• Improvement
• Equipment
• New construction

Definition. Acquisition of any interest in land, including improvements of any kind located on the acquired land, except certain utility easements.

Criteria. All acquisitions of real property are subject to the capital project proposal process. This includes capital leases as defined earlier in the instructions. Donations of real property are addressed in the Department of General Services' Directive No. 1 Revised, Real Property Management, dated June 20, 1984.
 

New Construction

Definition. A new construction project is a single undertaking involving construction of one or more facilities. Included in the project are: all work necessary to accomplish a specific purpose and produce a complete and usable new structure; the associated architectural and other technical services; the equipment installed and made part of the facility; and site development and improvements. New construction includes:

• Construction of or site work for a new plant, including the erection, installation, or assembly of a new building, structure, or utility system.
• Any addition, expansion, or extension to a structure that adds to its overall exterior dimensions.
• Complete replacement of a facility that, because of age, hazardous conditions, obsolescence, structural and building safety conditions or other causes, is beyond the point where it may be economically repaired or renovated and can no longer be used for its designated purpose.

• It creates additional building space of 5,000 square feet or greater (this does not apply to site development or building systems projects);
• It has a total project cost of $250,000 or greater; or
• It is acquired through a lease with options to purchase or any other alternative financing approach.

 

Definition. An improvement is defined as all work necessary to produce a complete and usable change to an existing facility or structure, including the associated architectural and other technical services, the fixed equipment installed and made part of the facility or structure, and site development. Improvements include:

• Alteration of interior space arrangement and other physical characteristics, such as utilities, so that the structure may be more effectively used for its present designated functional purpose.
• Conversion of interior arrangement and other physical characteristics, such as utilities and fixed equipment installed on and made a part of the facility or structure, so that an existing structure may be effectively utilized for a new functional purpose.
• Renovation of most or all of a facility or structure or an existing mechanical system to comply with current code requirements or to modernize it so that it may be more effectively used for its designated functional purpose.
• Restoration of a facility or structure to the maximum extent possible to its former or original state (historic property).
• Relocation from one site to another of a facility or structure either by moving it intact or by disassembling it and subsequently reassembling it.
• Major repair to restore a facility, mechanical system, or utility system to a condition that allows it to continue to be appropriately used, including the reprocessing or replacement of parts or materials that have deteriorated by action of the elements or "wear and tear" in use.

Equipment

Definition. Equipment is a tangible resource of a permanent or long-term nature used in an operation or activity.

Criteria. No precise criteria exist for the funding of equipment purchases as a stand-alone capital project. Consult with your DPB analyst to determine whether an equipment purchase should be requested in the capital budget. All equipment associated with projects defined as new construction or improvements must be included in the capital budget for these projects. If the equipment is to be financed by revenue bonds, it must be requested in the capital budget.

Funding for capital expenditures summarized
by funding option
 

	1992-94  $ in millions	1994-96  $ in millions	1996-98  $ in millions
Current Revenues	291.3	405.4	461.3
Debt Financing	1,374.0	599.6	500.3
TOTAL	$1,665.3	$1,005.6	$961.6

 
1.    Figures may not add due to rounding.
2.    Current revenues consist of general fund dollars, special funds, higher education operating
       funds, Commonwealth transportation funds, trust & agency funds, dedicated special funds,
       federal trust funds, internal services fund, and enterprise funds.
3.    Represents tax-supported debt authorized during the biennium

Source: Department of Planning and Budget and the Department of the Treasury

Biennial Budgeting: Key dates for the six-year capital budget submissions
 

April Odd # Years	Agencies notified of which high priority projects in existing six-year plan to prepare detailed narrative justifications and schematic information.
May to August Odd # Years	Agencies conduct issue assessments and revise strategic plans.
May Odd # Years	Agencies submit six-year capital requirements including maintenance reserve requests and capital leases.
June Odd # Years	Agencies submit detailed information for high priority projects authorized in April.
July Odd # Years	Agencies (1) notified of other projects in their May six-year plan to prepare detailed narrative justifications and schematic information and (2) submit information on existing capital leases.
August Odd # Years	DPB validates maintenance reserve subprojects that meet criteria.
Sept. Odd # Years	Agencies submit (1) detailed information for projects authorized in July, (2) annual maintenance reserve plan, and (3) financial feasibility studies for revenue bond projects.
Dec Odd # Years	Governor submits executive budget to the General Assembly.
April Even # Years	Biennial Budget enacted, effective July 1.
Fall Even # Years	Agencies submit capital requests for emergency projects or to supplement projects that have been bid but have insufficient funds.
Dec Even # Years	Governor submits executive budget amendments to the General Assembly.
March Odd # Years	Amendments to biennial budget enacted, effective upon passage.

 

Debt authorization by category, 1982-1997