SAM—BUDGETING
OVERVIEW OF CAPITALIZED ASSETS6801
(Revised 5/98)
The Capitalized Assets sections of SAM reference policies and procedures on budgeting and financial administration of capital outlay projects and—more broadly—on programs for capitalized asset financing. These sections are divided into five parts:
- An overview of capital outlay and capitalized asset financing (SAM Sections 680–6809);
- Budgeting capital projects (SAM Sections 6810–6839);
- The administrative approval process for implementing acquisition, planning, design, construction, and equipping of capital projects (SAM Sections 6840–6868);
- Long-term financing of capitalized assets (SAM Sections 6870–6888); and
- Glossary and cross-index of capital outlay terminology, acronyms, and forms (SAM Section 6899).
The Department of Water Resources for the State Water Project and the Department of Transportation for highway-related projects are not subject to the instructions contained in this chapter. In addition, this chapter does not address projects undertaken with funds not subject to legislative appropriation, such as higher education’s housing, student union programs, and other auxiliary organizations.
As used in this chapter, the term capitalized assets refers to all processes which may result in the acquisition, new construction, alteration, renovation or betterment of real assets, regardless of character of appropriation for the expenditure. This includes capital outlay projects and budget change proposals, certain leases that meet the definition of a capitalized lease, long-range plans for infrastructure, and financing of projects and capitalized leases.
The term capital outlay refers to a subset of these activities, funded specifically under the capital outlay character of appropriation. See Section 6806 for a discussion of characters of appropriation.
CAPITALIZED ASSETS: WHO DOES WHAT6805
(New 5/98)
The client department, the State Public Works Board (PWB), the Department of Finance (DOF), the Department of General Services (DGS), the Pooled Money Investment Board (PMIB), and the State Treasurer’s Office (STO) all may perform key roles in carrying out an infrastructure program.
1.The client department manages the programs for which infrastructure acquisition, construction or improvement is a supporting activity. The department identifies program needs in a strategic plan, determines the related infrastructure requirements, prepares a five-year capitalized assets plan, prepares individual capital outlay budget change proposals, works with DOF and DGS to budget and implement the plan, and may work with PMIB and STO to provide interim and long-term financing for the project. At all stages of a capital outlay project or a capitalized lease project, the client department is responsible for justifying program needs, keeping the project within scope and cost, and meeting administrative requirements set forth in statute and SAM. Some departments have the authority to design and construct projects, exclusive of the control or oversight of DOF, PWB and/or DGS.
2.DOF reviews capital outlay budget change proposals (COBCPs) for inclusion in the Governor’s Budget, reviews legislation proposing capital outlay projects and capitalized leases, has authority to adjust the scope of projects subject to legislative reporting requirements, chairs and provides staff to PWB in that board’s oversight of project implementation, and has delegated authority from PWB to carry out certain of the board’s tasks. DOF also participates in bond sales activities for capital outlay and capitalized lease projects.
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CAPITALIZED ASSETS: WHO DOES WHAT6805 (Cont. 1)
(New 5/98)
3.PWB acquires property for the state, must approve the preliminary plans for capital projects, may set reasonable conditions for any project, and may issue debt instruments and authorize interim financing to construct facilities. PWB ensures that projects remain within legislatively approved scope and cost and are carried out with speed and diligence. The board has authority to augment projects by up to 20 percent, subject to legislative notification requirements and may terminate projects. In addition, the board holds the power of eminent domain (condemnation authority) for most projects. An overview of PWB’s role and responsibilities is presented in SAM Section 6842.
4.DGS has broad authority for real property acquisition, sales, statewide property inventory, and energy efficiency services for state and K-14 school facilities. Its services are offered on a reimbursable basis. DGS determines whether departments are capable of carrying out minor projects directly. DGS is also staff to PWB for property acquisition and energy efficiency contracts.
5.PMIB has the authority to grant requests for Pooled Money Investment Account loans for projects needing interim financing before bonds are sold. Additional information on PMIB’s processes is provided in Section 6878.
6.STO is the state’s official agent for the sale of debt instruments. STO chairs PMIB and sits as a member on PWB. In addition, STO provides (or makes arrangements for) trust services for debt issuances. As agent for sale, STO holds the exclusive right to select financing teams for issuances. STO’s agent-for-sale role includes all debt financings of joint powers authorities, regardless of whether the state is a member of the authority. Additional information on STO’s role is provided in Sections 6870–6888.
CAPITAL OUTLAY VERSUS STATE OPERATIONS AND LOCAL ASSISTANCE6806
(Revised 5/98)
The state appropriates funds in three broad classifications—state operations (support), local assistance, and capital outlay—referred to as the character of appropriation. Unless statutory language specifically allows otherwise, once budgeted as one of the three characters, a program or activity must follow that classification’s expenditure rules.
Infrastructure management uses all three characters of appropriation, depending on the activity. The general rule is that the acquisition/creation/renovation of real assets is classified as capital outlay if the state holds ownership. Operation and maintenance of state real assets is classified as state operations. State-funded but locally-owned infrastructure is classified as local assistance.
Certain types of leasing activities—called capitalized leasing—which are funded as state operations can also result in a capital acquisition. As used in this chapter, the term capitalized assets covers both traditional capital outlay as well as capitalized leasing. (Reminder: Capitalized assets are to be reported to the DGS Statewide Property Inventory [SPI] Unit for inclusion in the SPI.)
Exception to the prohibition against using support funds for capital outlay: Section 6.00 of the Budget Act provides a limited exception to the rule that support funds may not be used for capital outlay purposes. This section allows up to $35,000 of support funds to be encumbered for preliminary plans, working drawings, or construction of any project for the alteration of a state-owned facility (Section 6.00 does not apply to leased facilities). This amount may be exceeded only if:
1.DOF determines the proposed alteration is critical and the use of a higher level of support funds is necessary; and
2.The maximum cost of the project does not exceed $250,000.
DOF must notify the Legislature not less than 30 days in advance when approving more than $35,000 in support funding for a capital project. Section 6807 on minor capital outlay describes the approval process for projects of more than $35,000.
Guidelines for determining character of appropriation: The following discussion and table are intended as a guide to assist departments in determining whether an activity should be budgeted as capital outlay, support, or local assistance.
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CAPITAL OUTLAY VERSUS STATE OPERATIONS AND LOCAL ASSISTANCE6806(Cont. 1)
(Revised 5/98)
Capital outlay: Section 3.00 of the Budget Act defines capital outlay as “acquisition of land or other real property, major construction, improvements, equipment, designs, working plans, specifications, repairs, and equipment necessary in connection with a construction or improvement project” (emphasis added). Administratively, capital outlay is defined as:
1.Any real property acquisition or new construction.
2.Any alteration, renovation, addition or betterment (including interior asbestos removal/remodeling) which extends the design life or alters/upgrades the function of a structure.
a.This does not include repairs and maintenance, which are intended to keep a facility functional at its designed level of services and life expectancy.
- “Alteration” means any modification of existing space (buildings, structures or other facilities) that changes the use as to function, layout, capacity, or quality. Typical alterations include demolition of fixed partitions and/or construction of new fixed partitions or initial installation of carpeting and movable partitions. However, there are two instances in which alterations may be done with state operations funding:
(1)In a leased space situation, the landlord generally makes the alterations and amortizes them through the lease. The lease, including increases for amortized alterations or lump-sum payment for alterations, is a state operations expense subject to the support budget review process; and
(2)As noted in preceding text, Section 6.00 of the Budget Act allows the use of the support appropriation for alterations, within specified limits.
- “Betterment” means any modification that increases the designed level of services or life expectancy of a facility or other state infrastructure (e.g. seismic improvements, upgrades, etc.).
- Fixed and movable equipment needed for initial occupancy of a new facility or space, but usually only if the new facility is not replacing an existing facility (see 6806 Illustration). Fixed equipment is referred to as Group 1 equipment, and movable equipment is referred to as Group 2 equipment (Section 6855).
- A lease-purchase (installment payment) agreement because equity is built as payments are made. Although the actual lease payments will be budgeted in state operations, the transaction is a capitalized assets acquisition.
All planned lease-purchases, whether authorized through the budget or special legislation, must be included in the department’s five-year capitalized assets plan. If the lease-purchase will be authorized through the Budget Act, a COBCP is required to verify economic benefits, whether or not there is a related support BCP for lease costs. (For lease-purchase agreements authorized through special legislation, DOF may require information similar in content to a COBCP at the proposed legislation stage.) These requirements apply to lease-purchases for state infrastructure financed through a joint powers authority, another level of government, or a private developer (Sections 6818 and 6820).
5.Both the request for, and the exercise of, a purchase option. A lease with a purchase option gives the state the right, during the course of the lease, to purchase the asset for a predetermined price, if desired, which is a capital outlay acquisition. Adding a purchase option in a lease agreement is considered initiating a potential capital outlay acquisition. Although the lease payments prior to the exercise of the option are classified as state operations, the potential acquisition must be tracked as part of the department’s overall capitalized asset plan. Therefore, if authorization is sought through the Budget Act, anticipatedpurchase options and their exercise must both be presented for review as COBCPs, subject to dollar thresholds noted in Sections 6818 and 6820. Regardless of method of authorization, the planned use of purchase options must be included in the department’s five-year capitalized assets plan.
6.Generally, the following are not considered as capital outlay: relocation (including temporary “swing space” while a project is under construction) and moving expenses, although DOF may authorize moving expenses as a capital outlay cost on an exception basis.
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CAPITAL OUTLAY VERSUS STATE OPERATIONS AND LOCAL ASSISTANCE6806(Cont. 2)
(Revised 5/98)
State operations: The following facility-related expenses are classified as state operations:
- Equipment not included in the complement necessary for initial operation of a new construction or renovation project.
- Movable equipment for new employees or new programs that are not part of a capital outlay project. (Such equipment is budgeted as an operating expense in the department’s support budget when the positions or programs are authorized.)
- Replacement equipment items (regardless of amount).
- Repair projects, including special repairs, not connected with a construction or improvement project. Examples of special repair projects include repainting, re-roofing, electrical rewiring, plumbing repairs, dredging of river or stream beds to restore original flow capacity, replacing old equipment items, and road repairs. (Regardless of amount, “special repairs” are budgeted in the client department’s state operations appropriation.)
- Maintenance, including deferred maintenance. Maintenance is budgeted as “facilities operations” in the client department’s operating expense schedule.
- Relocation—including temporary “swing” space—and moving expenses, whether or not related to a capital outlay project. (However, DOF may authorize exceptions to this rule.)
- Lease or rental costs, and any associated budget requests. (However, as noted in the preceding text, capitalized leasing must be reflected in the five-year capitalized asset plan and COBCPs are required under specified conditions per Section 6818.)
- Generally NOTalterations in state-owned buildings, except as provided in Section 6.00 of the Budget (see preceding). In leased facilities, support funds may be used for alterations.
Local assistance is: The following infrastructure-related expense is classified as local assistance:
- Grants to local agencies for the operation, maintenance, and acquisition or development of facilities or land, provided the local entity retains ownership after completion of the project.
Page 6806 ILLUSTRATIONDISTINCTION BETWEEN CAPITAL OUTLAY AND STATE OPERATIONS
STATEOPERATIONS / CAPITAL OUTLAY
DESCRIPTION OF PROJECT 1/ / OPERATING EXPENSES AND EQUIPMENT / PROJECT LEVEL MINOR PROJECTS / PROJECT LEVEL MAJOR PROJECTS
Construction projects:
New construction, alteration 2/ ,extension or betterment of existing structure.
(Construction projects include necessary Group I fixed equipment.) / If $250,000 or less and
scheduled as minor
projects in Budget Act3/ / In excess of
$250,000 3/
Repair and maintenance projects:
Repair and maintenance projects that continue the usability of a facility at its designed level of services / Irrespective of amount
Equipment (Group II, movable) projects (Section 6855):
- If related to a specific construction project.
- New equipment to meet program needs and not related to a construction project; replacement of existing equipment even though the new equipment is to be used in a new facility.
Purchase of land and/or facility/structure:
Including related costs such as condemnation and court costs, legal fees, and title reports etc. / Irrespective of amount
Capitalized leases of real property: All leases which build equity as payments are made. (Section 6818):
- Lease-purchase
- A lease with purchase option agreement or amend an existing lease to add a purchase option
- Any other capitalized lease per Section 6818
Operating leases of real property: Pure leases that do not build up equity as payments are made (Section 6876). / Irrespective of amount
Exercise of purchase option for currently rented or leased space (Section 6820) / Irrespective of amount
Relocation and moving costs
- Unrelated to a specific construction project.
- Related to a specific construction project.
Irrespective of amount 4/
Technical assistance/consultants
This may include studies, master planning, feasibility studies, program management, and budget packages. / Depends on timing and nature/scope of activities. / Budget packages are generally capital outlay; other studies and assistance depend on timing and nature/scope of activities.
1/ State-funded but locally-owned infrastructure is classified as local assistance.
2/ Control Section 6.00 allows the use of limited support appropriations for the alterations of state-owned facility.
3/ See Public Contract Code Section 10108.5 for exceptions.
4/ DOF may authorize exceptions to this rule.
MINOR CAPITAL OUTLAY 6807
(Revised 5/98)
Minor capital outlay is any project under $250,000 (except an acquisition project) which is scheduled in the Budget Act specifically under the heading “minors.” However, Resources Agency capital outlay projects of up to $500,000 may be proposed as minor projects with the concurrence of DOF (Public Contract Code 10108.5). The $250,000 limit does not apply to district agricultural associations or the State Lands Commission.
Important budgeting points include:
- Per Section 3.00 of the Budget Act, the term minor projects includes planning, working drawings, construction, improvements, and equipment projects not specifically set forth in the budget schedule. It does not include any acquisition project, regardless of amount.
- Minor projects are generally scheduled together as a single “project” and must be labeled as “minors” in the client department’s capital outlay Budget Act item. Any project not scheduled specifically as a minor project, regardless of amount, is a major project. (The decision on how to propose scheduling the project rests with DOF.)
- DGS may delegate the authority to client departments to carry out a minor project directly, pursuant to the Public Contract Code Section 10808 and 10808.5.
- Per Section 2.00 of the Budget Act, the period of appropriation availability for minor projects is one year, followed by a two-year liquidation period. (Major projects, on the other hand, have a three-year appropriation availability.)
- A minor project is not subject to PWB oversight, and by practice PWB does not augment projects which are not subject to its approval processes.
- DOF may increase the approved amount of a minor capital outlay project through a redirection within the minor program if the project is not scheduled individually and the amount of the increase does not result in a project of over $250,000. Substitution of minor projects is permissible with DOF concurrence, provided the project being replaced is not scheduled individually. Substitutions are based on critical need.
- Minor projects may be subject to the California Environmental Quality Act (CEQA) as described in Section 6850.
- Minor capital outlay proposals are due to DOF by July 1 of each fiscal year. Each proposed project must be submitted in the format for major projects outlined in Section 6818.
- Reappropriation of minor projects is not generally permitted. Minor projects should therefore be projects where all funds can be encumbered in one year.
- It is not permissible to “piecemeal” larger projects through several minor projects.
Minor projects created through Section 6.00 of the Budget Act: Asdescribed in Section 6806, a minor project may be created for alteration of a state facility using support funds, subject to DOF approval when the total project amount is between $35,000 and $250,000. When DOF approval is required, the request must be accompanied with all the information required in a COBCP (Section 6818). The request must be submitted at least 60 days in advance of proposed project implementation (30 days for DOF to review the request and notify the Legislature; 30 days for the Legislature’s review), and no later than April 30 of each year. (Submit copies of the request to both the DOF support analyst and the Capital Outlay Unit, along with any related Form 22 for transfer of funds to DGS’ Architecture Revolving Fund.)