What Is Capital Projects Fund?
A capital projects fund is a type of governmental fund used by state and local governments to account for financial resources designated for the acquisition or construction of major capital facilities. These facilities include public infrastructure such as roads, bridges, schools, public buildings, and other long-lived assets. As part of governmental accounting, specifically within the realm of fund accounting, the capital projects fund ensures that resources allocated for large-scale construction or acquisition initiatives are tracked separately and transparently. This distinct fund serves to demonstrate accountability for how public money is spent on these significant, often multi-year, projects.
History and Origin
The framework for governmental accounting, including the use of funds like the capital projects fund, has evolved over time to ensure transparency and accountability in public finance. The Governmental Accounting Standards Board (GASB), established in 1984, is the primary independent, private-sector organization that sets generally accepted accounting principles (GAAP) for U.S. state and local governments. Before GASB's establishment, various entities influenced governmental accounting standards, with a formal process beginning in 193312, 13, 14. A significant development in governmental accounting standards occurred with GASB Statement 34, issued in 1999, which introduced requirements for reporting general government infrastructure, further solidifying the need for dedicated funds like the capital projects fund to track and report on such assets10, 11. The ongoing need for infrastructure development in the United States, often financed by municipal bonds, underscores the continued relevance of these funds.7, 8, 9
Key Takeaways
- A capital projects fund is a governmental fund used by state and local governments for major capital expenditures.
- It tracks financial resources dedicated to the acquisition or construction of long-lived public assets.
- This fund promotes transparency and accountability in public finance for large-scale projects.
- It operates on a modified accrual basis of accounting, focusing on current financial resources.
Interpreting the Capital Projects Fund
The capital projects fund provides a clear picture of the financial activity related to a government's long-term investments in infrastructure and other substantial assets. When reviewing a government's financial statements, the balances and transactions within a capital projects fund indicate the progress and funding status of major construction or acquisition endeavors. A healthy balance may suggest adequate funding for ongoing projects, while a deficit could signal potential funding shortfalls or delays. Analysts and citizens can assess the efficiency of public spending and the government's commitment to developing its [fixed assets] by examining the inflows, such as [bond proceeds] or intergovernmental grants, and outflows, such as [construction costs] and other project-related expenses. The fund's activity reflects a government's capital improvement plan and its ability to execute on large-scale initiatives.
Hypothetical Example
Imagine the City of Glendale decides to build a new public library. The estimated cost for the project, including land acquisition, construction, and initial outfitting, is $20 million. To fund this, the city issues $15 million in [general obligation bonds] and receives a $5 million grant from the state.
The City of Glendale establishes a capital projects fund for the new library.
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Initial Funding:
- Cash from bond proceeds: $15,000,000
- Cash from state grant: $5,000,000
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Expenditures during construction (Year 1):
- Payments for land acquisition: $2,000,000
- Payments to construction contractors: $8,000,000
- Payments for architectural fees: $500,000
At the end of Year 1, the capital projects fund would show:
Revenues and Other Financing Sources:
Bond Proceeds: $15,000,000
Intergovernmental Grant: $5,000,000
Total Inflows: $20,000,000
Expenditures:
Land Acquisition: $2,000,000
Construction: $8,000,000
Architectural Fees: $500,000
Total Outflows: $10,500,000
Change in Fund Balance: $20,000,000 - $10,500,000 = $9,500,000
This remaining fund balance would be carried forward to subsequent years to cover the remaining construction and outfitting costs until the project is complete. This segregation allows for clear financial tracking of the specific project.
Practical Applications
Capital projects funds are essential in various real-world scenarios for governmental entities. They are widely used for financing and accounting for significant public works, such as the construction of new schools, the expansion of transportation networks like roads and bridges, and the development of water and sewer systems. For instance, local governments frequently use these funds when issuing [municipal bonds] to finance large infrastructure improvements, which represent a substantial portion of state and local capital spending.5, 6
Moreover, these funds play a critical role in managing grants received from higher levels of government for specific capital endeavors, ensuring that these restricted resources are utilized solely for their intended purpose. The process of federal permitting for major infrastructure projects, while often lengthy, highlights the scale and financial commitment these projects entail, further necessitating distinct accounting mechanisms like the capital projects fund.3, 4 Such funds are fundamental for transparently tracking the acquisition and construction of [capital assets] that serve the public good.
Limitations and Criticisms
While capital projects funds are vital for governmental accountability, they are not without limitations. One primary criticism stems from the modified accrual basis of accounting they utilize, which focuses on current financial resources and expenditures rather than the full economic cost of a project. This can sometimes lead to a less complete picture of a project's long-term financial implications, such as ongoing [maintenance costs] or depreciation. Furthermore, the discrete nature of fund accounting can sometimes make it challenging to gain a consolidated view of a government's overall financial health, as resources are compartmentalized into various funds like the [general fund] or [special revenue funds].
Another challenge relates to the sheer complexity and often protracted timelines of large capital projects, particularly in public infrastructure. Issues such as permitting delays and cost overruns can significantly impact the financial integrity of a capital projects fund. For example, extensive "red tape" and legal challenges in federal permitting processes can lead to substantial delays and increased costs for projects, even those with significant funding, as highlighted by discussions around infrastructure challenges and regulatory hurdles.1, 2 These external factors can strain the financial resources within a capital projects fund and necessitate adjustments to a government's [budgetary control].
Capital Projects Fund vs. Enterprise Fund
The distinction between a capital projects fund and an [enterprise fund] lies primarily in the nature of the activities they account for and their respective accounting bases.
| Feature | Capital Projects Fund | Enterprise Fund |
|---|---|---|
| Purpose | Accounts for financial resources to acquire or construct major capital facilities. | Accounts for activities that operate like commercial enterprises, providing goods or services to the public for a fee. |
| Focus | Specific, often temporary, projects (e.g., building a new school). | Ongoing, self-supporting operations (e.g., water utility, public transit system). |
| Revenue Sources | Bond proceeds, grants, special assessments, transfers from other funds. | User charges, fees for services, debt specifically backed by enterprise revenues. |
| Accounting Basis | Modified accrual basis (focus on current financial resources). | Full accrual basis (focus on economic resources, including depreciation and long-term liabilities). |
| Financial Statements | Statement of Revenues, Expenditures, and Changes in Fund Balance; Balance Sheet. | Statement of Net Position; Statement of Revenues, Expenses, and Changes in Net Position; Statement of Cash Flows. |
While a capital projects fund is established for a finite period until a project is completed, an enterprise fund typically operates continuously, much like a business. Confusion can arise because both may deal with capital assets; however, the capital projects fund focuses on the creation of these assets for general governmental use, whereas an enterprise fund focuses on the operation and maintenance of assets that generate revenue for a specific, self-sustaining service.
FAQs
What types of projects are typically financed by a capital projects fund?
Capital projects funds are typically used for large-scale, long-lived public assets. This includes the construction of schools, hospitals, police and fire stations, roads, bridges, water treatment plants, and other significant [public works].
How are capital projects funds generally financed?
Capital projects funds are commonly financed through sources such as the issuance of [general obligation bonds] or revenue bonds, intergovernmental grants from state or federal agencies, dedicated property taxes or other local revenues, and transfers from a government's [general fund].
Do capital projects funds use accrual accounting?
No, capital projects funds primarily use the modified accrual basis of accounting. This means they focus on measurable financial resources and expenditures. Long-term assets are not depreciated within the fund itself, nor are long-term liabilities, such as the bonds used to finance the project, recorded there. These are generally accounted for in the government-wide financial statements.
What happens to a capital projects fund after the project is complete?
Once a capital project is completed and all associated expenditures have been made, the capital projects fund is typically closed out. Any remaining cash balance is usually transferred to another fund, such as a [debt service fund] to pay off related bonds, or to the general fund if permitted. The completed capital asset is then recorded in the government's government-wide financial statements.
How do capital projects funds ensure accountability?
Capital projects funds enhance accountability by segregating financial resources and expenditures for specific large projects. This allows for clear tracking of how public funds are raised and spent on designated capital improvements, enabling oversight by citizens, auditors, and legislative bodies. This financial transparency is crucial for maintaining [public trust].