CAPITAL OUTLAY VERSUS STATE OPERATIONS AND LOCAL ASSISTANCE - 6803

(Revised: 04/2025)

 

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.  Support appropriations cannot be used to fund capital outlay projects, except as noted below.

Infrastructure management uses all three characters of appropriation, depending on the activity. The general rule is that the acquisition/construction/renovation of real property is classified as capital outlay when the state holds or has the equivalent of fee 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 leases, such as capitalized leases, are funded as state operations, but result in a capital acquisition. As used in this chapter, the term capitalized assets covers both traditional capital outlay as well as capitalized leases.

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 support funds to be encumbered for preliminary plans, working drawings, performance criteria, construction, or design build of any project for the alteration of a state-owned facility upon Finance Approval (Section 6.00 does not apply to leased facilities). This Section includes thresholds for overall project costs and for Legislative notification.

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.

Capital outlay: is the expenditure of funds for the acquisition of land or other real property, construction, improvements, design, and equipment necessary in connection with a construction or improvement project. Administratively, capital outlay consists of:

1. Any real property acquisition, new construction, or demolition.
2. Any renovation or addition to a state-owned facility that changes capacity or functionality.
3. Fixed and movable equipment associated with a capital outlay project.
4. A capitalized lease agreement (Section 6836). Although the actual lease payments will be budgeted in state operations, the transaction is a capitalized assets acquisition because equity is built as payments are made.
5. Exercising a purchase option on a lease. This action transfers ownership to the state, and would be considered an acquisition of real property.

State operations: The following facility-related expenses are classified as state operations:

1. Projects to acquire or replace equipment that is not associated with a capital outlay project.
2. Standalone special repairs and deferred maintenance projects include projects that extend the useful life of a facility, but do not change functionality or capacity. Examples include, but are not limited to, repainting; re-roofing; electrical rewiring; plumbing repairs; heating, ventilation, and air conditioning system replacement; dredging of river or stream beds to restore original flow capacity; replacing old equipment items; and road repairs.
3. Relocation costs, such as swing space and moving expenses, whether or not related to a capital outlay project. Exceptions to this must be approved by Finance.
4. Lease or rental costs and associated budget requests.
5. Projects to abate hazardous materials or remove architectural barriers (e.g., Americans with Disabilities Act compliance).
6. Projects funded via Section 6.00 of the Budget Act.

Local assistance: 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.