One of the most often neglected areas of water and sewer utility operations is long-range planning for capital needs. In accounting terms an expense item is generally something that is considered consumed shortly after its purchase. Examples are office supplies, hand tools, and nuts and bolts. Capital purchases or projects are larger, more expensive items that have a longer useful life. If you install 2,000 feet of new sewer line you expect that line to last for several years. The cost of the line and its installation would not be expensed on the statement of revenues, expenses and changes in net position, but would be recorded as a capital item on the statement of net assets. At the end of the financial year capital items are recorded as a part of the utility plant and are then depreciated over their useful life.
City water and sewer utilities should develop a plan for capital needs for the next four to five years. This will help to accomplish several things:
- The city will have a plan for the orderly replacement of equipment and utility infrastructure;
- This plan will help the city provide necessary funding for the projects; and
- The plan will allow the city to prioritize its needs and schedule the work.
The capital budget should be viewed as a tool for the city to use and revise as needed. It will need to be updated on an annual basis. The capital budget also helps the city demonstrate to ratepayers where revenue dollars are being used to improve water and sewer operations.