The state appropriations limit (SAL) restricts how the state can use revenues that exceed a specified threshold. One important SAL exclusion is qualified capital outlay. Generally, this exclusion gives policymakers more control over how funds are spent. In this post, we provide our view on some commonly asked questions about the statutory definition of capital outlay for SAL-related purposes.
The State Appropriations Limit. The SAL restricts how the state can use revenues that exceed a specified threshold. Under this requirement, each year the state must compare the appropriations limit to appropriations subject to the limit itself. Appropriations subject to the limit are calculated by taking proceeds of taxes and reducing them by excluded spending.
Statutory Definition of Qualified Capital Outlay. One important SAL exclusion is qualified capital outlay. Generally, this exclusion gives policymakers more control over how funds are spent. The constitution defers the definition of capital outlay for SAL-related purposes (“qualified capital outlay”) to state statute. As such, Government Code Section 7914 defines qualified capital outlay as: “an appropriation for a fixed asset (including land and construction) with a useful life of 10 or more years and a value which equals or exceeds one hundred thousand dollars ($100,000).” Because this statute is fairly broad, often there are questions about how it should be interpreted in certain cases. While some new proposals and existing spending meet this threshold without question, there are other more ambiguous cases. In this post, we provide our view on some commonly asked questions about interpreting this provision.
What Is a “Fixed Asset?” The statute does not define the term fixed asset, although it does give land and construction as examples of included components. In accounting and finance, the term refers to a business’ long-term tangible property (as opposed to intangible property, like a trademark). As such, there are many types of properties that clearly meet this definition, including: buildings (such as houses, office buildings, and school buildings), land (including undeveloped land, such as parks), highways, roads, and bridges. There are also some properties that appear to meet the definition, although perhaps less clearly, like information technology projects.
Does the State Need to Own the Asset to Count It as an Exclusion? No, nothing in statute requires the state (or, indeed, an entity of government) to own an asset for it to be counted as an exclusion.
Do Expenditures for Maintenance or Deferred Maintenance Count as Exclusions? Yes, as long as the expenditure is maintaining an asset that meets the criteria (that is, the asset is tangible property and has a useful life of ten years and a value of at least $100,000). Statute requires an expenditure to be made “for” a fixed asset. We think reading this definition fairly broadly is reasonable. As such, maintenance or deferred maintenance—which extend the useful life or increase the value of the asset—can be considered excluded under SAL. Purchases that improve an asset can include, for example, heat and cooling systems, lighting, windows and window treatments, and elevators and lifts. Similarly, maintenance of assets, like the labor costs for making repairs, also can be excluded as long as the underlying asset meets the criteria above. However, we would not consider purchases of equipment or personal property that do not improve the underlying asset excludable. Such purchases include, for example, furniture and computers. Similarly, we would not consider operations costs (that do not improve an asset) as excludable.
Do Purchases of Assets Count if a Single Unit is Worth Less Than $100,000, Even if the Value of the Total Purchase Is Greater? In some cases, the state might purchase a group of assets (for example, multiple tiny homes or a fleet of vehicles) where each individual purchase (a tiny home, including the land it sits on, or a vehicle) is worth less than $100,000, but the value of the entire purchase is much greater. In these cases, we think the relevant question is whether the group of units as a whole is the asset or each individual unit is the asset. In the case of tiny homes, there is an argument that if the tiny homes are part of a single plot of land or single development they—as a group—could be excludable. If the homes were scattered throughout a city, however, we think the argument is more tenuous. For this reason, in the case of vehicles, we think a vehicle represents an asset—not a fleet—and so the value of an individual vehicle must exceed $100,000 in order to count as an exclusion.
Do Services Provided in Conjunction With Purchases of Capital Outlay Count as Exclusions? No, services that are provided with the purchase of capital outlay, like supportive services provided with the construction of housing or operations costs associated with state transit services, would not count as exclusions.