Implementation of an urban public realm can be divided into two discrete but inter-related parts. First, to substantially rehabilitate or create a new public facility requires funding for planning, design, and construction of the “capital project.” Second, once built, that new or renovated public facility will require ongoing annual funding to support operations, maintenance, and programming – the “operating budget” – for many years to come and, effectively, in perpetuity.
What is a “Capital Project?”
A design and construction project – for a building, a road, or a park, or a plaza – is usually called a “capital project.” A capital project is a big, costly, one-time project that, once completed, should result in a durable facility, improvement, or asset that will have a long “usable life” and provide benefits to the public for many years to come. “Usable life” may mean 20 or 30 years when it is associated with the term of the loan (bonds) used to finance it but in many cases a facility lasts much longer. Minneapolis City Hall, for example, is over 100 years old and although it receives capital investment from time to time in the form of plumbing and mechanical upgrades, new office layouts, and so forth, the overall building has had a very long usable life and should last another 100 years.
A capital project may be an all-new project or the rehabilitation or “recapitalization” of an existing facility. Capital projects include city office buildings, police and fire stations, parks, plazas, roadways, water, and sewer infrastructure. The term “capital project” is also used in the private sector, where a typical capital project might be a factory, office building, warehouse, or distribution center.
Because it will provide benefits over that long usable life, a capital project is usually funded primarily with debt or borrowing – using the proceeds from the sale of bonds. The bonds are repaid over a fixed period of time – for example twenty or thirty years – with annual tax revenues. The idea is to use a little bit of income each year to pay for the benefits derived each year, rather than trying to pay for a big project all at once. Borrowing is also a way to spread the cost of the project over the useful life of the improvement and over all of the users who will benefit from the improvement over that useful lifetime. (You can think about your own auto loan, student loan, or home mortgage payments the same way: If you are going to benefit from the asset for a long period, then it may make more sense to pay for it a little bit at a time. You may also have difficulty paying for it all at once, too.)
PPP Public Realm projects are usually funded with a combination of government grants and private donations. A fundraising committee comprised of public and private sector leaders will be assembled for the purpose of soliciting funds from both elected officials and private donors. The people and agencies who raise and contribute the cash are usually honored at a ribbon cutting ceremony once the project is complete. Fundraising for the ongoing operations of a place presents a different set of challenges.
Routine and Non-Routine Capital Projects
Routine projects are those projects that happen on a schedule. They may include the replacement of the playground equipment in a park or the reconstruction of a street or the renovation of an old public building or public space. These kinds of projects happen all the time, all over the city.
Non-routine projects are big, new, one-time projects that are more complicated. Often these projects are the product of public-private collaboration and often they are promoted by and partially funded by the business community. Often they are downtown. Examples include a big new urban park where there had never been one before, a playground in a rapidly developing neighborhood, a pedestrian street, or a public plaza. Sometimes a real estate development project leads to increased private investment and redevelopment in the surrounding area.
What is an “Operating Budget?”
Once the project is complete, the costs do not go away. The owner and/or operator of the park or facility must pay ongoing costs. These costs can be grouped into three categories: Operations, maintenance, and programming.
Operating costs include the costs of the paid staff (full time or part time, direct staff or contract staff) who take care of the place. These personnel may include administrative staff as well as the people who provide security and pick up trash. Operating costs also include the costs of contracts with vendors to provide certain services such as lawn care, fountain and pool maintenance, snow removal, and landscape maintenance as well as utility charges like power, water, and sewer. In some cases, all staffing is provided under contract by a single operating entity.
Maintenance costs include the regular and periodic costs of changing light bulbs, repainting wood trim on a building, repairing damaged turf or cracked concrete, fixing plumbing problems, and replacing dead trees, bushes and plants. Some maintenance is regular/routine/preventative and some is more infrequent – as in when something breaks. An underfunded operation is sometimes referred to as a “break-fix” model, where you do very little maintenance and only when something (important) breaks. Maintenance can be performed by staff or by contractors/vendors.
Finally, Programming includes the costs associated with activating a place. This part of the budget may include staffing, equipment rental, additional security, advertising, and other costs for specific events like a concert series and for ongoing programs such as pianos and Ping-Pong tables. Activation may also include concessions and food from a small ice cream cart to a fixed “bricks and mortar” café or restaurant.
The capital project and the operating budget must be developed in tandem as they affect one another. The potential future operations (including income potential from food, beverage, and events, for example) will require certain features from the design and, conversely, the design must accommodate certain anticipated uses and include systems and materials that are reliable and not overly expensive to operate and maintain once installed.
Operating budgets are funded with an array of sources of funds that might include annual allocations from a local government (typically the largest and most important share); rents and charges for use; charitable donations from private companies, foundations, and individuals; and corporate sponsorships. Parks that operate food and beverage facilities (for example, Sea Salt restaurant, in Minnehaha Park) can generate a share of operating funds from rents (space) and percentage rents (% of gross sales) paid to the park by the food concessionaire. Some large public parks have “friends of” non-profit charitable organizations that hold annual fundraisers in support of the park.
One big challenge is that fundraising for the operating budget is less glamorous than a big one-time capital campaign that ends with a ribbon cutting, a donor plaque, and a photo op. Operating fundraising goes on constantly and the numbers are significant. For example, while fundraising $10M for a new park may seem like a big lift, the total value (present value, or PV) of an annual operating budget of $500,000/year for the same park could be as much as $5M more, and that is a lot of money for which the funders receive relatively little recognition. Once the project is complete, people expect it to look wonderful and be fully activated in perpetuity and that shouldn’t cost too much because all you really need is a goat to trim the grass, right?
Another funding challenge is that some people believe that if you design, build, and operate the park correctly, you ought to be able to make enough money to cover the operating costs – and even generate a surplus – through programming and food and beverage revenue. This vision of a park as a break-even or even a profitable business model is often driven by the private-sector business leaders who believe that you can just cut the government waste and professionally operate it like a profit-making business. This argument is also often used to justify project capital and operating budgets although the actual revenues rarely match the original, optimistic projections. Indeed, this model only works in a few, very special, typically very dense urban places, like Bryant Park in Manhattan, for example. Almost all other parks operate at a loss (from a business standpoint) and must be subsidized with public and private funds.
But another way to think about it is that parks have always been a valuable public amenity that require and are deserving of funding, similar to streets and sidewalks and other public infrastructure that is paid for with tax dollars. In the end, cities or other governments usually pay the majority share of a PPP park’s annual operating budget, for example 75%. One challenge is that in the US, governments (like City Councils) are prohibited from implementing budgets that span into future administrations. The reasoning is that it would be unfair and unwise to tie future city leaders and their governments to costs over a long timeframe when they may need to have flexibility to adapt a budget to new or changing interests and economic trends. The point is, it is a big job coming up with the operating funds every year and it never ends.
Summary – Capital and Operating
When starting a public realm project, you must consider both capital and operating budgets – the one-time project costs and the costs of operating it every year into the future once it is complete. The following is a simple summary of the differences between capital and operating.
- Large, one-time cost
- Long-lived asset (For example, a useful life of 20-30 years or more)
- Debt-financed (Long-term borrowing, for example bonds with 20-30-year terms)
- Annual costs
- Payroll, contracts, leases, rents, utilities
- Things you use up
- Cash-flow (Funded from city and other annual operating budgets, private fundraising, and sometimes from a reserve fund)