Financial Management

VLCT Model Capital Program and Budget Policy Guidance

The capital assets of a town and their condition are critical to the quality of services that a municipality can provide. Capital asset expenditures can be more controversial than other expenditures because they typically involve large sums of money, often raised through debt financing, and not every citizen will agree as to the necessity of each project that is undertaken. By using a well thought out capital improvement program, the town can plan for replacement of assets, potential capital reserve funding, operating budget expenditures, and debt service expenditures.

Vermont law provides for adoption of a capital budget and plan at 24 V.S.A. § 4430 and encourages that the capital improvement plan conforms to the municipal plan.

Capital improvement policies need to be general and flexible to accommodate a community’s political will while still providing enough guidance to enable sound financial choices. Therefore, the policy will generally consist of guidelines designed to stimulate an informed debate to encourage the most enlightened choices, rather than trying to force efficient or effective decisions by way of a rigid menu of policy choices. Determining the criteria for selecting projects in advance will take the emotion out of the selection process.

Consider the following when developing a capital improvement policy:

Capital Improvement Program. The basis of any capital improvement plan is the capital improvement program (CIP), a five-year projection of the town’s capital needs and its available financial resources. The purpose of the CIP is to help build consensus on what are the most important projects, thus ensuring these projects are undertaken first. The policy needs to include the criteria that will be used to prioritize the projects that are included in the plan.

Project Financing. There are numerous alternatives for financing capital projects, from pay-as-you-go financing or accumulation of reserve funds to leases and other debt instruments. The policy should include a discussion of the town’s preferred financing methods.

For more information on capital planning, please see the Vermont Land Use Planning Implementation Manual, published by the Vermont Land Use Education and Training Collaborative. The Implementation Manual is available at www.vpic.info.

Please note that this model policy has been developed for illustrative purposes only. VLCT makes no express or implied endorsement or recommendation of any financial policy, nor does it make any express or implied guarantee of legal enforceability or legal compliance, nor does VLCT represent that any particular policy is appropriate for any particular municipality. Your legal counsel should review any proposed financial policy before adopting it.

Planning for Today and Tomorrow

Capital planning helps towns prepare for the future. It’s a way to make important decisions about big projects - like fixing roads, building a new highway garage, or replacing water pipes - before problems happen. Taxpayers often ask, “Why plan so far ahead?” The answer is simple: planning saves money, reduces costly surprises, and helps the town prepare for emergencies – from sudden repairs to natural disasters. A capital plan makes sure tax dollars are used wisely, and the town doesn’t promise more than it can afford.

What Is Capital Planning?

A capital plan is a long-term guide for big investments like buildings, roads, equipment, and land. It helps towns know what they own, what needs fixing, and what they’ll need in the future. Capital projects take time and money. Planning helps make sure they’re done right.

What Capital Planning Does for Taxpayers

• Saves Money Over Time: Planning helps towns buy and repair things at the right time, avoid emergency repairs, and get better interest rates when borrowing.
• Protects What You’ve Paid For: Roads, buildings, and equipment don’t last forever. Capital planning makes sure they’re repaired or replaced before they fail.
• Plans for Asset Life: Planning helps towns avoid surprise costs. Using yearly wear and tear, towns can decide when to repair or replace and save money by looking at the full cost over time. 
• Keeps Taxes Stable: By planning ahead, towns can spread costs over time and avoid sudden tax increases.
• Finds More Funding: With a plan in place, towns can apply for grants to help pay for projects - less money needed from local taxes.
• Sets Priorities: Not every project can happen at once. Planning helps decide which projects matter most to the community.
• Avoids Costly Mistakes: Planning helps towns avoid last-minute decisions and budget problems. Without a plan, projects may cost more or miss long-term needs.
• Gives Residents a Voice: The capital planning process gives you a chance to weigh in. Should the town focus on plow trucks or wastewater upgrades? The plan opens that conversation.
• Improves Transparency: Residents can see what’s coming, give input, and prepare for things like road closures or construction noise.
• Builds Trust: A clear plan shows that the town is thinking ahead and using money responsibly.

How It Works

• Towns take stock of what they already own – buildings, roads, vehicles, equipment, utilities, land, and other assets – and its condition.
• They look 5 to 20 years ahead to decide what needs to be built or fixed.
• They figure out whether the project needs to be done in stages or all at once so major steps like design, permits, and construction can be included in the project cost.
• They figure out how to pay for each project or step. Should the town use cash from the town budget, previous savings, grants, special taxes, or borrowing?
• Plans can change if needs or costs change. Flexibility is built in because the legislative body (Selectboard, City Council, etc.) looks at the capital plan every year when they prepare a budget.

Planning Pays Off

Capital planning is like using a map - it helps the town avoid wrong turns, save money, and reach its goals. It’s not just about buildings and roads; it’s about making sure the community stays strong, safe, and equipped for tomorrow. Planning doesn’t mean spending more money. It means spending money wisely. Without a plan, the town risks wasting money, missing out on grants, and falling behind on basic services. With a good plan, the town stays resilient, stable, and ready for whatever comes next.

VLCT has a robust list of resources to help with capital planning.  Whether your municipality is just thinking about it or is ready to take it to the next level, we are here to help.  And as always, if you need a human to help you navigate, don't hesitate to ask us! Email the Municipal Operations Support Team: mos@vlct.org.

Like any planning effort, town budgeting involves an element of risk. When preparing and adopting a proposed budget, neither the selectboard nor the voters can precisely predict circumstances during the coming year. A town budget must necessarily be built on certain assumptions and estimates of resource flows, such as revenues and expenditures.

Recognizing this uncertainty, the Government Finance Officers Association (GFOA) recommends that general-purpose governments maintain reserves in their general fund of no less than two months (approximately 17%) of regular operating revenues or expenditures to cover unanticipated shortfalls, unforeseen expenditures, and cash flow needs. In addition, the Vermont Bond Bank (VBB) publishes annual median financial indicators for Vermont municipalities and plans to include fund balance benchmarks in these reports, which may be used alongside national guidance to help towns assess appropriate local targets. GFOA further recommends that governments adopt a formal policy to define appropriate fund balance levels and guide their use. See Fund Balance Guidelines for the General Fund. Governmental Fund fund balance is reported following GASB (Governmental Accounting Standards Board) standards, that classify fund balance according to the constraints on its use. Unassigned fund balance, the most flexible category, appears only in the General Fund and represents spendable resources not otherwise restricted, committed, assigned, or nonspendable.

Fund balance is simply the mathematical difference between assets and liabilities. It increases when inflows exceed outflows and decreases when outflows exceed inflows. Fund balance is sometimes misunderstood as excess money that could be used to reduce taxes or fees. In practice, unassigned fund balance is a long-standing and essential component of town financial reporting and management, used to understand and communicate a town’s overall fiscal position. Maintaining an appropriate level of fund balance supports stable and predictable tax rates over time and strengthens a town’s ability to manage revenue fluctuations. Adequate fund balance provides flexibility to respond to economic downturns, emergencies, and other unanticipated events, while also ensuring sufficient cash flow for ongoing operations. Overall, fund balance helps mitigate both short- and long-term financial risk and contributes to a town’s overall fiscal stability. The use of fund balance categories is a standard part of governmental financial statements and reflects how towns have historically assessed financial capacity and risk.

Prior to 2025 and the passing of 24 V.S.A. § 1585, it was unclear, though it was widely practiced, whether Vermont law authorized towns to maintain and carry forward a dollar amount in unassigned fund balance from year to year. With the passage of the new law, selectboards now have the discretion to carry forward or use unexpended voter approved funds, consistent with other applicable laws and local policies. Notably, the selectboard does not require voter approval for expenditure of these funds. Specifically, the law says: ‑approved funds, consistent with other applicable laws and local policies

“Monies from a budget approved by the voters at an annual or special meeting that are not expended by the end of a municipality’s fiscal year shall be under the control and direction of the legislative body of the municipality and may be carried forward from year to year as an unassigned fund balance. Unassigned fund balances may be invested and reinvested as are other monies received by a town treasurer and may be expended for any public purpose as established by the legislative body of the municipality.” 24 V.S.A. § 1585.

Under section 1585, even if selectboards do not technically require voter approval for the use of these funds, state law and best financial practices still require maintaining transparency and accountability. This is best achieved when fund balance activity is properly accounted for and reported (e.g., included in discussion of budget preparation and in the annual audit).

This policy provides guidance to the selectboard on monitoring and managing fund balance, including unassigned fund balance, in a manner consistent with GAAP, GASB standards, and Vermont law, while recognizing that fund balance itself exists as the difference between assets and liabilities. Selectboards are encouraged to apply this policy in light of their financial circumstances, long-term plans, and risk tolerance, including defining parameters for target fund balance levels appropriate to local circumstances; conditions for use and replenishment of the fund balance; corrective actions if fund balance falls below the target (such as reducing discretionary expenditures, reallocating resources, or implementing a multi-year recovery plan); and treatment of excess fund balance, such as one-time uses, capital needs, or tax rate stabilization. 

Please note that this model policy has been developed for illustrative purposes only. VLCT makes no express or implied endorsement or recommendation of any financial policy, nor does it make any express or implied guarantee of legal enforceability or legal compliance, nor does VLCT represent that any particular policy is appropriate for any particular municipality. Your legal counsel should review any proposed financial policy before adopting it.

As always, please contact the Municipal Operations Support (MOS) if you have questions at mos@vlct.org or 800-649-7915.

VLCT's Model Fund Balance Policy

VLCT's "Selectboard Grant Pre-Application Form" template can be used by Selectboards to ensure that all grant activity involving the Town is intentional, coordinated, and aligned with municipal priorities. By requiring review and approval before an application is submitted, the selectboard retains oversight of how the Town’s name, assets, staff time/capacity, and financial resources may be committed—often long before a grant is awarded.

"The beginning is the most important part of the work." *

Selectboard onboarding and development are essential to effective local governance. New members step into complex legal, financial, and policy responsibilities that affect every resident, and a clear onboarding process helps them contribute confidently and avoid missteps. Ongoing development keeps the full board aligned, informed, and working as a team. Getting started can be simple: create a concise orientation packet (charter, bylaws, key policies, budget overview), schedule a brief onboarding meeting with the chair and town manager or administrator (if applicable), and plan at least one annual retreat or training session. These small steps build shared understanding, improve decision-making, and strengthen trust in local government.

The following templates, tools and resources can help new selectboard members better understand the "how to" aspects of the role they are taking on.  They can also help existing boards adopt new processes and practices to improve upon how they are currently carrying out their work.  At VLCT all dogs - new and old - can learn new tricks. 

*Plato

Templates:

• How to Get An Item on the Selectboard Meeting Agenda Template
• Selectboard Agenda Request Form Template
• Executive Summary of Selectboard Meeting Agenda Item Template
• Staff Report on Agenda Item for Selectboard Meeting Template
• Selectboard Onboarding Packet Table of Contents Template
• Selectboard Grant Pre-Application Form Template

Resources:

• The Selectboard Handbook
• The Selectboard Resources Compendium
• Selectboard Organizational Meetings
• A Guide to Planning Simple, Effective Selectboard Retreats