Financial Management Series Number 6 An Introduction to CAPITAL PLANNING Alan Probst Local Government Specialist Local Government Center University of Wisconsin - Extension

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Financial Management Series
Number 6 An Introduction to
CAPITAL PLANNINGAlan ProbstLocal Government
SpecialistLocal Government CenterUniversity of
Wisconsin - Extension
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Why Do Capital Planning?

• Failure to plan virtually assures that scarce
  resources will be consumed in reacting to crises
  and that critical facilities, infrastructure, and
  equipment will continue to deteriorate

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Why Do Capital Planning?

• Helps local officials think through complex
  infrastructure development and financial
  decisions
• May avert some of the expensive mistakes that
  frequently result from crisis management

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Why Do Capital Planning?

• Lenders and bond raters expect it
• Ensures assets inherited from prior
  administrations are preserved

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Capital Improvement Plan (CIP)

• Most capital planning is done as part of a
  Capital Improvement Plan (CIP)
• Capital Improvement Plans commonly cover a five
  year period starting with the next budget year
  and are updated annually

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Major Elements

• An inventory of present physical assets
• A maintenance and replacement schedule
• A time-table and estimate of future needs

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Considerations

• A complete financial analysis of historical
  revenues and expenditures is strongly recommended
• Correlates to pre-approved documents and
  ordinances, i.e. doesnt conflict with approved
  Comprehensive Plan

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Where to Start?

• Step One
• Establish a process
• Local officials need to establish the process by
  which they will do their capital planning
• May plan with officials and internal staff
• May appoint a Planning Advisory Committee

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Step Two

• Ensure someone is appointed to coordinate
  the effort
• If there is a County Administrator,
  Administrative Coordinator, City Manager, Village
  Administrator appointed, that person is the
  logical choice
• If none available, a professional planner is a
  good alternative

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Step Three

• Identify what is and is not a capital project or
  purpose
• This can differ based on the type of local
  government, population, budget size, or other
  unique factors

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Criteria

• Capital expenditures are relatively expensive
• The expense does not normally recur annually
• They have a useful life expectancy of more than
  one year
• May want to set a minimum life expectancy to be
  considered capital

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Criteria

• Governments commonly set a number, such as
  10,000, for a threshold as to what constitutes a
  capital purchase or project
• Some purchases, such as IT equipment, may not
  reach the dollar threshold but are still commonly
  managed under capital projects for ease of
  tracking

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Common Capital Assets

• Infrastructure (roads, sewers. storm sewers,
  sidewalks, bridges, curb and gutter, street
  lights)
• Buildings (administration buildings, libraries,
• museums, treatment plants, civic centers, pools)
  
• Equipment (fire trucks, police cruisers,
  generators, snow plows, IT equipment)
• Land (parks, gardens, tree nurseries,
  waterfronts, industrial park land)

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Step Four

• Identify the revenue sources to be used to
  support capital projects.
• Capital projects may be funded through general
  revenue, grants, designated revenue funds,
  special taxes or fees, or some form of debt.

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Common Revenue Sources

• General Fund/General Revenue
• Grants (remember matching requirements)
• General Obligation (GO) Bonds
• Local borrowing
• Revenue Bonds
• Special Assessments
• Impact Fees User Fees
• State or Federal Pass Through Financing
• Partnerships donations
• Tax Incremental Financing

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Guiding Principles

• Borrowing for operating expenditures is generally
  considered financially unsound
• Borrowing for capital projects is considered
  essential financial decision-making
• Borrowing for capital projects requires effective
  debt management

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Guiding Principles

• The key is managing debt so you borrow for the
  right projects at pre-determined borrowing points
  that maximize the governments borrowing
  efficiency

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Guiding Principles

• Effective debt management can minimize interest
  cost and even stabilize local government
  financial positions
• Periodic review of debt and re-financing when
  conditions are favorable are essential to
  effective debt management and capital planning

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Debt Limitation

• Article XI, sec. 3(2) and 3(3) of the Wisconsin
  Constitution limits local government borrowing
  and other debt to 5 of equalized taxable
  property
• Local financial considerations will commonly hold
  local government debt to a level lower than the
  Constitutional limitation

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Step Five

• Inventory current capital assets
• Most such base information should be readily
  available through the governments insurance
  carrier
• Needed for accountability and usage tracking

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Relation to GASB 34

• GASB 34 is an inventory of all public works
  related assets
• Values of bridges, roads, facilities
• Based on life-cycle costing
• Relates directly to asset inventory needed for
  capital planning.

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Step Six

• Prioritize
• It is unlikely in local government that there
  will ever be enough funds, resources, or staff
  time available to pursue every capital project
  which can be justified
• Local leaders must prioritize to ensure the right
  projects are kept when the resources run out

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Step Seven

• Staff input
• Verify condition of existing infrastructure and
  equipment
• Identify trends affecting capital issues
• Develop a list of needs and suggested projects
• Submit to Coordinator for consolidation

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Step Eight

• Evaluate Staff Recommendations
• Compare staff recommendations with established
  priorities
• Compare with available revenues
• Make adjustments for a draft plan

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Step Nine

• Public Input
• Comply with Wisconsin Open Meetings Law
• Informal involvement or public hearing
• When the CIP is part of the Capital Budget or a
  Comprehensive Plan, the Public Hearing
  requirement applies

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Step Ten

• Finalize Plan and Adopt
• Make Final Adjustments
• Can adopt as part of annual budget process
• Adopt by resolution

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Points to Remember

• The capital plan is a flexible document
• Can be changed when the situation requires
• As a Plan it is not cast in stone

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Steps

• Establish a process
• Appoint a coordinator
• Identify what is and isnt a Capital Project
• Identify supporting revenue sources
• Inventory current assets

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Steps (cont)

• 6. Prioritize
• 7. Collect staff input
• 8. Evaluate and make adjustments
• 9. Public input/Public Hearing
• 10. Finalize and adopt by Resolution

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Flowchart of Capital Planning Process

• County Department Heads Prepare Project Requests
• Project Requests are reviewed and prioritized by
  Committee of Jurisdiction
• Executive/Finance Committee completes first
  review
• Department modifies plan
• Proposed projects and interview schedule are
  published in newspaper
• Executive/Finance holds public review and comment
  session and interviews department heads
• Committee of Jurisdiction reviews and recommends
  plan

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Flowchart of Capital Planning Process (cont.)

• Proposed projects are published in newspaper
• Executive/Finance evaluates and prioritizes
  projects and forwards to full county board
• Public Hearing on Capital Plan as part of the
  budget process
• Full Board approves 5-year Capital Improvement
  Plan and approves annual Capital Budget as part
  of Annual Budget
• Department Implements
• Project Committee of Jurisdiction oversees total
  project
• Executive/Finance secures financing

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Sources

• Capital Budgeting and Finance A Guide for Local
  Governments, A. John Vogt, International
  City/County Management Association, 2004
• Management Policies in Local Government
  Finance, International City/County Management
  Association, ICMA University Press, 2004
• Capital Improvement Planning A Guidebook for
  Wisconsin Communities, Eilrich, Doeksen,
  Frye, 1995 (adopted extensively from Capital
  Improvement Guidebook developed for Oklahoma)

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Information Source

• http//www.uwex.edu/lgc/