Transcript LOCAL GOVT. FINANCE: An Introduction to CAPITAL PLANNING

Financial Management Series
Number 6
An Introduction to
CAPITAL PLANNING
Alan Probst
Local Government Specialist
Local Government Center
University of Wisconsin - Extension
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
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
Why Do Capital Planning?

Lenders and bond raters expect it

Ensures assets inherited from
prior administrations are preserved
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
Major Elements

An inventory of present physical assets

A maintenance and replacement
schedule

A time-table and estimate of future
needs
Considerations

A complete financial analysis of
historical revenues and expenditures is
strongly recommended

Correlates to pre-approved documents
and ordinances, i.e. doesn’t conflict
with approved Comprehensive Plan
Where to Start?
Step One
Establish a process
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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
Step Two
Ensure someone is appointed to
coordinate the effort

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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
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
Criteria

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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”
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
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)
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.
Common Revenue Sources

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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
Guiding Principles

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Borrowing for operating expenditures
is generally considered financially
unsound
Borrowing for capital projects is
considered essential financial decisionmaking
Borrowing for capital projects requires
effective debt management
Guiding Principles
The key is managing debt so you
borrow for the right projects at predetermined borrowing points that
maximize the government’s
borrowing efficiency
Guiding Principles

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Effective debt management can
minimize interest cost and even
stabilize local government financial
positions
Periodic review of debt and refinancing when conditions are
favorable are essential to effective debt
management and capital planning
Debt Limitation

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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
Step Five
Inventory current capital assets

Most such base information should be
readily available through the
government’s insurance carrier

Needed for accountability and usage
tracking
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.
Step Six
Prioritize

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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
Step Seven
Staff input

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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
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
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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
Step Ten
Finalize Plan and Adopt
 Make
Final Adjustments
 Can adopt as part of annual
budget process
 Adopt by resolution
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”
Steps
1.
2.
3.
4.
5.
Establish a process
Appoint a coordinator
Identify what is and isn’t a Capital
Project
Identify supporting revenue sources
Inventory current assets
Steps (cont)
6.
Prioritize
7. Collect staff input
8. Evaluate and make adjustments
9. Public input/Public Hearing
10. Finalize and adopt by Resolution
Flowchart of Capital Planning
Process
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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
Flowchart of Capital Planning
Process (cont.)
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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
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)
Information Source
http://www.uwex.edu/lgc/