1. Government Finance Officers Association of Arizona
Capital Improvement Planning
May 9, 2019
Presented By:
Pat Walker
Pat Walker Consulting LLC

2. Agenda Objectives of the Workshop Capital Planning Process
Projects in the CIP
Prioritization of the CIP
Funding the CIP
Technology and the CIP
Implementing and Monitoring
Wrap-up and discussion
Introduce presenters (we will all introduce ourselves)
Ask each person to provide role, organization represented, CIPs they have done and what they want to get out of the class.

3. Capital Planning Process

4. Balancing Capital Needs with Available Resources
Service Level Standards

5. Why have a Capital Planning Process?
Often large and BIG $$$
Projects can be long term
Want to ensure projects are:
Needed
Well designed
Efficiently implemented
Large projects with long lives. Examples (water / ww underground infrastructure). Element of risk – field of dreams problem. Objective of the process is to ensure the projects are needed, designed for the capacity, location most advantageous and implemented efficiently at the lowest cost.

6. Why have a Capital Planning Process?
To achieve goals and priorities set by Council to achieve your community needs
Determine acceptable mix of debt versus cash financing
Prioritization of capital projects to match
Large projects with long lives. Examples (water / ww underground infrastructure). Element of risk – field of dreams problem. Objective of the process is to ensure the projects are needed, designed for the capacity, location most advantageous and implemented efficiently at the lowest cost.

7. Why have a Capital Planning Process?
Impact on operating budget
Address revenue challenges
Process itself takes time
Define project
Secure Approval
Finish design
Acquire and prepare land
Schedule the project
Construct the project
Need to know the future operating budget. Once built, how much will it cost to operate? Will additional resources be needed? Does the City have the resources to fund both the upfront costs and the recurring operating costs including repair over time? If not, what does that mean for the priority, what decisions can be made to change this affect.

8. Why have a Capital Planning Process?
Long term debt financing is used
Citizens in future years pay for decisions made by citizens and local officials made today
Capital projects can change dramatically from year to year
Once needs are defined and prioritized, multi-year forecasting and debt funding requirements are reviewed and some debt may be used. Balances future demand with the costs to fund. Citizens will pay interest cost over time and there is a risk element once constructed if growth projections change. Annual or more frequent updates are necessary as capital projects and requirements can change dramatically (example late 1990’s, early 2000’s, mid 2000’s, today. What will tomorrow look like?

9. Why have a Capital Planning Process?
Projects can impact future economic development
Allows citizens to provide input and/or see planned capital projects
Plan for interdependent capital project for cost savings/efficiencies
Facilities may be a economic development tool to attract businesses as infrastructure is a decision for businesses. People, educated work force is also a determinant for companies, so facilities and a high quality place to live attract residents that in turn attract businesses.

10. Capital planning forces entities to consider and plan for:
Population growth
Will this increase need for schools, fire stations, roads, etc?
How will they be funded?
Will there need to be voter approval?
Project future environment, needs. What will the growth place on facilities? What is the existing capacity? When will it no longer be sufficient? When will it wear out? How will future needs be funded? Will it require bonding, voter approval? What kind of stakeholder involvement is necessary. Do master plans need to be updated?

11. Capital and Financial Planning Process
Approved Plan
Project Revenues and Financing to Meet Goals
Calculate Development Fees & Other Revenue Sources
Develop IIP, LOS, UOS
Identify Capital Requirements and Evaluate Alternative Financing
Develop Comprehensive Facility Master Plan
Evaluate Factors Affecting Capital Requirements
Customer Demand
Economic Development
Environmental Regulations
Declining Federal Assistance
Deteriorating Infrastructure
Improved Service Quality
Utility and Community Philosophy
STEP 3
STEP 4
STEP 5
STEP 6

12. Key Elements of an Effective CIP
Multi-year plan
Identifies funding sources & requirements (including O&M)
Covers both repairs and new capital project types
Identifies timing of each project(s)
Depicts the realities of the political world
Summarize elements

13. Capital Planning Vs Capital Budgeting
Capital budget is for normally for one year with the funding source identified
Capital planning are for projects scheduled for 5 years or more
Projects in capital plan are not budgeted except for the first year
Difference between capital budget and CIP. One year vs. multi-year. CIP not incorporated into the capital budget, except for the first year in terms of funding. Information may be included in the budget for planning, but funding decisions will not be made within the capital budget necessarily.

14. Projects in the CIP

15. GFOA Recommended Practices for Capital Planning
The Role of Master Plans in Capital Project Planning
Multi-Year Capital Planning
Capital Planning Policies
Coordinating Economic Development and Capital Planning
Technology in Capital Planning & Management

16. What capital projects go into a CIP?
Expensive, infrequent purchases
Long useful life of asset or infrastructure
Rehabilitation of infrastructure or buildings that extends their life
Information Technology projects
Large non-recurring operating expenditures
IT projects would still be large and non-recurring. Large non-recurring operating expenditures could be organization wide studies, master plans, etc. All of these can be defined in the CIP policy discussed previously.

17. Citizen input
Through elected officials
Surveys
Council meetings
Boards and Commissions
Focus groups
Chamber of Commerce

18. Elected Officials Input
Strategic goals
Citizen input!
Desired service levels

19. Department Input
Master Plans
Asset condition assessments
Department understanding of citizen’s desire
Extending the life of infrastructure or facilities

20. Details of a Capital Project for a CIP
Description of the project
Timing
Effect on service level
Cost components that may span several years
Funding sources
Recommended prioritization
What it is, planned timing, impact to service level (why it is in there). Multi-year vs. single year project. Where funding will come from (cash, bonds, special revenue sources, impact fees, general taxes). Order / prioritization.

21. Details of a Capital Project for a CIP
Impact on operating budget
Annual debt service
Lease or installment-purchase payments
New positions and operating expenses
Savings
Increase or decrease in revenues
What will the impact of the project be? Funding sources, liabilities. Additional recurring costs? Savings (by funding this, operating budget will decrease)? By building this, we can now serve new customers, charge fees for service, generate additional revenues)

22. Information on project submittals
Submitting department
Descriptive project title
Project description
Project location
Impact on annual operating budget
Timing of impact
Proposed funding sources

23. Information on project submittals
Cost estimate guidelines
Project prioritization by submitter
Justification for project
Why is it being proposed?
Consequences of not doing project
Relation of project to existing improvement or other project requests

24. Costing Capital Projects
Department estimates
Recent costs of similar projects
Templates for cost
Hire engineering firm
Architectural firm uses drawings
Consider “net costs”

25. Cost Components for CIP Project
Construction labor and materials
Planning, architectural and engineering design costs
Legal services related to project

26. Cost Components for CIP Project
Land and associated costs
Site improvements
Easements
Equipment and Furnishing (FF&E)

27. Cost Components for CIP Project
Interest and financing charges during construction
Construction Management
Contingency

30. Prioritization of the CIP

31. Why have prioritization of projects?
More demands than resources
Ability to compare diverse projects
Rank large number of projects
Provide consistency and logic
Break down “silos”
“Want” vs “Need”

32. Why have prioritization of projects?
Moderate political influences
Identifies important factors in selecting projects
Provides numeric rating
Adds credibility to the process
Competing demands

33. Approaches to prioritization processes
Simplistic - Judgments by decision makers whether it is high, medium, or low priority
Complex – Refer to specific criteria to establish priorities

34. Approaches to prioritization processes
Experience based judgment
Departmental or functional priorities
Broad categories of need
Urgency-of-need criteria
Weighted rating of urgency-of-need and related criteria
Goals and service needs assessment
Not unusual to use several of these approaches. For example, many use judgment based combined with broad ranking, specific urgency of need criteria and weighted rating systems. The most significant factor is experience-based judgment of local officials.

35. Approaches to prioritization process
Can rank and compare all CIP projects together
Rank new projects separate from rehab or replacement projects
Rank projects from various funding sources separate
No right or wrong way!

36. Experience Based Judgment
Most common approach used by small to medium size organizations
In touch with citizen needs and desires
Can be combined with rating criteria
To be successful, officials need to be well informed by personal experience, complaints by citizens, notices from state and regulatory agencies that facilities are out of compliance with current standards, in tune with public opinions about current facilities and infrastructure.

37. Experience Based Judgment
When it doesn’t work
Multiple capital requests
Complex capital requests
Numerous decision makers
Ability to “justify” project selection

38. Departmental or functional priorities
As initial step, departments rank their CIP projects
Criteria can established on departmental level
May not reflect organizational wide priorities

39. Broad categories of need
High Priorities – Projects that are essential and impending, and should be approved and funded in the upcoming budget year or in one of the early planning years of the CIP forecast period.

40. Broad categories of need
Medium Priorities – Projects that meet an essential or important need but do not have to be funded immediately.
Low Priorities – Projects that benefit the community but not enough to merit inclusion in the CIP in the current year, given other needs and funding limitations.

41. Urgency-of-need criteria
Meets legal requirements
Threatens public safety
Addresses goals and objectives
Improves efficiency
Maintains existing service levels

42. Urgency-of-need criteria
Supports economic development
Improves service levels
New services or programs
Improves quality of life

43. Urgency-of-need criteria
Improves quality of life
Improves service levels
New services or programs
Offers convenience

44. Weighted rating of urgency-of-need
Weight each criteria based on based on greater urgency
Assign numeric weights or maximum value to each criterion
Total score is then given for each project

45. Assessment based on program goals
If entity has good program goals, priorities and plans, numeric rating systems are not needed
Formally adopted by governing body
Strategic plans
May rank programs from high to low

46. Funding the CIP ?

47. PLAN AHEAD
Start early!
Many projects take a few years from initial discussions to the bond issuance process
Start laying the ground work for rate increases for enterprise revenue bonds if necessary
May need to work in election for voter authorized projects
Coordinate bond issuance with start of construction
Recognize that 5 years of historical financials will be included in offering documents
TIP: It is never too early to evaluate and establish financial/ debt policies

48. BENEFITS OF CASH FUNDING
Lowest cost of capital
Serves to preserve credit quality
For water and sewer, generally minimum of 50% of capital program is funded on a pay-go basis
Can enhance transparency and achieve objective of community- endorsed projects
Can be more feasible during system’s growth phase
Not feasible for large-scale projects that require significant upfront investment such as treatment plant or system construction or water right purchases

49. CASH VERSUS DEBT
While “Cash is King,” sizable capital programs include a balance between the two
Things to consider:
Need for liquidity and cash reserves
Need for speed
Life of assets
Equalizing benefits and costs across time
Escalating costs of projects

50. BALANCING CASH AND DEBT FINANCING
Liquidity and cash reserve policies
Types of revenues – recurring versus more volatile sources
Types of projects – recurring maintenance versus projects to address large, one-time needs or growth
Market conditions
Ratio targets

51. GENERAL OBLIGATION BONDS
Historically preferred method
Low cost of capital
Requires voter approval
Full faith and credit of issuer with a pledge of either unlimited or limited property tax revenues
Generally the safest form of bond issue
Implied G.O. Rating = Issuer Rating

52. SALES TAX REVENUE BONDS
Usually a gross pledge of sales tax revenues
General sales tax revenue bonds
Typically general fund revenues
Operations typically highly dependent upon these revenues for operations
Strong coverage ratios typically garner higher rating, especially from S&P
Dedicated sales tax revenue bonds
NOT typically general fund revenues
Often voter-approved for specific uses/projects
Voter approval may be easier to obtain for specific purposes

53. FINANCING CAPITAL PROJECTS
Capital Planning and Financing go hand-in- hand
Advance planning is key to a successful outcome
Financing tools and structures must accommodate available resources and current financials and future needs 53

54. Technology and the CIP

55. Various tools available
There are numerous technology tools available. Two we will be reviewing today are:
CIP Model with operating cost components
CIP model with rate components

56. Implementation and Monitoring

57. Monitoring the CIP
Project team can be established
Meet monthly or quarterly
Create formal process
Produce status reports
Discussion of GFOA Recommended Practice (Handout)

58. Questions and Discussion