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

2. 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

3. Why Do Capital Planning? Helps local officials think through complex infrastructure development and financial decisions Helps local officials think through complex infrastructure development and financial decisions May avert some of the expensive mistakes that frequently result from crisis management May avert some of the expensive mistakes that frequently result from crisis management

4. Why Do Capital Planning? Lenders and bond raters expect it Lenders and bond raters expect it Ensures assets inherited from prior administrations are preserved Ensures assets inherited from prior administrations are preserved

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

6. Major Elements An inventory of present physical assets An inventory of present physical assets A maintenance and replacement schedule A maintenance and replacement schedule A time-table and estimate of future needs A time-table and estimate of future needs

7. ConsiderationsConsiderations A complete financial analysis of historical revenues and expenditures is strongly recommended 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 Correlates to pre-approved documents and ordinances, i.e. doesn’t conflict with approved Comprehensive Plan

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

9. 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 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 If none available, a professional planner is a good alternative

10. 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 This can differ based on the type of local government, population, budget size, or other unique factors

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

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

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

14. 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. Capital projects may be funded through general revenue, grants, designated revenue funds, special taxes or fees, or some form of debt.

15. Common Revenue Sources General Fund/General Revenue General Fund/General Revenue Grants (remember matching requirements) Grants (remember matching requirements) General Obligation (GO) Bonds General Obligation (GO) Bonds Local borrowing Local borrowing Revenue Bonds Revenue Bonds Special Assessments Special Assessments Impact Fees & User Fees Impact Fees & User Fees State or Federal “Pass Through Financing” State or Federal “Pass Through Financing” Partnerships & donations Partnerships & donations Tax Incremental Financing Tax Incremental Financing

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

17. Guiding Principles The key is managing debt so you borrow for the right projects at pre- determined borrowing points that maximize the government’s borrowing efficiency

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

19. 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 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 Local financial considerations will commonly hold local government debt to a level lower than the Constitutional limitation

20. Step Five Inventory current capital assets Inventory current capital assets Most such base information should be readily available through the government’s insurance carrier Most such base information should be readily available through the government’s insurance carrier Needed for accountability and usage tracking Needed for accountability and usage tracking

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

22. 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 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 Local leaders must prioritize to ensure the right projects are kept when the resources run out

23. Step Seven Staff input Verify condition of existing infrastructure and equipment Verify condition of existing infrastructure and equipment Identify trends affecting capital issues Identify trends affecting capital issues Develop a list of needs and suggested projects Develop a list of needs and suggested projects Submit to “Coordinator” for consolidation Submit to “Coordinator” for consolidation

24. Step Eight Evaluate Staff Recommendations Compare staff recommendations with established priorities Compare staff recommendations with established priorities Compare with available revenues Compare with available revenues Make adjustments for a draft plan Make adjustments for a draft plan

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

26. Step Ten Finalize Plan and Adopt Make Final Adjustments Make Final Adjustments Can adopt as part of annual budget process Can adopt as part of annual budget process Adopt by resolution Adopt by resolution

27. Points to Remember The capital plan is a flexible document The capital plan is a flexible document Can be changed when the situation requires Can be changed when the situation requires As a “Plan” it is not “cast in stone” As a “Plan” it is not “cast in stone”

28. StepsSteps 1. Establish a process 2. Appoint a coordinator 3. Identify what is and isn’t a Capital Project 4. Identify supporting revenue sources 5. Inventory current assets

29. Steps (cont) 6. Prioritize 7.Collect staff input 8. Evaluate and make adjustments 9.Public input/Public Hearing 10.Finalize and adopt by Resolution

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

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

32. Sources:Sources: “Capital Budgeting and Finance: A Guide for Local Governments,” A. John Vogt, International City/County Management Association, 2004 “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 “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) “Capital Improvement Planning: A Guidebook for Wisconsin Communities*,” Eilrich, Doeksen, & Frye, 1995 (*adopted extensively from Capital Improvement Guidebook developed for Oklahoma)

33. Information Source http://www.uwex.edu/lgc/