Financial Management Series Financial Management Series Number 6Number 6

An Introduction toAn Introduction to CAPITAL PLANNINGCAPITAL PLANNING

Alan ProbstAlan ProbstLocal Government SpecialistLocal Government SpecialistLocal Government CenterLocal Government CenterUniversity of Wisconsin - ExtensionUniversity of Wisconsin - Extension

Financial Management Series Financial Management Series Number 6Number 6

An Introduction toAn Introduction to CAPITAL PLANNINGCAPITAL PLANNING

Alan ProbstAlan ProbstLocal Government SpecialistLocal Government SpecialistLocal Government CenterLocal Government CenterUniversity of Wisconsin - ExtensionUniversity of Wisconsin - Extension

Why Do Capital Planning?Why Do Capital Planning?Why Do Capital Planning?Why Do Capital Planning?

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

Why Do Capital Planning?Why Do Capital Planning?Why Do Capital Planning?Why Do Capital Planning?

Helps local officials think through Helps local officials think through complex infrastructure development complex infrastructure development and financial decisionsand financial decisions

May avert some of the expensive May avert some of the expensive mistakes that frequently result from mistakes that frequently result from crisis managementcrisis management

Why Do Capital Planning?Why Do Capital Planning?Why Do Capital Planning?Why Do Capital Planning?

Lenders and bond raters expect itLenders and bond raters expect it

Ensures assets inherited from Ensures assets inherited from prior administrations are preservedprior administrations are preserved

Capital Improvement Plan (CIP)Capital Improvement Plan (CIP)Capital Improvement Plan (CIP)Capital Improvement Plan (CIP)

Most capital planning is done as part of Most capital planning is done as part of a Capital Improvement Plan (CIP) a Capital Improvement Plan (CIP)

Capital Improvement Plans commonly Capital Improvement Plans commonly cover a five year period starting with cover a five year period starting with the next budget year and are updated the next budget year and are updated annuallyannually

Major ElementsMajor ElementsMajor ElementsMajor Elements

An inventory of present physical assetsAn inventory of present physical assets

A maintenance and replacement A maintenance and replacement scheduleschedule

A time-table and estimate of future A time-table and estimate of future needsneeds

ConsiderationsConsiderationsConsiderationsConsiderations

A complete financial analysis of A complete financial analysis of historical revenues and expenditures is historical revenues and expenditures is strongly recommendedstrongly recommended

Correlates to pre-approved documents Correlates to pre-approved documents and ordinances, i.e. doesn’t conflict and ordinances, i.e. doesn’t conflict with approved Comprehensive Planwith approved Comprehensive Plan

Where to Start?Where to Start?Where to Start?Where to Start?

Step OneStep One Establish a processEstablish a process

Local officials need to establish the Local officials need to establish the process by which they will do their process by which they will do their capital planningcapital planning

May plan with officials and internal staffMay plan with officials and internal staff May appoint a Planning Advisory May appoint a Planning Advisory

CommitteeCommittee

Step TwoStep TwoStep TwoStep Two

Ensure someone is appointed to Ensure someone is appointed to coordinate the effortcoordinate the effort

If there is a County Administrator, If there is a County Administrator, Administrative Coordinator, City Administrative Coordinator, City Manager, Village Administrator Manager, Village Administrator appointed, that person is the logical appointed, that person is the logical choice choice

If none available, a professional If none available, a professional planner is a good alternativeplanner is a good alternative

Step ThreeStep ThreeStep ThreeStep Three

Identify what is and is not a capital Identify what is and is not a capital project or purposeproject or purpose

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

CriteriaCriteriaCriteriaCriteria

Capital expenditures are relatively Capital expenditures are relatively expensiveexpensive

The expense does not normally recur The expense does not normally recur annuallyannually

They have a useful life expectancy of They have a useful life expectancy of more than one yearmore than one year

May want to set a minimum life May want to set a minimum life expectancy to be considered “capital”expectancy to be considered “capital”

CriteriaCriteriaCriteriaCriteria Governments commonly set a number, Governments commonly set a number,

such as $10,000, for a threshold as to such as $10,000, for a threshold as to what constitutes a capital purchase or what constitutes a capital purchase or projectproject

Some purchases, such as IT Some purchases, such as IT equipment, may not reach the dollar equipment, may not reach the dollar threshold but are still commonly threshold but are still commonly managed under capital projects for managed under capital projects for ease of trackingease of tracking

Common Capital AssetsCommon Capital AssetsCommon Capital AssetsCommon Capital Assets

Infrastructure Infrastructure (roads, sewers. storm sewers, (roads, sewers. storm sewers, sidewalks, bridges, curb and gutter, street lights)sidewalks, bridges, curb and gutter, street lights)

Buildings Buildings (administration buildings, libraries, (administration buildings, libraries,

museums, treatment plants, civic centers, pools)museums, treatment plants, civic centers, pools)

Equipment Equipment (fire trucks, police cruisers, generators, (fire trucks, police cruisers, generators, snow plows, IT equipment)snow plows, IT equipment)

Land Land (parks, gardens, tree nurseries, waterfronts, (parks, gardens, tree nurseries, waterfronts, industrial park land)industrial park land)

Step FourStep FourStep FourStep Four

Identify the revenue sources to be Identify the revenue sources to be used to support capital projects.used to support capital projects.

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

Common Revenue SourcesCommon Revenue SourcesCommon Revenue SourcesCommon Revenue Sources

General Fund/General RevenueGeneral Fund/General Revenue Grants (remember matching requirements)Grants (remember matching requirements) General Obligation (GO) BondsGeneral Obligation (GO) Bonds Local borrowingLocal borrowing Revenue BondsRevenue Bonds Special AssessmentsSpecial Assessments Impact Fees & User FeesImpact Fees & User Fees State or Federal “Pass Through Financing”State or Federal “Pass Through Financing” Partnerships & donationsPartnerships & donations Tax Incremental FinancingTax Incremental Financing

Guiding PrinciplesGuiding PrinciplesGuiding PrinciplesGuiding Principles Borrowing for operating expenditures Borrowing for operating expenditures

is generally considered financially is generally considered financially unsoundunsound

Borrowing for capital projects is Borrowing for capital projects is considered essential financial decision-considered essential financial decision-makingmaking

Borrowing for capital projects requires Borrowing for capital projects requires effective debt managementeffective debt management

Guiding PrinciplesGuiding PrinciplesGuiding PrinciplesGuiding Principles

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

Guiding PrinciplesGuiding PrinciplesGuiding PrinciplesGuiding Principles Effective debt management can Effective debt management can

minimize interest cost and even minimize interest cost and even stabilize local government financial stabilize local government financial positionspositions

Periodic review of debt and re-Periodic review of debt and re-financing when conditions are financing when conditions are favorable are essential to effective debt favorable are essential to effective debt management and capital planning management and capital planning

Debt LimitationDebt LimitationDebt LimitationDebt Limitation

Article XI, sec. 3(2) and 3(3) of the Article XI, sec. 3(2) and 3(3) of the Wisconsin Constitution limits local Wisconsin Constitution limits local government borrowing and other debt government borrowing and other debt to 5% of equalized taxable propertyto 5% of equalized taxable property

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

Step FiveStep FiveStep FiveStep Five

Inventory current capital assetsInventory current capital assets

Most such base information should be Most such base information should be readily available through the readily available through the government’s insurance carriergovernment’s insurance carrier

Needed for accountability and usage Needed for accountability and usage trackingtracking

Relation to GASB 34Relation to GASB 34Relation to GASB 34Relation to GASB 34

GASB 34 is an inventory of all public works GASB 34 is an inventory of all public works related assetsrelated assets

Values of bridges, roads, facilitiesValues of bridges, roads, facilities

Based on life-cycle costingBased on life-cycle costing

Relates directly to asset inventory needed for Relates directly to asset inventory needed for capital planning.capital planning.

Step SixStep SixStep SixStep SixPrioritizePrioritize

It is unlikely in local government that It is unlikely in local government that there will ever be enough funds, there will ever be enough funds, resources, or staff time available to resources, or staff time available to pursue every capital project which can pursue every capital project which can be justifiedbe justified

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

Step SevenStep SevenStep SevenStep Seven

Staff inputStaff input

Verify condition of existing infrastructure Verify condition of existing infrastructure and equipmentand equipment

Identify trends affecting capital issuesIdentify trends affecting capital issues Develop a list of needs and suggested Develop a list of needs and suggested

projectsprojects Submit to “Coordinator” for Submit to “Coordinator” for

consolidationconsolidation

Step EightStep EightStep EightStep Eight

Evaluate Staff RecommendationsEvaluate Staff Recommendations

Compare staff recommendations Compare staff recommendations with established prioritieswith established priorities

Compare with available revenuesCompare with available revenues Make adjustments for a draft planMake adjustments for a draft plan

Step NineStep NineStep NineStep Nine

Public InputPublic Input

Comply with Wisconsin Open Meetings LawComply with Wisconsin Open Meetings Law Informal involvement or public hearingInformal involvement or public hearing When the CIP is part of the Capital Budget or When the CIP is part of the Capital Budget or

a Comprehensive Plan, the Public Hearing a Comprehensive Plan, the Public Hearing requirement appliesrequirement applies

Step TenStep TenStep TenStep Ten

Finalize Plan and AdoptFinalize Plan and Adopt

Make Final AdjustmentsMake Final Adjustments Can adopt as part of annual Can adopt as part of annual

budget processbudget process Adopt by resolutionAdopt by resolution

Points to RememberPoints to RememberPoints to RememberPoints to Remember

The capital plan is a flexible The capital plan is a flexible documentdocument

Can be changed when the situation Can be changed when the situation requiresrequires

As a “Plan” it is not “cast in stone”As a “Plan” it is not “cast in stone”

StepsStepsStepsSteps

1.1. Establish a process Establish a process

2.2. Appoint a coordinatorAppoint a coordinator

3.3. Identify what is and isn’t a Capital Identify what is and isn’t a Capital ProjectProject

4.4. Identify supporting revenue sourcesIdentify supporting revenue sources

5.5. Inventory current assetsInventory current assets

Steps (cont)Steps (cont)Steps (cont)Steps (cont)

6.6. PrioritizePrioritize

7.7. Collect staff inputCollect staff input8.8. Evaluate and make adjustmentsEvaluate and make adjustments9.9. Public input/Public HearingPublic input/Public Hearing10.10. Finalize and adopt by ResolutionFinalize and adopt by Resolution

Flowchart of Capital Planning Flowchart of Capital Planning ProcessProcess

Flowchart of Capital Planning Flowchart of Capital Planning ProcessProcess

County Department Heads Prepare Project RequestsCounty Department Heads Prepare Project Requests Project Requests are reviewed and prioritized by Project Requests are reviewed and prioritized by

Committee of JurisdictionCommittee of Jurisdiction Executive/Finance Committee completes first reviewExecutive/Finance Committee completes first review Department modifies planDepartment modifies plan Proposed projects and interview schedule are Proposed projects and interview schedule are

published in newspaperpublished in newspaper Executive/Finance holds public review and comment Executive/Finance holds public review and comment

session and interviews department headssession and interviews department heads Committee of Jurisdiction reviews and recommends Committee of Jurisdiction reviews and recommends

planplan

Flowchart of Capital Planning Flowchart of Capital Planning Process (cont.)Process (cont.)

Proposed projects are published in newspaperProposed projects are published in newspaper Executive/Finance evaluates and prioritizes projects Executive/Finance evaluates and prioritizes projects

and forwards to full county boardand forwards to full county board Public Hearing on Capital Plan as part of the budget Public Hearing on Capital Plan as part of the budget

processprocess Full Board approves 5-year Capital Improvement Full Board approves 5-year Capital Improvement

Plan and approves annual Capital Budget as part of Plan and approves annual Capital Budget as part of Annual BudgetAnnual Budget

Department ImplementsDepartment Implements Project Committee of Jurisdiction oversees total Project Committee of Jurisdiction oversees total

projectproject Executive/Finance secures financingExecutive/Finance secures financing

Sources:Sources:Sources:Sources:

““Capital Budgeting and Finance: A Guide for Local Capital Budgeting and Finance: A Guide for Local Governments,” A. John Vogt, International City/County Governments,” A. John Vogt, International City/County Management Association, 2004Management Association, 2004

““Management Policies in Local Government Finance,” Management Policies in Local Government Finance,” International City/County Management Association, ICMA International City/County Management Association, ICMA University Press, 2004University Press, 2004

““Capital Improvement Planning: A Guidebook for Wisconsin Capital Improvement Planning: A Guidebook for Wisconsin Communities*,” Eilrich, Doeksen, & Frye, 1995 (*adopted Communities*,” Eilrich, Doeksen, & Frye, 1995 (*adopted extensively from Capital Improvement Guidebook developed extensively from Capital Improvement Guidebook developed for Oklahoma)for Oklahoma)

Information SourceInformation SourceInformation SourceInformation Source

http://www.uwex.edu/lgc/http://www.uwex.edu/lgc/