How Much Is Enough? Determining Appropriate Levels of Capital Investment

Transcription

1 How Much Is Enough? Determining Appropriate Levels of Capital Investment Monday, June 1, :15-5: CPE Moderator: Speakers: Jan Hawn, City of Belluve, WA Tom Dawe, Public Sector Digest Gary Donaldson, City of Atlanta, GA

2 Capital Improvement Projects: How Much Is Enough? Gary Donaldson, Chief Revenue Officer City of Atlanta, GA June 1, 2015

3 Philly Cheesesteak, Pizza, Beer 3

4 Every Decision Has Consequences 4

5 How Much is Enough and for Who? l Identify Key Stakeholders: Tax/Rate Payers, Elected Officials, Interest Groups, and Finance Officer l Identify Key Constituents and Quantify Fiscal Impacts in Tangible Ways l Communicate and Communicate More l GFOA Resources and Best Practices 5

6 GFOA - Capital Planning Best Practices l Development of Capital Planning Policy (2011) l Multi-Year Capital Planning (2006) l Communicating Capital Improvement Strategies (2013) l Capital Asset Assessment, Maintenance, and Replacement Policy (2007 & 2010) l Building Resiliency into Capital Planning l Incorporating a Capital Project Budget in the Budget Process (2007) l Incorporating Environmentally Responsible Practices in the Capital Improvement Program (2010) 6

7 GFOA - Capital Planning Best Practices l Linking Economic Development and Capital Planning Strategies (2011) l Presentation of the Capital Budget in Operating Budget Document (2008) l Role of the Finance Director in Capital Asset Management (2011) l Role of Master Plans in Capital Improvement Planning (2008) l Use of Technology in Capital Planning and Management (2011) 7

8 Preparing and Adopting Multi-Year Capital Planning l Background Ø Capital assets are the foundation for providing services Ø The procurement, construction, and maintenance are a critical activity of the government and require careful planning Ø An important component of an entities economic development program and strategic plan Ø Essential to the future financial condition of an organization 8

9 Preparing and Adopting Multi-Year Capital Planning l Recommendation Ø That governments prepare and adopt a comprehensive multi-year capital plan Ø The plan identifies and prioritizes expected needs based on a strategic plan Ø CIP should be at least three years, preferably five or more 9

10 Seeing the Big Picture LOCAL Population Employment Income Property Business Activity Growth Flexibility Elasticity Dependability Diversity NATIONAL AND REGIONAL Inflation Employment Regional Markets Federal/State Mandates Grants-In-Aid Tax Restrictions Incorporation Laws Weather Earthquake Flood, Fire Etc. Growth Mandated Cost Productivity Effectiveness Operating Results Fund Balances Reserves Liquidity Long-Term Debt Short-Term Debt Overlapping Debt Contingent Debt Qquasi Debt Debt Schedules Pensions Leave Benefits Deferred Maintenance Attitudes Toward: Taxes Services Political Processes Depreciation Asset Inventories Maintenance and Replacement Schedules 10

11 Capital Asset Definition l Capital assets 1) are used in operations, 2) have an initial useful life in excess of one year, and 3) are comprised of Tangible and Intangible assets. l Tangible assets include (land, buildings, building improvements, vehicles, machinery, equipment, works of art, historical treasures, and infrastructure). l Intangible assets include (easements, software, water rights). l Amount to a cost of $5,000 or more. 11

12 What is the Goal of Acquiring Capital Assets? l To develop and maintain assets and infrastructure that reflect the community s needs and values l To acquire valuable assets that will have a useful life of multiple years l To acquire assets that can be maintained l To acquire assets that are affordable. 12

13 Government Perspective l Tax Base. Tax base composition e.g. residential versus commercial is an important factor in addressing the question of who pays. l Wealth and Income. Personal Income and Per Capita Income Levels. l Debt Burden. Debt Service as % of Combined Operating and Debt Service Expenditures. 13

14 Financial Indicators 1 Long-Term Debt Net Direct Long-Term Debt Assessed Valuation 2 Debt Service Net Direct Debt Service Net Operating Revenues 3 Overlapping Debt Overlapping Long-Term Debt Assessed Valuation 4 Fixed Costs Fixed Costs Net Operating Expenditures 5 Maintenance Effort Expenditures for Repair and Maintenance of Fixed Assets Amount of Assets 14

15 Financial Indicators cont. 6 Level of Capital Outlay Capital Outlay from Operating Funds Net Operating Expenditures 7 Depreciation Depreciation Expense Cost of Depreciable Fixed Assets 8 Residential Development Market Value of Residential Base Market Value of Total Property 9 Unfunded Pension Liability Unfunded Pension Plan Vested Benefits Assessed Valuation 10 Revenues Per Capita Net Operating Revenues in Constant Dollars Population 15

16 Financial Indicators cont. 11 Property Tax Revenues First Year Property Tax Revenues X CPI Second Year in Constant Dollars CPI First Year 12 Uncollected Property Taxes Uncollected Property Taxes Net Property Tax Levy 13 User Charge Coverage Revenues from Fees and User Charges Expenditures for Related Services 14 Elastic Tax Revenues Elastic Operating Revenues Net Operating Revenues 15 General Fund Balances Unrestricted Fund Balance Net Operating Revenues 16

17 Moody s GO Rating Scorecard Rating Factor Weighting Economy/Tax Base 30% Tax Base Size (full value) 10% Full Value per Capita 10% Wealth (median family income) 10% Finances 30% Fund Balance (% of Revenues) 10% Fund Balance Trend (5- Yr Change) 5% Cash Balance (%of Revenues) 10% Cash Balance Trend (5- Yr Change) 5% Management 20% Institutional Framework 10% Operating History 10% Debt/Pensions 20% Debt to Full Value 5% Debt to Revenue 5% Moody's adjusted Net Pension Liability 5% (3- Yr average) to Full Value Moody's adjusted Net Pension Liability 5% (3- Yr average) to Revenue 17

18 S&P GO Rating Scorecard Rating Factor Weighting Imputed Score Institutional Framework 10% Uniform score for all of the same type of governments in same state Economy 30% Total Market Value Per Capita and Projected Per Capita Effective Buying Income as a % of US Projected Per Capita EBI Management 20% Issuer's Financial Management Assessment Score considered with other certain qualitative factors Financial Measures 30% Liquidity (10%)- Total Government Available Cash as % of Total Governmental Funds Debt Service and % of Total Governmental Funds Expenditures Budgetary Performance (10%)- Total Governmental Funds Net Result (%) and General Fund Net Results (%) Budgetary Flexibility (10%)- Available Fund Balance as a % of Expenditures Debt and Contingent Liabilities 10% Net Direct Debt as % of Total Governmental 18

19 Taxpayer Perspective l Income. Median Household Income. l Debt Burden. Consumer Debt to Income Ratios. l Wealth. Median Family Net Worth. 19

20 Consumer Finances The Survey of Consumer Finances indicates that between : Family Income rose 4% Consumer Price Index averaged 2.3% Core Logic National House Price Index increased at an average annual rate of 2% Ownership rates of housing and business declined Income disparity and demographic data 20

21 The Steps to Developing a Capital Plan 1. Identify/Prioritize Capital needs 2. Develop Projects/Estimate costs 3. Develop Financing Strategies 4. Execute/Monitor Capital projects 21

22 Identify/Prioritize Capital needs l Understand the capital needs of your community Build rapport with your capital department(s): Meet with your department contacts regularly Understand their operations Understand their needs and constraints Become a technical resource Attend capital planning meetings Boards and Commissions Review capital artifacts and documentation Current and past Capital Improvement Plans Budget documentation Learn as much about their operation as possible- you ll need it! 22

23 Identify/Prioritize Capital Needs Questions To Consider l Will the capital asset that requires repair, maintenance, or replacement, if not addressed, result in higher costs in future years? l Are the infrastructure improvements needed to support new development or redevelopment? l Does the project have revenue-generating potential? l Does the project catalyze economic development? l Does the project represent changes in policy or community needs? 23

24 Prioritize Requests l Consider relationship of project financial and governing policies, plans, and studies l Incorporate input and participation from major stakeholders and the general public l Consider legal requirements and/or mandates l Anticipate the operating budget impacts l Apply analytical techniques (e.g., net present value, pay back period, cost-benefit analysis, life cycle costing, cash flow modeling) l Re-evaluate capital projects approved in previous multiyear capital plans l Use a rating system to facilitate decision-making 24

25 Template of a CIP Criteria Scale 25

26 Develop Projects and Estimate Costs l Capital project managers develop projects that are intended to address capital needs: Clarify project scope Identify project steps Estimate project costs Estimate Timeline 26

27 Capital Project Analysis l Key capital project cost drivers: Staff time will staff be allowed to charge time to capital projects? Land acquisition how many owners? Are they willing to sell? Design and engineering internal staff or external consultants? Construction costs how concrete are estimates? Environmental remediation what are we going to find when we start digging? Scope creep what will stakeholders want to add to the project? Close-out how much should be set aside to resolve any close-out issues? On-going maintenance what will the impact be on the O&M budget? 27

28 Capital Budgeting Capital Expenditure & the Capital Budget l What is a capital expenditure? Spending of significant value to acquire or build property with useful life greater than one year l What cost items are chargeable to a capital project or acquisition? Site, site preparation, real property construction or acquisition, planning/design, equipment, legal & administrative costs related to project, etc. l Should expensive, non-recurring operating expenditures go into the capital budget? Fire trucks, information technology projects, etc? 28

29 CIP Review and Approval l CIP Planning and Implementation: Annual schedule, timing of CIP development relative to operating budget development l Identify and Prioritize New Capital Projects: Key Stakeholders, Community and Citizen Input l Approval Authority: Use of Centralized approval authority comprised of broad and diverse stakeholders upfront is advisable particularly for referenda initiatives l Capital Budget: Addition of new capital projects i.e. urgent requests or new mandates may take priority in first year of CIP (capital budget) l Operating Budget: Capital Projects may have Operating Expenses implications that will need to be factored in the budget process l Reporting and Monitoring: Important particularly for referenda projects and build trust with citizens 29

30 CIP Committee: Centralized and Interest- Based Approach l Involve Key Stakeholders:. Leaders, Neighborhood and Citizen Groups Project Managers and Planners Finance Experts For Larger CIP Governments consider two tiers acting as two filter stages for project evaluation and ranking Tier 1- director level or agency head, legislative and executive branches Tier 2- below director and agency head level, neighborhood and citizen groups l Create Collaborative Environment l Focus on Interests and Not Positions: Filters Tier 2 Tier 1 Allow for Creative Alternatives Focus on Big Picture Set Standing Meetings and Milestones 30

31 Develop Financing Strategies l Anticipate expected revenue and expenditure trends, including their relationship to multi-year financial plans l Prepare cash flow projections of the amount and timing of the capital financing l Comply with all established financial policies l Consider and estimate funding amounts from appropriate funding alternatives l Ensure reliability and stability of funding sources l Evaluate the affordability of the financing strategy, including the impact on debt ratios, taxpayers, ratepayers 31

32 Financing Plan Options l Capital Reserve (Pay-As-You-Go): Develop policy committing to annual appropriation i.e. % of depreciation and/or inflation indexed l Capital Funds: Fund balance assignments targeted for capital and investment income on unrestricted cash l Private sector and other contributions: Special Tax Improvement Districts, Developer Impact Fees and Utility Connection Fees l Federal and State Grants: Community Development Block Grants, Transportation, Education, and Public Safety l Debt, Double-Barreled General Obligation Pledge (Ad Valorem Tax and Other Revenues): Coordinate Voter- Referendum and include Other Revenues i.e. Sales Tax Authorization for Capital Projects, Security Pledge 32

33 Capital Financing Options Pay-as-you-go l General obligation (G. O.) bonds l Revenue bonds l Capital leases: o Privately placed for equipment or small projects o Certificates of participation for large projects Debt Financing l Annual revenues l Capital reserves l Grants l Partnering (using others money) o Inter-local projects o Public-private projects l Charges to property o Special assessments o Impact fees 33

34 Capital Financing Options Pay-as-you-go (acquire) l Fiscal responsibility is enhanced. This financing strategy forces those in control to deal immediately with the mix of current and intergovernmental revenues for funding capital projects. l Flexibility. During times of economic adversity, a government operating with a pay-as-you-go philosophy will have more financial flexibility than a pay-as-you-use government. l Future borrowing enhanced. Credit rating may be higher the less the government borrows. 34

35 Capital Financing Options Debt Financing l Fiscal Practicality. Many governments do not have the available resources to fund major capital investments with operating resources. l Funding Security. Operating funds can ebb and flow, thereby leading to project uncertainty. Debt financing established a dedicated resource to cover project costs and maintain stability l Reduces Pressure on Operating Funds. Using a debt financing approach reduces the impact of the project to debt service payments, which are significantly less than project costs 35

36 Develop Financing Strategies l Conduct long-term projections Anticipate expected revenue and expenditure trends, including their relationship to multi-year financial plans Prepare cash flow projections of the amount and timing of the capital financing Evaluate reliability and stability of funding sources l Conduct Scenario Analysis Evaluate the affordability of financing strategy scenarios, including the impact on operating funds, debt ratios, taxpayers, ratepayers Consider and estimate funding amounts from appropriate funding alternatives l Understand financing guidelines and constraints Comply with all established financial policies 36

37 Capital Reserve Fund Funding Maintain an annual contribution equal to % of annual depreciation of the total assets of government 37

38 CIP Committee Process Flow 38

39 Capital Project Summary-Example Current Scope: Schedule and Budget Planning Preliminary Design Final Design Implementation Substantial Completion Closeout Acquisition Total: Current Start Current Finish LTD* Expense LTD Budget Proposed New Appropriation Future Appropriation Baseline Budget at Completion Estimate at Completion Proposed Expenditure Budget Planning Preliminary Design Final Design Implementation Substantial Completion Closeout Acquisition Total: Total: 39

40 Project Summary-Example Continued Department/Agency: Public Works Project Number: Justification: Project Status: Changes Since Last Request: Alternatives Analysis: Funding Discussion: Risk Discussion: 40

41 Execute and Monitor Projects l Review Project Status Reports Request to receive copies of monthly project status reports Meet regularly with Project Manager(s) to discuss capital project portfolios At least quarterly Discuss any changes, or issues that may impact project budget Review change control documentation Develop a summary report of findings, issues and recommendations: Validate findings 41

42 How much is enough? Determining Appropriate Levels of Capital Investment TOM DAWE JUNE 1ST, The Public Sector Digest Inc. All rights reserved.

43 About PSD Research and Technology GFOA 2015 Two Divisions RESEARCH Public Sector Digest TECHNOLOGY +CityWide Software Solutions

44 County of Ryde GFOA 2015

45 Sources of Municipal Funding GFOA 2015 Ontario Property Tax 49.5% User Fees 21.7% Intergovernmental Rev. 21.5% Source: Federation of Canadian Municipalities

46 Infrastructure Responsibilities GFOA 2015 Ontario Federal (50% of revenues) Railways/Airports Marine Facilities Defence Facilities Courts and Prisons Provincial (42% of revenues) Hospitals Education Facilities Highways and Structures Courts and Prisons Local (County and Municipal) (8% of revenues) Water and Sewage Roads and Structures Public Transit Parks and Recreation Police/Fire Services Social Housing

47 American Infrastructure GFOA 2015 Total American Infrastructure Deficit: $3.6 trillion

48 Asset Management Plans GFOA 2015

49 Asset Management Plans GFOA 2015 The International Infrastructure Management Manual "a plan developed for the management of one or more infrastructure assets that combines multi-disciplinary management techniques (including technical & financial) over the life cycle of the asset in the most cost effective manner to provide a specific level of service. An AMP typically covers the following areas: Introduction and link to Strategic Plan State of the Infrastructure Report Desired Level of Service Asset Management Strategy Financial Strategy

50 Asset Management Our perspective on the process GFOA 2015 After 100+ AMPs: Data integrity Communication with clients Education and training

51 Asset Management Data integrity GFOA 2015 What worked 1. Greater confidence with Condition versus Financial Age 2. Current Replacement Cost (Tender/per unit) vs CPI 3. Detailed Inventory With Attributes Room for Improvement 1. Centralized Repository Finance/Engineering Data 2. Lifecycle Events/Rehabilitation Strategy 3. Disaggregate data Pooled for PSAB

52 Asset Management Communication with clients GFOA 2015 What worked 1. Departmental Participation 2. Asset Management Position/Role 3. Council or Senior Staff Buy-In Room for Improvement 1. Understanding an AMP 2. Lack of Time & Resources 3. Levels of Service

53 Asset Management Education and training GFOA 2015 What worked 1. Webinars/Training Sessions/Case Studies 2. Departmental Participation Room for Improvement 1. Commitment to Asset Management 2. Educating existing and new councils

54 Financial Strategy GFOA 2015 Growth requirements Service enhancements Infla5on requirements Renewal requirements Amortization of historical cost of investment Principal and interest payments Operating and maintenance costs

55 Financial Strategy GFOA 2015 Growth requirements Service enhancements Inflation requirements Renewal requirements Amortization of historical cost of investment Principal and interest payments Operating and maintenance costs

56 Financial Strategy GFOA 2015 Growth requirement s Service enhancements Inflation requirements Renewal requirements Amortization of historical cost of investment Principal and interest payments Operating and maintenance costs

57 Financial Strategy GFOA 2015 Financial Plan requirements Existing Assets New Assets due to growth Long-term plan (minimum 10 years) Use of traditional sources of municipal funds Tax Levies, User Fees, Reserves Debt Development charges Use of non-traditional sources of municipal funds Reallocated budgets and partnerships Use of senior government funds Gas Tax and Grants

58 Tools and Resources GFOA 2015 GFOA: Preparing for Risk-Based Reserve Analysis Primary and Secondary Risk Factors E.g., natural disasters, revenue volatility, and liquidity Public Sector Digest: Provides financial strategy for infrastructure Abbreviated asset management plan Colorado Springs, Napa, Palmetto Bay, Poway

59 Tools and Resources Asset Heat Map GFOA 2015 Risk Matrix and Scoring Methodology Risk = Probability of failure x Consequence of Failure

60 Asset Management Plan GFOA 2015 Phase 1: Organizational assessment and interviews Corporate asset management policy Condition assessment program development Information gathering Data gap analysis Implementation review

61 Asset Management Plan GFOA 2015 Phase 2: Life cycle framework development Risk and criticality model development Decision tree development Financial requirements development Financial capacity analysis Budget scenario development Levels of service framework development

62 Asset Management Plan GFOA 2015 Phase 3: Systems calibration Update asset management plan Review levels of service

63 Asset Management Summary GFOA 2015 Multi-year approach with defined activities Annual review and multi-year budget Addition of tools and technologies when appropriate Using the AMP to maximize available funding opportunities Performance Measurement and Management

64 Contact GFOA 2015 Tom Dawe, President The Public Sector Digest Inc

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