Capital Budget Basics November 18, 2014

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Capital Budget Basics November 18, 2014 A

Presented by: Anne Gulati, Needham Public

1 Capital Budget Basics November 18, 2014 A how-to session on including maintenance schedules & capital expenses into annual budget preparation. Presented by: Anne Gulati, Needham Public Schools & Kurtis Johnson, Blackstone Valley Vocational RSD Moderator: Paul Schaefer, King Philip RSD

2 Capital Budgeting Defined A Capital Improvement Plan is a multi-year plan of proposed capital outlays and related financing of infrastructure, such as the construction or renovation of buildings, streets & sidewalks, water & sewer, parks and sports fields, as well as the purchase of major equipment. The Capital Budget typically is the first year of the multi-year capital plan and includes funding sources for the proposed projects.

3 Capital Budgeting Defined Capital projects differ from operating expenses in that they generally involve: The acquisition, design, construction, renovation or betterments to land, building, facilities, equipment or vehicles Expenditures which take place beyond a single fiscal year Often funded with debt to share costs with future beneficiaries Systematic acquisition over an extended time period Scheduled replacement/maintenance of physical assets Threshold unit cost in excess of a specific amount (e.g. $25,000) Threshold useful life of five (5) or more years Proposed capital outlays should be: Thoroughly vetted Linked to documented goals/community needs Aligned to funding sources to determine if, when, and how the project will be pursued

4 Capital Budgeting Defined This blueprint of proposed future projects for capital purposes is linked to the Operation Budget in the form of: Capital Outlays Debt Service Operational impact of projects Increased utility expense (or savings) Additional staffing required for ongoing operations Specialized contractual services Insurance expense Other costs or efficiencies that impact the annual operating budget

5 Getting Started (Gain Support) Establish A Facilities Subcommittee & Define Expectations BVT: This subcommittee will accept responsibility for a periodic yet continual review, inspection and evaluation of the condition of our facility and campus. The subcommittee will identify priorities and cost effective approaches for improvement and provide input and reaction to proposals which strengthen the learning climate for students. Additionally, this subcommittee will examine the strengths and weaknesses of the impact and effectiveness of in-house and/or contractual personnel affiliated with facility supervision, maintenance and/or improvement. NOTE: Although this committee provides cost effective alternative approaches to various proposals, it should maintain separation from funding decisions. This allows committee members to stay focused on the needs of the facility and prioritization of the projects. The budgeting subcommittee will then determine how to fund each initiative.

6 Resources MASBO.org Facilities Management Documents on MASBO.org Facilities Planning Guide Capital Planning & Facility Maintenance

7 Master Plan/Capital Needs Study Strategic Vision that supports the Mission Statement and Goals Facilities maintenance schedules/checklist Condition of existing facilities and equipment roofs/walls/floors HVAC/electrical water-sewer athletic fields drives/parking areas security systems (door access/cameras) sprinkler systems vehicles heavy machinery other Consider age, expected life, wear & tear, nature and frequency of repairs & maintenance (routine, preventative, emergency), and other factors that might impact a current year decision Should address a minimum of 5 to 10 years

8 Master Plan/Capital Needs Study Examples Master Plan - an architectural strategic plan to determine the scope of repairs, modernization, upgrades and/or new construction needed to serve the current and future facilities needs of the community. Contemplates all Project Sites Consider the benefits of a Facilities Master Plan Process that provides a high-level overview of the planning process. Condition Assessment - an independent architectural & engineering study that documents the physical condition of existing building and equipment assets, and recommends a schedule for the maintenance, renovation or replacement of those assets.

9 Develop Meaningful Capital Planning Forms Consider the size and nature of the organizational structure Regional (Single or Multi Campus) -v- versus City/Town Detailed descriptions of each project Project schedule and funding timeline Be mindful of Chapter 149 and Chapter 30, Section 39M Extensive projects may affect multiple years Feasibility studies Acquisition and/or use of land (Conservation/Zoning) Design (Chapter 7) Construction Additional costs (personnel, utilities, maintenance, insurance) OR Anticipated benefits (cost savings, personnel/process efficiencies) Prioritization with detailed justification Financing options (grants, operations, stabilization, debt) Expected life of capital improvement

10 Capital Planning Forms RESOURCE EXAMPLES Capital Budgeting Forms Extraordinary CIP Form Capital Guidelines & Instructions

11 Funding Capital Related Projects Establish a Stabilization Fund State House Note Program (Forms) Requires 2/3 Vote of City Council, Town Meeting or District Prudential Committee to create & appropriate the fund for a specific purpose Consider the potential use of stabilization funds to avoid spikes in capital requests and/or debt Draw from Stabilization Fund when expenditures > amounts budgeted Add to Stabilization Fund when expenditures are < amounts budgeted Borrowing (debt) is governed by MGL Chapter 44: Asset Useful Life Schedules & Maximum Borrowing Terms

12 Funding Capital Related Projects Use Free Cash or E&D (as certified by D.O.R.) Free Cash - actual revenue collections in excess of estimates and expenditures less than appropriation (also consider the impact of deficit fund balances and receivables that remain uncollected as of August 31 st ) Many communities have policies that limit the use of free cash to no more than 2% of the prior year s appropriated budget Regional Use of E&D Constitutes an increase to the operating budget Consider the impact of MGL c.71, 16B: votes by a local appropriating authority to appropriate the municipality s apportioned share of the R.S.D. budget shall constitute approval of the annual R.S.D. budget any municipality s apportioned share may not be increased in the same fiscal year without approval of the local appropriating authority. Once notice has been served, member communities have 45 days to take action on the proposed use of E&D No action constitutes a yes vote

13 MSBA Funding Funding Capital Related Projects Anticipated reimbursements lower a community s required investment Caveat - Community must demonstrate capability to fund 100% of the project Consider using Advanced Funds In-Lieu of Borrowing Advance Funds In-Lieu of Borrowing Temporary ONLY (bridges reimbursement gap of the MSBA Grant) Interest expense (net savings interest income versus interest expense) Could be as much as.5 basis points Administrative requirements (substantially lessened) Cost of issuance eliminated Must have sufficient Free Cash or Excess & Deficiency availability Must be paid back to general fund by end of fiscal year

14 Funding Capital Related Projects Energy and/or rebate incentives lighting, boilers, reconditioned air, geo-thermal, recycled water runoff for field maintenance work directly with local energy provider/access energy efficiency grants Community Preservation Act Funds A surcharge on the municipal tax levy for the acquisition, creation and preservation of open space, historic resources, community housing or land for recreational use Grant Funding

15 Funding Capital Related Projects Aggressive Pursuit of Grants Ensure grant funding/purpose is in line with the municipality's mission, goals and master plan Avoid the funding cliff Focus on one-time expenditures that add value to the system, but don t create a recurring need Needs assessment aligned with mission (long/short term goals) Business & Industry Educational Foundations (Local) Other Public/Private Foundations or Organizations Collaborative Grants (Several Municipalities) Casting a net across multiple opportunities will generate a higher yield than a single funding source

16 Effects of Inadequate Capital Budgeting May impact MSBA funding opportunities Active and on-going maintenance serves to protect the Commonwealth s investment in school buildings Maintenance incentive reimbursement points Can add up to two (2) additional points Maintenance & Capital Planning Record (Completed by District) Additional resources can be found on the MSBA website: May impact bond rating when issuing or refinancing debt, resulting in higher interest rates on bond issues and diversion of resources to pay for interest on loans Five (5) year capital plan Comparison to reserves Reviewed in context to issued financial statements How will capital needs be funded (operations/e&d/debt) Review of current debt ratio (O/S Debt to City or Town s Full Valuation)

17 Maintenance & Repair Budgeting Maintain a listing of all equipment and/or systems that require ongoing scheduled/preventative maintenance Recommended maintenance schedules (per owner s manual) Detailed by year as suggested by manufacturer Be mindful that older equipment will likely need more frequent and costly repairs Provide contingency for unanticipated replacement/repairs Consider historic data Consider age and ongoing use of machinery/equipment Use of software that is capable of scheduling equipment inspections and maintenance/parts replacement Perform cost benefit analysis (repairs versus replacement) Monitor unusually high budgetary variances and incorporate into the forthcoming budget cycle This information should be used to quantify anticipated expenditures related to maintenance & repairs

18 Link to Operation Budget Estimate the annual cost of operating and maintaining a facility to be constructed or acquired as part of the planning process. These costs will need to be built into the operating budget: Salary & wages of new personnel Services, supplies & materials Equipment Project debt service impact of proposed projects. Projects should remain within established debt management thresholds: Debt Service as a % of gross revenues (e.g. 10%) Debt Service as a % of General Fund revenues (e.g. 3%) Debt Per Capita Net debt as a $ of assessed value of taxable property Cap on annual bond sales to maintain bank qualifications Minimum expenditure eligibility for long-term borrowing (e.g. $100,000) Bond repayment period not to exceed expected useful life of project

19 Capital & Debt Management Policy Capital Policy Definition of capital project Require adequate maintenance and orderly replacement of capital plant and equipment Assets maintained at level that: protects capital investment and minimizes maintenance and replacement costs Consider future operating and maintenance costs Debt Policy Proceeds from long-term debt not used for current, ongoing operations Defines debt management thresholds (debt ratios) Sets limits and conditions for incurring debt Sets guidelines for repayment periods

20 Questions & Answers

INTRODUCTION. Why a CIP? What is a Capital Improvement?

INTRODUCTION. Why a CIP? What is a Capital Improvement? INTRODUCTION The Capital Improvements Program (CIP) is a six-year plan used to identify and coordinate public needs in the City, taking into consideration existing plans, goals and resources. The purpose