If I Had $1,000,000: An Effective Capital Budgeting Process

Transcription

1 DAY MAY 23, :00 3:15 PM If I Had $1,000,000: An Effective Capital Budgeting Process MODERATOR SPEAKERS Patrice Sutton Finance Director, Village of Libertyville, IL Nicole Kreiser Debt Manager, Wake County, NC Darryl Street Senior Financial Policy Advisor, Washington, D.C. David Clark Director, Capital Improvements Program, Washington, D.C. #GFOA2017

2 7 Year Capital Improvement Planning CIP Project Prioritization and Plan Development

3 Presentation Overview: CIP Development Needs Assessment Project Prioritization Cost Estimation Funding Capacity Analysis 3

4 Needs Assessment Comprehensive Master Planning Critical Needs Assessment Facility Condition Assessments Roofs HVACs MEP (Mechanical, Electrical, Plumbing) Paving Flood Control Infrastructure 4

5 Wake County CIP Priorities 1. Ensure life, safety, and basic environmental concerns. 2. Provide operating expense savings. 3. Maintain the integrity of current capital assets. 4. Improve existing facilities, technology systems and infrastructure to meet emerging needs and higher service levels. 5. Without expanding the County's existing role, add new facilities and systems based on approved plans. 6. Expand the County's service delivery role with investments in facilities, infrastructure, and new technology. 7. Match contributions by partners to support community and systems infrastructure. 5

6 In Depth Cost Estimation Estimates Provided By: Consultants Staff in Facilities Design and Construction and General Services Administration Projects Typically Funded One Year Design, Second Year Construction to Allow for Budget Refinement Annual Updates of CIP allow for Updates to Inflation Factors and Estimated Project Costs for 7 Year Horizon 6

7 Funding Capacity Analysis: CIP is a Funded Plan Plan is a funded plan: FY 2018 Transfer from General Fund = $ Million cents of cents recommended property tax rate: FY 2018: $ Million Debt Service: $ Million (76% of Debt Service Revenue) WCPSS Cash Funded Capital: $35.56 Million WTCC Cash Funded Capital: $10 Million County Cash CIP: $29.9 Million Portion of Article 40 and Article 42 sales tax revenue (30% and 60% respectively) FY 2018: $ Million for Debt Service (17% of Debt Service Revenue) 7

8 Continuum of Projects FY18 Funded Projects FY19 to FY24 Planned Horizon Projects will be Appropriated as part of the Budget: Typically adopted by BOC in Capital Projects Ordinance Projects are Planned and Included in CIP: Revenues are assigned to projects. Updated annually scope and costs may change, or ultimately may not be funded Projects are Not Included in CIP: Project timing, priority, business case, or funding are still being determined. 8

9 Summary Understand Needs through Master Planning and Comprehensive Annual Needs Analysis Prioritize Those Needs. Review Priorities to Ensure Consensus with Prioritization Approach Review Costs Through Budget Development Process. Update Costs Projected in Future Years in Annual CIP Development Fiscally Constrain the CIP. Understand Funding Capacity and Plan Projects Accordingly. 9

10 History of the District of Columbia 1801 Created 1846 Alexandria County portion returned to Virginia 1878 Congress establishes three member Board of Commissioners rd Amendment Right to Vote for President 1967 President appoints first Mayor 1973 Congress passes Home Rule Act; popularly elected Mayor, 13-member Council Functions as a City, County, State and School District Mid-1990s Control Board instituted; Independent CFO created Mid-2001 Control Board activities suspended 10

11 Infrastructure Challenges Since 1988 the American Society of Civil Engineers (ASCE) infrastructure report card has scored the nation s infrastructure a D on a scale of A to F. Arlington Memorial Bridge that connects D.C. and Virginia is 5 years away from only allowing foot traffic if it s not replaced. The District has spent billions on schools reconstruction due to long-term lack of adequate maintenance. METRO!!! 11

12 District s Current Financial Status District has to finance and provide the infrastructure needs of a state, county, city and school district The District enjoys a growing population, economy and tax base Fully-funded pension and OPEB trusts Strong bond ratings (AA to AAA category) and strong level of reserves Results in low overall costs of borrowing Relatively low current paygo levels 12

13 Current Capital Planning Process 6-year capital improvement program 4-year balanced financial plan, which incorporates the sixyear capital plan Street condition assessments performed by DDOT to set priorities Capital needs beyond the 6-year CIP, or unfunded current needs, are not addressed 13

14 Long Range Capital Financial Planning Long-range capital financial plan was developed as part of the OCFO Strategic Plan and Council legislation Incorporates the current 6-year CIP and all other infrastructure needs, unconstrained by funding Reflects maintenance needs for all current assets Reflects bond capacity limits and existing pay-as-you-go resources Identified funding gaps and determines optimal funding solutions 14

15 Approach to Develop Long-Range Capital Financial Plan (LRCFP) Obtained software to inventory all capital assets, including condition assessments Developed new capital projects, unconstrained by funding, as well as costs for maintenance of all assets Developed criteria to score, rank and prioritize all projects New projects and maintenance of existing assets Determined funding capacity by year under current fiscal constraints Debt capacity, local funds, federal funds, etc. Identified Public-Private Partnerships (P3s) where private sector funding could assist 15

16 Asset Tree Approach 16

17 District of Colum bia The DC Waterfall Analysis 17

18 Reinvestment Rate Comparison (Amounts in USD millions) Washington, D.C. Canada Asset Type Current Asset Value 1 Average Annual Investment 2 Avg. Reinvestment Rate Current Reinvestment Rate (National Average) 3 Horizontal Infrastructure (i.e. roads, sidewalks, bridges, etc.) $3,523.1 $ % 0.8% 1.1% Vertical Infrastructure (i.e. facilities, buildings, etc.) $6,425.1 $ % 1.7% Equipment IT Fleet $315.3 $ % N/A Notes: 1. Based on District of Columbia FY 2016 Comprehensive Annual Financial Report (CAFR). 2. Based on District of Columbia FY 2017 FY 2022 Capital Improvement Plan (CIP). 3. Based on 2016 Canadian Infrastructure Report Card. 18

19 Unfunded Capital Needs Total capital needs identified (FY2017 FY2022) as $10.5B Less the District s share of WMATA s future capital needs Less projects to be potentially funded as P3s (approx. $1B to $1.5B) District s current CIP is approx. $6.3 Billion Fund the highest priority capital needs Still leaves approx. $4.2 Billion of unfunded capital needs These unfunded capital needs can be reasonably financed over a year period 19

20 Annual Funding Shortfall Capital maintenance projects shortfall of $1.97 billion Average annual shortfall of approx. $325 million Roughly matches total annual depreciation of District assets New capital projects shortfall of $2.22 billion Average annual shortfall of approx. $370 million (in $ millions) Fiscal Year Year Total Unfunded Capital Maintenance Projects $1,967.0 Unfunded New Capital Projects $2,224.2 Total Unfunded Capital Needs $748.7 $691.0 $793.0 $764.5 $569.6 $624.4 $4,

21 Current 6-Year CIP (FY ) CARSS identifies unfunded capital needs not financed in 6-year CIP 21

22 Approach to Developing Funding Solutions Utilized CARSS to identify funding gaps by year for capital needs Developed a long-range capital financial plan optimization model to determine the lowest cost solution to finance the capital funding gap 22

23 Funding Solutions Strong annual revenue growth provides future borrowing capacity Aggressive program of monitoring existing debt for refinancing opportunities and debt retirement provides additional future borrowing capacity Optimal funding solution is to borrow up to the 12% statutory debt limit (Debt Cap) and fund remaining shortfall with paygo 23

24 A Discussion of Return on Investment (ROI) Calculated the value, by asset type, and computed an ROI for each Change in the value Value of the increased life of the asset Change in future expected O&M expenses The overall weighted ROI for investment in capital maintenance projects is just over 5% annually 24

25 Example of an ROI Calculation for Fleet In this example we assume there is a need to replace an engine in a vehicle at a cost of $3,000. The vehicle has a current value of $5,000, and replacing the engine will add 3 years to the life of the vehicle. Value Measurement Change to Market Value of Asset Value of the Increased life of the Asset Change in Future Operating Expense Costs Asset Type: Fleet Cost of the Investment $3,000 % Increase in Value 65.0% Old Asset Value $5,000 New Asset Value $6,950 Change in Value $1,950 Extended Life Years 3 Cost to replace Asset $30,000 % of Interest on Cost Avoidance 4.0% Annual Interest Avoidance $1,200 Total Cost Avoidance over extended life $3,600 Average Annual Operating Expense $600 % Change to operating Expense 60.0% Annual Operating Savings $360 Total Savings $1,080 Total Investment $3,000 Gain or Loss on Investment $6,630 Years of Return 3 Annual Net Gain from Investment $1,210 Annual ROI 40.3% 25

26 What do we get for the money? ROI Assumptions Using FY 2017 Data, if we fully funded the gap: We'll retain 65% of the value of our fleet investments - which includes depreciation. The investment cost avoidance calculation is based on 75% of our investment being new vehicles. The remaining 25% of costs are for capital expenses (chassis, engines, transmissions etc.) and thus avoid the purchase of new vehicles, which would have a market value of 5 times the current value of the major vehicle parts we're investing in. The operating impacts are calculated based on the use of an average annual fleet maintenance cost of 10% of the original market value during it's final 3 years of useful life. The cost savings is based on the fact that we would have replaced the vehicles and/or major systems on time, and thus maintenance would drop back to 'normal' levels. 26

27 What about Metro? 27

28 Operating Revenue & Maintenance Funding Gap (in $millions) Total is approx. $21 Billion 28

29 Capital Budget Revenue & Funding Gap (in $millions) Total is approx. $15.6 Billion 29

30 10-Year Funding Gap Summary ($ Millions) CIP Funding Gap $ 6, Maintenance Budget Gap $ 1, Total $ 7, Annual Average (10 Years FY 2017 FY 2026) $ See the full Pro Forma for greater details 30

31 Reinvestment in Mass Transit Why do we need $15.6 Billion of capital investment over the next 10 years to reach a state of good repair? How did we get almost $7 Billion behind? The less than satisfactory reinvestment rate! Mass Transit Metro ($ millions) Asset Type Current Asset Value Average Annual Investment % Reinvestment Target Public Transit WMATA $ 39,640 $ % 3.9% 31

32 Summary of Metro Issues Allows WMATA to reach a State of Good Repair in 10 years SGR total capital needs are estimated by WMATA at $15.6 Billion Represents a maintenance gap of $1.3 billion and a capital gap of $6.2 Billion (total 10 year combined gap of $7.5B) Far exceeds reasonable capacity of the compact jurisdictions A dedicated regional funding source is essential to achieve a State of Good Repair A dedicated funding source collecting approx. $650M annually, beginning in January 2019, can cover both the maintenance and capital funding gaps, as well as additional critical capital needs Without a dedicated funding source in place by January 2019, jurisdictions will not be able to fund WMATA s capital needs 32

33 Impacts of No Additional Funding Estimated cost of rush hour (only) trip delays are estimated at between $153M and $235M annually Passenger safety risks will continue to increase and traffic congestion will continue and worsen Approx. $25 billion of development has occurred near metro stations over the past 8 years Future development and economic growth could stall Economic forecast implies regional, state and local government tax revenue growth from 2.5% to 4% annually Reducing the economic forecast by just 0.25% to 0.50% results in annual losses to compact area taxes, collectively, ranging from $1 billion to $2.3 billion, respectively, after ten years. 33

34 Conclusions 34

35 Next Steps for D.C. Aggressively pursue opportunities to refund existing debt and use savings to fund infrastructure needs Increase pay-as-you-go funding by $325 million per year by FY2019 Represents just 3.7% of the general fund budget or slightly more than just one year of revenue growth Pursue projects with P3 potential to engage private sector funding and solutions Pursue and secure a dedicated regional funding source and/or federal assistance to address Metro s funding needs 35

36 Any questions on why reinvesting in capital is important? 3 6