The ABC’s of CIP’s
E-Quarterly Newsletter - October 2024
By Jessica Cook, Director of Fiscal Consulting,
Jon Cameron, Senior Municipal Advisor | Managing Director
and Aaron Bushberger, Municipal Advisor
Capital Improvement Plan Basics for Local Governments
Planning for capital improvements is a crucial exercise for local governments. You need to ensure that your assets are in good working order and safe condition. Countless articles have been written about the importance of capital planning – the need for public input, expensive engineering studies, and special software packages. It can be daunting. Where do you begin? How do you make sure projects can actually be funded when budgets are tight? In this article we will provide a step-by-step guide on how to approach capital planning and offer some funding tips and strategies.
First of all, decide when to set aside the time to complete your capital plan. For your first plan, we recommend developing it at a different time of year than when you complete the budget. Ideally the plan would be completed in advance of the budget preparation so you can include next year’s capital in your budget. The timing for planning street improvements in the fall may also generally allow you to bid projects for spring starts – perhaps obtaining favorable pricing. Be sure to allow enough time for all the department heads to weigh in on their respective needs, and for the Council to consider and adopt the plan. Minnesota school districts are required to submit their long-term facilities maintenance (LTFM) plan to the State by July 31 each year. School districts will also oftentimes develop a multi-year operating capital plan to identify future curriculum, equipment and other smaller capital asset needs. While neither LTFM revenue nor Operating Capital revenue sources are sufficient to address all deferred maintenance and capital needs, these plans can help define and prioritize district needs.
Practically, you will need to determine how you’re going to assemble the plan – whether that’s a spreadsheet or one of the relatively affordable off-the-shelf software options or, for large-scale school building referendum projects, utilizing an architecture or general contracting firm. If you choose to use a spreadsheet, be sure to list the following in separate columns: improvement or purchase, department, fund in which it will be accounted, project number, year needed, and funding source. Funding sources should include tax levy, grants, assessments and state aid as well as cost sharing with other governments.
Once you’ve decided how to track the information, you’re ready to start gathering data.
Step 1: Inventory what you already have
An important thing to consider is what types of capital assets you should be including. The capital improvement plan should follow your capitalization policy. For example, any asset that has a useful life over five years or costs more than $10,000. Everything wears out, so when you think about what you’ll need in the future, a good place to start is by determining what you have now and when it will need to be replaced or repaired. You probably already have a good list started with your insurance information. What vehicles, equipment and buildings are you insuring now? They should all be in your capital plan. Don’t forget about other assets such as technology and software that need periodic replacement.
Step 2: Assess useful life of existing assets
Once you have a list of your current assets, estimate how long they will last. Estimate the remaining useful life of existing vehicles and how often other rolling stock needs to be replaced, such as plows and police vehicles. Remember to add costs for equipping the vehicles for use. Police vehicles typically require additional capital assets to make them ready for use. School buses and vans may be regularly leased, if you maintain your own fleet. You may need assistance from an engineer related to your streets and utilities, or from an architect to assess your buildings, especially for those large-scale school building projects that you will take to voters. But remember estimates in a capital plan are fine. You don’t necessarily need a full-blown pavement management plan or building inspection. Assure your engineers you won’t be holding them to their estimates, so they don’t feel they need to do a detailed (and expensive) study. Use today’s prices for your capital plan. That way if you change the year, you don’t have to change the price. Costs can, and should, be inflated later, when you’re planning how to pay for your needs. In the case of a referendum vote, finding that balance between estimates and accuracy before going to voters is the best path forward to informing and engaging the community in the process.
Step 3: Assess future needs
If your community is growing, you may need to buy additional maintenance equipment, expand your public works facility, and build a new elementary school or parks. Think broadly about all the services your community provides. Which ones need to expand due to population growth? Sometimes there’s also the desire to provide additional services, such as adding a swimming pool or community center. Surveys of your constituents can help you gauge the community’s appetite for high-profile projects, even if you don’t think you can afford them. In the next step we’ll guide you through prioritizing community needs and wants.
Step 4: Prioritize capital projects
A simple system of assigning a Priority of 1-3 to each can help the Council or Board understand the critical importance of some projects so they don’t get continuously deferred. We suggest the following prioritization:
- “Mission Critical” — basic services will falter if this project doesn’t get done or the equipment isn’t purchased.
- If we have the money, this project needs to happen soon. It’s on its way to becoming a top priority.
- These projects and purchases are “wish list” items that can be funded if additional revenue is identified, or as higher priority projects are completed.
Step 5: Identify funding sources & strategies
For each improvement identify a funding source such as utility revenues, special assessments, property tax levy, or bonding. If you select bonding, remember that you will need to include the repayment of those bonds in your annual budget and debt levies. If you need a projection of an estimated annual debt service amount, call your Municipal Advisor.
In Wisconsin, levy limits make it very difficult to accumulate cash for capital projects, so most municipalities need to resort to borrowing. Revenue supported bonds, such as those that finance utility projects, can be issued in amounts that can be supported with user rate revenues. The total general obligation debt a Wisconsin municipality can carry is limited to 5% of its total equalized value.
One potential levy limit strategy in Wisconsin is to issue promissory notes with a maturity of at least 1 year and a day that are prepayable at any time. The community then levies for the total principal and interest but once the levy is in place, the bond proceeds are used to pay off the debt, leaving the levy in place to be used for capital purchases and projects.
In Minnesota, a state without levy limits for municipalities, a community can issue GO debt without an election for several purposes, including equipment, street reconstructions that meet certain criteria, and projects that are at least 20% assessed, for cities and counties. School boards have authority to issue GO debt without voter approval for purposes including deferred maintenance, indoor air quality and parking lot projects.
Step 6: Measure the financial implications
Now that you have your capital needs identified, how do you pay for it? Once you have a capital improvement plan, you can incorporate it into your financial forecasting and annual budgets. Be sure to include inflation on your capital projects at this stage. This financial forecasting will allow you to inform your elected officials of the tax impacts of proposed improvements on sample properties. A comprehensive financial management plan can take operating, capital and debt needs into consideration to determine affordability for residents. Especially for larger projects, community surveys can prove to be a valuable resource in determining the tax tolerance of taxpayers for various projects.
Remember, if you are just starting the capital improvement planning process, you can follow the planning steps outlined here without worrying about being fully comprehensive. Instead, the plan can grow and evolve over time. Each year you can make it more robust until it includes all your infrastructure and equipment. Don’t be afraid to use “placeholder” amounts as estimates. For example, if street projects were $300,000 per year the last two years but you don’t have a street plan going forward, just assume the same pace and cost of projects for the future. Developing your plan with rough estimates and incomplete data is the first step in getting your community on track to completing essential projects.
Step 7: Adopt the capital plan
As you get to the point of completing a capital plan and reviewing it with your elected body, having the elected body formally adopt the plan can be a crucial step in the planning process. Formal plan adoption allows you to post and distribute the plan to the public knowing your elected body has reviewed and approved it. It also shows forward planning to credit rating agencies which speaks to the management portion of their rating process.
For school districts, it’s important to remember that LTFM plans are living, breathing documents which provide a five to ten-year forecast of capital needs. As such, they need to be updated at least annually to add one more year and reflect shifting circumstances and priorities.
As you begin the process of capital improvement planning, Ehlers can assist by evaluating potential funding sources and providing estimates of annual debt service payments on future capital. We can also explain the potential funding strategy and financial impacts to elected officials to build consensus and gain buy-in.
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