Government Finance Officers Association of Arizona

1. Government Finance Officers Association of Arizona Capital Improvement Planning May 9, 2019 Presented By: Pat Walker Pat Walker Consulting LLC

2. Agenda • Objectives of the Workshop • Capital Planning Process • Projects in the CIP • Prioritization of the CIP • Funding the CIP • Technology and the CIP • Implementing and Monitoring • Wrap-up and discussion

3. Capital Planning Process

4. Balancing Capital Needs with Available Resources Service Level Standards

5. Why have a Capital Planning Process? • Often large and BIG $$$ • Projects can be long term • Want to ensure projects are: • Needed • Well designed • Efficiently implemented

6. Why have a Capital Planning Process? • To achieve goals and priorities set by Council to achieve your community needs • Determine acceptable mix of debt versus cash financing • Prioritization of capital projects to match

7. Why have a Capital Planning Process? • Impact on operating budget • Address revenue challenges • Process itself takes time • Define project • Secure Approval • Finish design • Acquire and prepare land • Schedule the project • Construct the project

8. Why have a Capital Planning Process? • Long term debt financing is used • Citizens in future years pay for decisions made by citizens and local officials made today • Capital projects can change dramatically from year to year

9. Why have a Capital Planning Process? • Projects can impact future economic development • Allows citizens to provide input and/or see planned capital projects • Plan for interdependent capital project for cost savings/efficiencies

10. Capital Planning • Capital planning forces entities to consider and plan for: • Population growth • Will this increase need for schools, fire stations, roads, etc? • How will they be funded? • Will there need to be voter approval?

11. Capital and Financial Planning Process STEP 3 STEP 4 STEP 5 STEP 6

12. Key Elements of an Effective CIP • Multi-year plan • Identifies funding sources & requirements (including O&M) • Covers both repairs and new capital project types • Identifies timing of each project(s) • Depicts the realities of the political world

13. Capital Planning Vs Capital Budgeting • Capital budget is for normally for one year with the funding source identified • Capital planning are for projects scheduled for 5 years or more • Projects in capital plan are not budgeted except for the first year

14. Projects in the CIP

15. GFOA Recommended Practices for Capital Planning • The Role of Master Plans in Capital Project Planning • Multi-Year Capital Planning • Capital Planning Policies • Coordinating Economic Development and Capital Planning • Technology in Capital Planning & Management

16. What capital projects go into a CIP? • Expensive, infrequent purchases • Long useful life of asset or infrastructure • Rehabilitation of infrastructure or buildings that extends their life • Information Technology projects • Large non-recurring operating expenditures

17. Citizen input • Through elected officials • Surveys • Council meetings • Boards and Commissions • Focus groups • Chamber of Commerce

18. Elected Officials Input • Strategic goals • Citizen input! • Desired service levels

19. Department Input • Master Plans • Asset condition assessments • Department understanding of citizen’s desire • Extending the life of infrastructure or facilities

20. Details of a Capital Project for a CIP • Description of the project • Timing • Effect on service level • Cost components that may span several years • Funding sources • Recommended prioritization

21. Details of a Capital Project for a CIP • Impact on operating budget • Annual debt service • Lease or installment-purchase payments • New positions and operating expenses • Savings • Increase or decrease in revenues

22. Information on project submittals • Submitting department • Descriptive project title • Project description • Project location • Impact on annual operating budget • Timing of impact • Proposed funding sources

23. Information on project submittals • Cost estimate guidelines • Project prioritization by submitter • Justification for project • Why is it being proposed? • Consequences of not doing project • Relation of project to existing improvement or other project requests

24. Costing Capital Projects • Department estimates • Recent costs of similar projects • Templates for cost • Hire engineering firm • Architectural firm uses drawings • Consider “net costs”

25. Cost Components for CIP Project • Construction labor and materials • Planning, architectural and engineering design costs • Legal services related to project

26. Cost Components for CIP Project • Land and associated costs • Site improvements • Easements • Equipment and Furnishing (FF&E)

27. Cost Components for CIP Project • Interest and financing charges during construction • Construction Management • Contingency

30. Prioritization of the CIP

31. Why have prioritization of projects? • More demands than resources • Ability to compare diverse projects • Rank large number of projects • Provide consistency and logic • Break down “silos” • “Want” vs “Need”

32. Why have prioritization of projects? • Moderate political influences • Identifies important factors in selecting projects • Provides numeric rating • Adds credibility to the process • Competing demands

33. Approaches to prioritization processes • Simplistic - Judgments by decision makers whether it is high, medium, or low priority • Complex – Refer to specific criteria to establish priorities

34. Approaches to prioritization processes • Experience based judgment • Departmental or functional priorities • Broad categories of need • Urgency-of-need criteria • Weighted rating of urgency-of-need and related criteria • Goals and service needs assessment

35. Approaches to prioritization process • Can rank and compare all CIP projects together • Rank new projects separate from rehab or replacement projects • Rank projects from various funding sources separate • No right or wrong way!

36. Experience Based Judgment • Most common approach used by small to medium size organizations • In touch with citizen needs and desires • Can be combined with rating criteria

37. Experience Based Judgment • When it doesn’t work • Multiple capital requests • Complex capital requests • Numerous decision makers • Ability to “justify” project selection

38. Departmental or functional priorities • As initial step, departments rank their CIP projects • Criteria can established on departmental level • May not reflect organizational wide priorities

39. Broad categories of need • High Priorities – Projects that are essential and impending, and should be approved and funded in the upcoming budget year or in one of the early planning years of the CIP forecast period.

40. Broad categories of need • Medium Priorities – Projects that meet an essential or important need but do not have to be funded immediately. • Low Priorities – Projects that benefit the community but not enough to merit inclusion in the CIP in the current year, given other needs and funding limitations.

41. Urgency-of-need criteria • Meets legal requirements • Threatens public safety • Addresses goals and objectives • Improves efficiency • Maintains existing service levels

42. Urgency-of-need criteria • Supports economic development • Improves service levels • New services or programs • Improves quality of life • New services or programs

43. Urgency-of-need criteria • Improves quality of life • Improves service levels • New services or programs • Improves quality of life • Offers convenience

44. Weighted rating of urgency-of-need • Weight each criteria based on based on greater urgency • Assign numeric weights or maximum value to each criterion • Total score is then given for each project

45. Assessment based on program goals • If entity has good program goals, priorities and plans, numeric rating systems are not needed • Formally adopted by governing body • Strategic plans • May rank programs from high to low

46. ? Funding the CIP

47. Start early! Many projects take a few years from initial discussions to the bond issuance process Start laying the ground work for rate increases for enterprise revenue bonds if necessary May need to work in election for voter authorized projects Coordinate bond issuance with start of construction Recognize that 5 years of historical financials will be included in offering documents TIP: It is never too early to evaluate and establish financial/ debt policies PLAN AHEAD

48. BENEFITS OF CASH FUNDING • Lowest cost of capital • Serves to preserve credit quality • For water and sewer, generally minimum of 50% of capital program is funded on a pay-go basis • Can enhance transparency and achieve objective of community- endorsed projects • Can be more feasible during system’s growth phase • Not feasible for large-scale projects that require significant upfront investment such as treatment plant or system construction or water right purchases

49. CASH VERSUS DEBT • While “Cash is King,” sizable capital programs include a balance between the two • Things to consider: • Need for liquidity and cash reserves • Need for speed • Life of assets • Equalizing benefits and costs across time • Escalating costs of projects

50. BALANCING CASH AND DEBT FINANCING • Liquidity and cash reserve policies • Types of revenues – recurring versus more volatile sources • Types of projects – recurring maintenance versus projects to address large, one-time needs or growth • Market conditions • Ratio targets