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Home My WebLink AboutCity Council - 04/28/2011 AGENDA CITY COUNCIL/BUDGET ADVISORY COMMISSION WORKSHOP THURSDAY,APRIL 28, 2011 COMMUNITY CENTER 6:00 PM, CAMBRIA ROOM CITY COUNCIL: Mayor Nancy Tyra-Lukens, Council Members Brad Aho, Sherry Butcher Wickstrom, Kathy Nelson, and Ron Case BUDGET ADVISORY COMMISSION; Annette Agner, Eapen Chacko, Dan Funk, Rick King (Chair), Michael Morris, Jon Muilenburg (Vice Chair), Chris Nylander, Sue Kotchevar(Staff Liaison) CITY STAFF: City Manager Rick Getschow, Police Chief Rob Reynolds, Fire Chief George Esbensen, Public Works Director Eugene Dietz, Community Development Director Janet Jeremiah, Parks and Recreation Director Jay Lotthammer, Communications Manager Joyce Lorenz, City Attorney Ric Rosow I. CALL MEETING TO ORDER II. EDUCATIONAL SESSION ON CAPITAL IMPROVEMENT FUNDING III. ADJOURN ... _ -• ' � • �;p. City of Eden Prairie �•�- __ . II, : .:••?� �:`` City Council � ... : - ; , ;_ 1 ;�es..... ". 4.. . • • � x� _ 4 & Budget Advisory • Commission ,_ _: _ _ „ , . _ , ___ -- Capital Improvement Funding Terri Heaton, Senior \Ace President 651.213.3022 theata&prirgs[etl.cvm Public Sector Advisors El Springsted Introductions Purpose of Meeting Public Sector Advisors .1 el Springsted Springsted Incorporated • Public Finance — Bond Issuance, Debt Planning and Management — Independent Finandal PcMsor • Operational Finance - GP, Utility Rate Analysis, Growth Impart Studies • Economc Development • Human Resources and Organizational Management • I nvestment Services Public Sector Advisors el Springsted Terri Heaton, CIPFA, CPA, MBA • Springsted Client Representative, nine years • Teaching team at Harrline for Master's program • Frequent speaker on public finance • Eden Prairie resident, 21 years Public Sector Advisors el Springsted Presentation Outline • Capital finandng prindples and guidelines • Long-term financing planning • Coriminity funding impact • Finandng options - Pay-As-You-Use (debt) • Options for Eden Prairie • Credit rating considerations Public Sector Advisors 101 Springsted Presentation Focus Current Pay As You Go Plan Fund Fund Purpose Capital Maintenance & Reinvestment Fund Capital projects — primarily pavement management and parks Facilities Internal Service Fund Building maintenance; revenues are charges to other funds and interest earnings Information Technology Internal Service Fund Maintaining and upgrading network, computer infrastructure and communications service technologies; revenues are charges to other funds and interest earnings Capital Improvement Plan Pavement Annual amount budgeted for pavement Management Fund management that is not spent — used for City share of larger reconstruction projects Public Sector Advisors 101 Springsted Capital Financing Principles and Guidelines Public Sector Advisors 6 Springsted Capital Financing Principles and Guidelines • Operating budget - plan for ongoing, recurring transactions • when will projects be financed? Only when they cannot be financed from operations • $ threshold defining capital - $25, CXX) for capital; $1,000, 000 for debt • Payback for bonds within life expectancy of asset purchased Public Sector Advisors 101 Springsted Capital Financing Principles and Guidelines • Relationships with rating agencies maintained • How often will CI P be updated? cweiy 2 years • Liquor profits are a dedicated source of payment • Process for approval of plan aty has this • I ntegrated with operating budget aty abes this • Hierarchy for prioritization for new projects Analyzed by staff and consultants using tools by category Public Sector Advisors el Springsted Capital Principles and Guidelines • Finandal capacity — Revenue sources, annual debt service, future needs • Flexibility • "Wish list" vs. a plan • Matching benefidanes to those who pay • Public input • Develop capital financing strategy Public Sector Advisors 101 Springsted Capital Assets of the City Net of Depreciation Description Amount Land &Improvements $33,225,000 Infrastructure $116,751,000 Distribution System $101,978,000 Buildings and work in Progress $84,325,000 Leasehold Improvements $403,000 Machinery & Equipment $2,109000 Autos $4,302,000 Other Assets $1,121,000 Total $345,100,000 Public Sector Advisors 10 101 Springsted Capital Asset Statistics Descri • City Streets 231 miles Trails 114 miles Conservation Areas 15 Historic sites 5 City Parks 43 Number of Fire Stations 4 Public Sector Advisors 11 ID Springsted Long-Term Planning Fixed Asset Replacement Policy • Maximizes use of resources • Matches benefidanes to those paying • Establishes estimated life • Pay-as-you-go vs. debt for certain assets • Lease or purchase • Utilization of assets • Asset disposal Public Sector Advisors 12 el Springsted Capital Financing Guidelines Maintenance of Existing Assets • Establish remaining life, performance standards and evaluation of appropriateness for service levels • Allocate sufficient funds in multi-year capital plan from 3 to 10 years • Monitor and communicate progress to stated goals • Provide report to elected officals on assets including: — Condition, replacement life, sources for assets, net value, actual expenditures and performance data (pavement management index) Public Sector Advisors 13 el Springsted Principles and Guidelines Capital Finance and Debt • Only bond for capital with a life of 5 years or more • Where possible, use non-tax revenues to repay bonds • Consider debt for all entities and coordinate process (Utilities and HRA) Public Sector Advisors 14 el Springsted Long-term Financial Planning Public Sector Advisors 15 el Springsted 2011 2012 2013 2014 2015 Current Pay As You Go Program Budget Budget Budget Budget Budget Revenue Major Categories Liquor 900,000 900,000 900,000 900,000 900,000 General Fund Transfer In 0 0 0 0 0 City Center Rental Income 450,000 460,000 470,000 Tax Levy 88,000 88,000 88,000 88,000 88,000 Interest 45,000 35,000 23,000 11,000 (3,600) Other Revenue/One Time Revenue 291,000 226,000 218,000 206,000 206,000 Facility User Charge 393,000 393,000 393,000 393,000 393,000 IT User Charge 159,500 159,500 159,500 159,500 159,500 Total Revenue 2,326,500 2,261,500 2,251,500 1,757,500 1,742,900 Expense Police 30,000 25,000 Parks and Recreation 270,000 680,000 1,010,000 230,000 212,000 Engineering 250,000 Pavement Mgmt less General Fund Share 1,655,000 1,740,000 1,825,000 1,910,000 2,000,000 Trails Maintenance 220,000 230,000 240,000 250,000 260,000 Facilities 813,000 959,000 1,055,000 735,000 355,000 IT 50,000 116,000 193,500 120,000 130,000 Reserve future tenant costs 450,000 460,000 470,000 Total Expense 3,458,000 4,185,000 5,073,500 3,270,000 2,957,000 Revenues less Expense (1,131,500) (1,923,500) (2,822,000) (1,512,500) (1,214,100) Total Cash Balance 7,445,452 5,521,952 2,699,952 1,187,452 (26,648) Public Sector Advisors 101 Springsted Current Pay As You Go Program 2016 2017 2018 2019 2020 Projected Projected Projected Projected Projected Revenue Major Categories Liquor 900,000 900,000 900,000 900,000 900,000 General Fund Transfer In 0 0 0 0 0 City Center Rental Income Tax Levy 88,000 88,000 88,000 88,000 88,000 Interest _ - - _ Other Revenue/One Time Revenue 206,000 206,000 206,000 206,000 206,000 Facility User Charge 393,000 393,000 393,000 393,000 393,000 IT User Charge 159,500 159,500 159,500 159,500 159,500 Total Revenue 1,746,500 1,746,500 1,746,500 1,746,500 1,746,500 Expense Police Parks and Recreation 500,000 500,000 500,000 500,000 500,000 Engineering Pavement Mgmt less General Fund Share 2,072,000 2,147,000 2,224,000 2,304,000 2,386,000 Trails Maintenance 270,000 280,000 290,000 300,000 310,000 Facilities 800,000 800,000 800,000 800,000 800,000 IT 150,000 150,000 150,000 150,000 150,000 Reserve future tenant costs Total Expense 3,792,000 3,877,000 3,964,000 4,054,000 4,146,000 Revenues less Expense (2,045,500) (2,130,500) (2,217,500) (2,307,500) (2,399,500) Total Cash Balance (2,072,148) (4,202,648) (6,420,148) (8,727,648) (11,127,148) Public Sector Advisors 101 Springsted Pay-As-You-Go Techniques • Minnesota requires that for general obligation bonds, a levy be authorized for 105% of debt service to allow for nonpayment or delayed payments of taxes. (Eden Brie reduces the authorized debt levy if there is excess from the previous year) — Corrrnon practice to levy the 105% eath year and accumulate funds in the debt service fund — When bonds are retired, the cash can be used to: • Lover new bond issuance • Extend pavement management projects • Projects not otherwise funded Public Sector Advisors el Springsted Pay-As-You-Go Techniques • Building capital funds via using one-time and non- reliable revenues for onetime expenditures — Year-end operating transfer of excess reserves — Market value homestead credit — Unused bond proceeds applied to similar projects — Proceeds from sale of assets — Donations Public Sector Advisors el Springsted Capital Planning for Maintenance Example Funding Source 2012 2013 2014 2015 2016 Capital Funds PAYGO PAYGO PAYGO PAYGO PAYGO GO Reconstruction Bonds PAYUSE GO a P Bonds PAYUSE GO Equipment Notes PAYUSE Capital Levy PAYGO PAYGO PAYGO PAYGO PAYGO Franchise Fees PAYGO PAYGO PAYGO PAYGO PAYGO Total 111 a Public Sector Advisors El Springsted Community Funding Impact Public Sector Advisors 21 el Springsted The man who says he is willing to meet you halMay is usually a poor judge of distance. --Author Unknow Public Sector Advisors 22 el Springsted Community Impact • Capital improvement plan forecasts the impact on taxes levied, utility funds, cash reserves, etc. • The balancing act is to undertake capital projects at the most efficient time (i.e. , when the street is least expensive to repair and will extend the life of the asset the most) but to time it so that those paying for the service are least impacted by the added cost • Community impact is measured by taxes, fees and service levels Public Sector Advisors 23 el Springsted Principal for Who Should Pay Fees vs . Taxes • Benefit for users, not others-fee • Benefit for entire community-tax • Benefits specific users and some benefit to the Oty as a whole-combination of both • Taxes are a deductible expense; fees are generally not deductible Public Sector Advisors 24 el Springsted Utility Fees • Eden Prairie has just updated utility infrastructure needs and anticipated replacement costs for the future • Utility rate changes are already being addressed Public Sector Advisors 25 el Springsted Levy Pattern Example l 20000000— 18000000 16000000 J 14000000- - - Levy 0 0 12000000 J 0 0 0 10000000 J 8000000 r '�' _ ' ' ' ' ' ' � `Jr 1990 1992 1994 1996 1998 2000 2002 2004 2006 Public Sector Advisors 26 101 Springsted Levy Pattern Example 2 16000000 14000000- - - 12000000- 10000000 J - 8000000- Levy 6000000—' 4000000— 2000000— 0 , — — — — — 1990 1992 1994 1996 1998 2000 2002 2004 2006 Public Sector Advisors 27 101 Springsted Levy Pattern Example 3 7000000-/ , , 6000000-' ...- „„ ..-- ,- z , A 7 7 5000000-z- ' / — g- 4000000— 3000000� — ❑ Levy 2000000 1000000 0-'- ' — — ' 1 ' _T ,7 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Public Sector Advisors 28 el Springsted Levy Pattern Example 4 18000000 16000000 14000000 12000000 10000000— 8000000- ❑ Levy 6000000— 4000000 J 2000000- 1990 1992 1994 1996 1998 2000 2002 2004 2006 Public Sector Advisors 29 101 Springsted LevyExample 4 - After Downturn 18000000 16000000 14000000- o 0 12000000- o 0 0 10000000-- ❑ Levy 8000000 J ❑ Downturn 6000000 4000000 2000000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Public Sector Advisors 101 Springsted If you don't get everything you want, think of the things you don't get that you don't want. —Oscar Wide Public Sector Advisors 31 el Springsted FinancingOptions Pay-As-You-Use (Debt Public Sector Advisors el Springsted Municipal Bonds Basics : What is a "muni" and what makes them special? • A contract between the issuer and the investor (bondholder) where the investor lends the issuer money in return for a pledge of repayment at a certain date — Interest is exempt from federal and state taxes — Tax equivalent yield results in lower interest rates — Investors are typically high-incorre individuals, banks, mutual funds, and insurance companies Public Sector Advisors el Springsted Municipal Bonds : What are the different types of municipal bonds? • General obligation bonds (GO) — Debt (prindpal and interest) secured by the taxing powers of the issuer. • Revenue bonds — Debt is payable solely from the revenues of the activity that was financed • General obligation revenue bonds — Debt is payable from a specified source(s) and taxing pater • Annual appropriation bonds —Typically a lease agreement to finance facilities. The governing body pledges to appropriate funds each year to back the lease Public Sector Advisors el Springsted Authority to Issue Debt: Roads and Streets • GO I mprovement Bonds — for maintenance of roads and streets where 20% or more of the project is specially assessed • CX) Reconstruction Bonds — less than 20% spedally assessed, but 5 year plan including amount to be bonded for must be unanimously adopted at public hearing Public Sector Advisors 35 el Springsted Authority to Issue Debt: Capital Improvement Plan Bonds • Requires majority approval of 5 year capital improvement plan and bonding for specific items at a public hearing • Authorized uses — City/tow hall — Library — Public safety facility — PubIicvorksfadlity Public Sector Advisors 36 el Springsted Before you criticize someone you should walk a mile in their shoes. That way you are a mile away and you have their shoes. —Unknow Public Sector Advisors 37 el Springsted Options for Eden Prairie Public Sector Advisors 38 101 Springsted Funding Sources Used by Other Cities to Finance Roads and Streets • Capital reserve funds • CO Bonds — street reconstruction bonds — assessment bonds • Right-of-way fees charged to internal utility funds • Capital levy • Tax-exerrpt properly fees (PI LOT Public Sector Advisors el Springsted Funding Sources Used by Other Cities to Finance Facilities • kcurrul ati on of fees charged to all users for facility replacement (funding deprecation) • CO capital irrprovernent bonds • Naming rights • Abatement bonds • Lease revenue bonds • Capital reserves • Special service district Public Sector Advisors el Springsted Funding Sources Options Available Under Current Law • Tax levy and GO assessment bonds • Franthi se fees • Right-of-vay charges to utility funds • Payment in lieu of taxes • Street light utility • Spedalservicedistricts • CX) reconstruction bonds (no assessments needed) • GO abatement bonds (dty-vvide levy) • User fees Public Sector Advisors el Springsted Franchise Fees Pros Cons • Based on energy usage • Resistance from energy rather than home value providers • System in place for • Taxpayers may view it as collections another tax • Includes tax-exerrpt • Punitive when energy costs properties increase due to supply or in • Used by many other unusually harsh weather communities • Not subject to levy limits Public Sector Advisors 42 el Springsted Right of Way Maintenance Fees Charged to Utilities Pros Cons • Based on usage rather than • Resistance from external home value payers • System in place for • Taxpayers may view it as collections another tax • Includes tax-exerrpt • Effort to detern-ine the cost properties allocation and maintain the • Not subject to levy limits data Public Sector Advisors 43 el Springsted Tax-Exempt Payment in Lieu of Taxes Pros Cons • Essential services are • Resistance from current provided to the community tax-exempt properties and all properties benefit • Arrangement must be • Includes tax-exerrpt agreed to by potential properties payer • Used by many other • Easier to arrange for new communities tax-exempt than existing • Fai rness (phase in) Public Sector Advisors el Springsted Street Light Utility Pros Cons • Based on usage rather than • Payers may view it as home value another tax • System in place for • Effort to determine the collections cost allocation and • Includes tax-exempt maintain the data properties • Service previously paid • Not subject to levy limits from property taxes (fee • Used by many other sties versus tax issue) • Conservation flavor Public Sector Advisors 45 101 Springsted Special Service Districts Pros Cons • Those benefiting from • At least 35% of affected service/improvement pay owners must not petition for it against the payment • System in place for • Effort to establish the collections district • I ncludes tax-exerrpt • Must be new services not properties already covered by taxes • Not subject to levy limits • Not a permanent fcc • Used by many other sties limited timeframe Public Sector Advisors 101 Springsted New Funding Sources Options Requiring Legislation • Local option sales taxes • Local payroll and income taxes • Street utility fees • EveIopment (impact) fees Public Sector Advisors 47 el Springsted Local Option Sales Tax Pros Cons • Based on spending rather • Other local entities want to than home value share pie once in place • Eden Prairie has retail, • Competition from other lodging and food sale retail in metro where sales potential tax is not imposed • Includes non-Eden Praise • Businesses subject to tax property owe-s have extra collection • Used by many other process and reporting oorrrrxmities • Legislature is exploring Public Sector Advisors el Springsted Street Utility Fee Pros Cons • New source to finance • Service previously provided existing and future road by taxes (fee versus taxes) improvements • Effort to determine the cost • Outside of levy limits allocation and maintain the • Includes tax-exerrpt data • State and Federal sources are not as reliable • Vieved favorably by many other communities • Legislature is exploring Public Sector Advisors 49 el Springsted Development Impact Fees Pros Cons • New source to finance • Service previously prided existing and future road by taxes (fee versus taxes) irrprovements • Effort to determine the cost • Outside of levy limits allocation and maintain the • Includes tax-exerrpt data • Assigns new costs to new • Qie time fee rather than developrrents °ng01ng • Vieved favorably by many • Competition from other other communities not charging • Legislature is exploring impact fees Public Sector Advisors 50 101 Springsted The early bird gets the vvorm, but the second mouse gets the cheese. --Unknown Public Sector Advisors 51 el Springsted Credit Rating Considerations Public Sector Advisors 101 Springsted The Process • Purpose of a credit rating — Provides an understandable mcasure of the degree of risk of an issuer's securities. The ratings are used by investors to aid them in making investment dedsions • Rating agencies - Mood /s Investors Service — Standard & Poor's Anandal Services — Fitth Investor Services Public Sector Advisors 53 el Springsted Why is a Bond Rating so Important? • Indication of likelihood of default The higher the rating, the less likely to default The less likely to default, the lover the interest rates Public Sector Advisors 54 el Springsted Rating Scale Eden Prairie Moody's S & P Fitch Highest Aaa AAA AAA Aal AA+ AA+ Aa2 AA AA Aa3 AA- AA- Al A+ A+ A2 A A A3 A- A- Baal BBB+ BBB+ Baa2 BBB BBB Lowest Baa3 BBB- BBB- (Investment Grade) Public Sector Advisors 55 el Springsted Eden Prairie is Part of an Elite Group of Minnesota Cities • Out of Minnesota's 85L sties: 17 have a rating of Asa • 9 sties have a rating of MI or higher Public Sector Advisors 56 el Springsted Eden Prairie is Recognized for it ' s Livability • Eden Prairie was voted the "Best Suburb" for 2011 in the annual City Pages "Best of the Twin Cities" awards! • Money Magazine ranked Eden Prairie, N/N the #1 "Best Places to Live" in America in 2010 Public Sector Advisors 57 el Springsted Factors Affecting Credit • Debt management • Management and leadership • Finandal perFormance • Tax base • Econorric development/growth • Sod o-econorri c factors • Innovations • Long-term vision and planning — Capital improvement financing Public Sector Advisors 58 el Springsted Acondusion is the place where you get tired of thinking. Arthur McBride Bloch Public Sector Advisors 59 el Springsted Contact Information Terri Heaton, Senior Vice President Springsted Incorporated 651-223-3022 theatonpri ngsted.Qom Public Sector Advisors 60 el Springsted City Manager' s Recommended Next Steps • May 3 - Oty Cound I V\brkshop • May5 - BACMeeting Public Sector Advisors 61 el Springsted 0 1iii, BEST PRACTICE Preparing and Adopting Multi-Year Capital Planning (2006)(CEDCP) Background.Buildings,infrastructure,technology,and major equipment are the physical foundation for providing services to constituents.The procurement,construction,and maintenance of capital assets are a critical activity of state and local governments,school districts,and other government agencies,and therefore require careful planning. Capital planning is critical to water,sewer,transportation,sanitation,and other essential public services. It is also an important component of a community's economic development program and strategic plan. Capital facilities and infrastructure are important legacies that serve current and future generations.It is extremely difficult for governments to address the current and long-term needs of their constituents without a sound multi-year capital plan that clearly identifies capital and major equipment needs,maintenance requirements,funding options,and operating budget impacts. A properly prepared capital plan is essential to the future financial health of an organization and continued delivery of services to citizens and businesses. Recommendation. The Government Finance Officers Association(GFOA)recommends that state and local governments prepare and adopt comprehensive multi-year capital plans to ensure effective management of capital assets.A prudent multi-year capital plan identifies and prioritizes expected needs based on a community's strategic plan,establishes project scope and cost, details estimated amounts of funding from various sources,and projects future operating and maintenance costs.A capital plan should cover a period of at least three years, preferably five or more. Identify needs.The first step in capital planning is identifying needs.Using information,including development projections, strategic plans, comprehensive plans,facility master plans,regional plans,and citizen input processes,governments should identify present and future service needs that require capital infrastructure or equipment.In this process, attention should be given to: • Capital assets that require repair,maintenance,or replacement that,if not addressed,will result in higher costs in future years • Infrastructure improvements needed to support new development or redevelopment • Projects with revenue-generating potential • Improvements that support economic development • Changes in policy or community needs Determine costs.The full extent of project costs should be determined when developing the multi-year capital plan.Cost issues to consider include the following: • The scope and timing of a planned project should be well defined in the early stages of the planning process • Agencies should identify and use the most appropriate approaches, including outside assistance,when estimating project costs and potential revenues • For projects programmed beyond the first year of the plan,governments should adjust cost projections based on anticipated inflation • The ongoing operating costs associated with each project should be quantified,and the sources of funding for those costs should be identified • A clear estimate of all major components required to implement a project should be outlined,including land acquisition needs, design,construction, contingency and post-construction costs • Recognize the non-financial impacts of the project(e.g., environmental)on the community Prioritize capital requests. Governments are continually faced with extensive capital needs and limited financial resources. Therefore,prioritizing capital project requests is a critical step in the capital plan preparation process. When evaluating project submittals,governments should: • Reflect the relationship of project submittals to financial and governing policies,plans,and studies • Allow submitting agencies to provide an initial prioritization • Incorporate input and participation from major stakeholders and the general public • Adhere to legal requirements and/or mandates • Anticipate the operating budget impacts resulting from capital projects • Apply analytical techniques,as appropriate,for evaluating potential projects(e.g.,net present value,pay back period,cost-benefit analysis,life cycle costing,cash flow modeling) • Re-evaluate capital projects approved in previous multi-year capital plans • Use a rating system to facilitate decision-making Develop financing strategies.GFOA recognizes the importance of establishing a viable financing approach for supporting the multi-year capital plan.Financing strategies should align with expected project requirements while sustaining the financial health of the organization.Governments undertaking a capital financing plan should: • 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 • Continue compliance with all established financial policies • Recognize appropriate legal constraints • Consider and estimate funding amounts from all appropriate funding alternatives • Ensure reliability and stability of identified funding sources • Evaluate the affordability of the financing strategy, including the impact on debt ratios,taxpayers,ratepayers, and others References • Capital Improvement Programming:A Guide for Smaller Governments, GFOA, 1996. • Recommended Budget Practices:A Framework for Improved State and Local Government Budgeting, National Advisory Council on State and Local Budgeting,GFOA, 1998. • GFOA Best Practice,`Establishing Appropriate Capitalization Thresholds for Tangible Capital Assets,"2001. • GFOA Best Practice,"Establishing the Useful Life of Capital Assets,"2002. • Capital Budgeting and Finance:A Guide for Local Governments, International City/County Management Association,2004. • "Managing the Capital Planning Cycle:Best Practice Examples of Effective Capital Program Management," Government Finance Review, June 2004. • GFOA Best Practice,"Establishment of Strategic Plans,"2005. Approved by the GFOA's Executive Board,February 24,2006. BEST PRACTICE Capital Asset Assessment,Maintenance and Replacement Policy(2007 and 2010)(CEDCP) Background. Capital assets include major government facilities,infrastructure,equipment and networks that enable the delivery of public sector services.The performance and continued use of these capital assets is essential to the health,safety,economic development and quality of life of those receiving services. Budgetary pressures often impede capital program expenditures or investments for maintenance and replacement, making it increasingly difficult to sustain the asset in a condition necessary to provide expected service levels. Ultimately,deferring essential maintenance or asset replacement could reduce the organization's ability to provide services and could threaten public health,safety and overall quality of life.In addition,as the physical condition of the asset declines,deferring maintenance and/or replacement could increase long-term costs and liabilities. Government entities should therefore establish capital planning,budgeting and reporting practices to encourage adequate capital spending levels. A government's financial and capital improvement plans should address the continuing investment necessary to properly maintain its capital assets. Such practices should include proactive steps to promote adequate investment in capital maintenance and replacement and necessary levels. Recommendation. The Government Finance Officers Association(GFOA)recommends that local, state and provincial governments establish a system for assessing their assets and then appropriately plan and budget for any capital maintenance and replacement needs.This includes: 1. Developing a policy to require a complete inventory and periodic measurement of the physical condition of all existing capital assets. The assessment should document the established methods of condition assessment, including any that are used to evaluate below-ground infrastructure. This physical condition inventory and measures used should be kept current,with facility condition ratings updated every one to three years.' This inventory should contain essential information, including: a. Engineering description b. Location c. Physical dimensions and condition d. "As-built"documents e. Warranties f. Maintenance history g. Replacement costs h. Operating cost information i. Usage statistics j. Book value k. Original Useful Life 1. Remaining Useful Life 2. Establishing condition/functional performance standards to be maintained for each type of capital assets. The condition measures and related standards should be understandable and reliable. Such standards may be dictated by mandated safety requirements,federal,state,or provincial funding requirements,or 'The frequency of physical condition rating and asset inventory updates may vary depending on several factors,including the asset age and type,likelihood of degradation,and ease at which assessments can be conducted. applicable engineering and other professional standards,2 including available software models.Use these standards and a current condition assessment as a basis for multi-year capital planning and annual budget funding allocations for capital asset maintenance and replacement. Assets near high risk areas such as hospitals may require a higher standard of performance and require a higher frequency of condition assessment. 3. Evaluating existing assets to determine if they still provide the most appropriate method to deliver services. Maintenance and replacement plans for assets should then be prioritized in accordance with overall goals and objectives to maintain expected service levels. Consider developing financial policies that identify and dedicate fees or other revenue sources to help achieve this goal.Also consider a procedure of performing a condition assessment prior to replacing a major asset or acquiring a new asset. 4. Allocating sufficient funds in the multi-year capital plan and annual operations budget for condition assessment,preventative maintenance,repair and replacement of capital assets in order to continue the provision of services that contribute to public health, safety, and quality of life of the public. Each government should establish an on-going source of funds in both the capital plan and budget for the repair and renewal needs of its assets consistent with this best practice.The Capital Improvement Program(CIP)should also include projections based on the remaining useful life and replacement costs over the next three to ten years regarding the government's intended future investment in these facilities and the estimated impact of these investments toward achieving the minimum or adequate-performance rating for each asset type or class. If the assets are part of the function of an enterprise fund,the rates, fees and charges may need to be adjusted to meet the funding requirements. 5. Monitoring and communicating progress toward stated goals and the overall condition of its capital assets with appropriate controls to ensure the validity and accuracy of the information.This process should describe how actual facility condition and performance compares to the targeted standard for each asset type. Governments should also review and report the operating impacts related to capital investments during project implementation and for a specified time period following project implementation. Governments should likewise monitor and report on the delivery of capital projects by establishing standards for planning,designing and constructing capital projects.3 6. At least every one to three years,providing a"plain language"Report on Capital Facilities to elected officials and made available to the general public that describes: a. Condition ratings jurisdiction-wide compared to established policy standards b. Condition ratings by geographical area,asset class, and other relevant factors c. Indirect condition data(e.g.,water main breaks,sewer back-up complaints) d. Replacement life cycle(s)by infrastructure type e. Funding sources for assets,including any restrictions that might be imposed on use and/or disposal f. Year-to-year changes in net value of assets g. Actual expenditures and performance data on capital maintenance compared to budgeted expenditures performance data(e.g.,budgeted street miles,reconstructed compared to actual) 2 These measures include state government-established standards,bridge sufficiency ratings,Pavement Quality Index(PQI) or Pavement Condition Index(PCI),Facility Condition Index(FCI),etc. Indirect measures such a water main breaks,sewage overflows,etc.,are also available for certain asset types. 3 Measures to assess the delivery of capital projects may include budget soft versus hard costs,schedule and budget variations,change orders,quality of construction,and architectural/engineering estimates versus actual delivery. h. Long-term trends extending over the prior four to six or more years. Year-to-year expenditure figures are less valuable due to general inflation rates and the changing supply and cost of construction contractors and contract bids over time. Other more"global"measures such as replacement cycle,4 year-to-year comparisons of work completed(e.g.,miles of sewers,water mains,street lights, etc.,repaired/replaced),book value, etc.,may also be used.5 References. • GFOA Best Practice, Considerations on the Use of the (GASB 34 Reporting Model)Modified Approach to Account for Infrastructure Assets,2002. • John Vogt, Capital Budgeting and Finance:A Guide for Local Governments, ICMA,2004. • Nicole Westerman,Managing the Capital Planning Cycle:Best Practice Examples of Capital Program Management, Government Finance Review,2004. • GFOA Best Practice, Capital Project Budget,2006. • GFOA Best Practice,Establishing the Estimated Useful Lives of Capital Assets,2007. • GFOA Best Practice, Capital Project Monitoring and Reporting,2007. • GFOA&National Advisory Council on State and Local Budgeting Best Practices in Public Budgeting (Practice#s 2.2,5.2,6.2, 11.5) • EPA, The Clean Water and Drinking Water Gap Analysis, 2002. • AWWA,Dawn of the Replacement Era:Reinvesting in Drinking Water Infrastructure,2001. Approved by the GFOA's Executive Board,March 5,2010. 4 "Replacement cycle" means the number of years to replace/reconstruct an entire infrastructure network assuming an average annual level of replacement. Example: 500 miles of concrete surface streets in network/ 10 miles average annual miles of streets replaced equals a 50-year replacement cycle. This can be compared to the engineering estimate of the useful life of the average concrete surfaced street. 5 Other useful measures of level of effort or condition can be found in internal government database,including department annual reports,fixed asset account records,GIS systems,etc. Capital Planning and Budgeting Glossary Budget(Operating) A plan of financial operation embodying an estimate of proposed expenditures for a given period (typically a fiscal year) and the proposed means of financing them (revenue estimates). The term is sometimes used to denote the officially approved expenditure ceilings under which a government and its departments operate. Budget Calendar The schedule of key dates or milestones that a government follows in the preparation and adoption of the budget. Budget Document The official written statement prepared by the budget office and supporting staff which presents the proposed budget to the legislative body. Capital Assets Assets of significant value and having a useful life of several years. Capital assets also are called fixed assets. Capital Expenditures Expenditures made for the purpose of acquiring capital assets; they exclude expenditures for routine maintenance of capital assets. Capital Improvement Budget A plan of proposed expenditures for capital assets and the means of financing them, usually the first year of the capital improvement program. The capital budget typically is enacted as part of the total annual budget,which includes both operating and capital outlays. Capital Improvement Program A plan for capital expenditures to be incurred each year over a fixed period of several years (usually five or six) setting forth each capital project and identifying the expected beginning and ending date for each project, the amount to be expended in each year, and the method of paying for those expenditures. Capital Outlays Expenditures for the acquisition of capital assets. Capital Project Status Report A report used to monitor and report on the progress toward completing approved projects in the capital budget. Capital Projects Projects that result in the purchase or construction of capital assets. Capital projects may encompass the purchase of land,construction of a building or facility,or purchase of a major piece of equipment. Enterprise Fund A fund established to account for operations 1)that are financed and operated in a manner similar to business enterprises, where the intent of the governing body is that the costs of providing goods and services to the general public on a continuing basis be financed or recovered primarily through user charges or 2) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net 'income is appropriate for capital maintenance, public policy, management control,and accountability of other purposes. S r,n sted Public Sector Advisors Financial Capacity Analysis An analysis undertaken to determine the ability of the government to fund new capital projects, comprised of an analysis of current fmancial condition and a projection of future trends. Fund An independent fiscal and accounting entity with a self-balancing set of accounts recording cash and/or resources together with all related liabilities, obligations, reserves, and equities, which are segregated for the purpose of carrying on specific activities or attaining certain objectives. General Fund The governmental accounting fund supported by ad valorem (property) taxes, licenses, permits, service charges,and other general revenues to provide for operating services. General Obligation(GO)Bonds Bonds that are secured by the issuer's "full faith and credit" pledge to repay debt. GO bonds issued by local governments usually are repaid from ad valorem taxes and other general revenue sources. Grant A contribution of assets (usually cash and for specified purposes) by one governmental entity to another. Typically these contributions are made to local governments by state and federal governments. Impact Fee A fee charged to developers by governmental entities to cover the infrastructure costs associated with new development. These fees often are tied to a standard measure, such as square footage or number of bedrooms per dwelling unit. Intergovernmental Revenue Revenue received from another government for a specific purpose. Life-Cycle Costs All costs associated with a capital project over the life of the asset, including the costs of engineering and design,construction,installation, day-to-day operations,maintenance,and rehabilitation. Mandate Any responsibility, action, or procedure that is imposed by one sphere of government on another through constitutional, legislative, administrative, executive, or judicial action as a direct order that is required as a condition of aid. Revenue Funds that the government receives as income. These receipts may include tax payments, interest earnings, service charges, grants, and intergovernmental payments. The term designates an increase to a fund's assets which does not increase a liability(e.g.,proceeds from a loan), does not represent a repayment of an expenditure already made, does not represent a cancellation of certain liabilities, and does not represent an increase in contributed capital. Revenue Bonds Securities for which debt service payments are generated from a specific revenue source. Revenue Estimate A formal estimate of how much revenue will be earned from a specific revenue source for some future period,typically a future fiscal year. Source of Revenue The point of origin of a particular revenue or group of revenues. SprrngSf£d Public Sector Advisors Strategic Priorities Priorities and goals adopted by the City Council. Tax Increment Financing(TIF)Bonds Bonds secured by incremental tax revenues generated within a specified area expected to benefit from economic development. A TIF district is created, and a baseline tax level is defined. Any tax revenues above the baseline tax level generated within the district as the area undergoes revitalization are used to make debt service payments for TIF bonds issued to finance projects benefiting the area. Springsted Public Sector Advisors