Presented by: Anne Gulati, Needham Public Schools &

Kurtis Johnson, Blackstone Valley Vocational RSD

Moderator: Paul Schaefer, King Philip RSD

Capital Budget Basics

November 18, 2014A how-to session on including maintenance schedules &

capital expenses into annual budget preparation.

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.

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

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

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.

ResourcesMASBO.org

Facilities Management Documents on MASBO.org

Facilities Planning Guide

Capital Planning & Facility Maintenance

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

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.

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

Capital Planning Forms

RESOURCE EXAMPLES

Capital Budgeting Forms

Extraordinary CIP Form

Capital Guidelines & Instructions

Funding Capital Related Projects• Establish a Stabilization Fund

Requires 2/3 Vote of City Council, Town Meeting or District Prudential

Committee to create & appropriate the fund for a specific purpose

http://www.mass.gov/dor/docs/dls/mdmstuf/technical-assistance/best-

practices/specialstabilization.pdf

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

• State House Note Program (Forms)

http://www.mass.gov/dor/local-officials/accountant-info/schedule-a-program/state-house-

note-program.html

• Borrowing (debt) is governed by MGL Chapter 44:

www.mass.gov/dor/docs/dls/publ/igr/2010/igr10-101.pdf

• Asset Useful Life Schedules & Maximum Borrowing Termshttp://www.mass.gov/dor/local-officials/accountant-info/schedule-a-program/

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 31st)

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

Funding Capital Related Projects• MSBA Funding

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”

www.massschoolbuildings.org

• 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

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

http://www.mass.gov/dor/local-officials/municipal-data-and-financial-management/data-bank-reports/cpa/

• Grant Funding

Funding Capital Related ProjectsAggressive 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

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:www.massschoolbuildings.org/building/prerequisites/maintenance_cap_planning

• 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)

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

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

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

Questions & Answers