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

Patrice Sutton

DAY ■MAY 23, 2017 2:00 ‐ 3:15 PM

Finance Director, Village of Libertyville, ILNicole KreiserDebt Manager, Wake County, NCDarryl StreetSenior Financial Policy Advisor, Washington, D.C.

MODERATOR

SPEAKERS

#GFOA2017

David Clark Director, Capital Improvements Program, Washington, D.C. 

7 ‐Year Capital Improvement 

Planning

CIP Project Prioritization and Plan Development

Presentation Overview: CIP Development

3

• Needs Assessment• Project Prioritization• Cost Estimation• Funding Capacity Analysis

Needs Assessment

4

Comprehensive Master Planning 

Critical Needs Assessment

Facility Condition Assessments

• Roofs

• HVACs

• MEP (Mechanical, Electrical, Plumbing)

• Paving

• Flood Control Infrastructure

5

Wake County CIP Priorities1. 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. 

6

In Depth Cost EstimationEstimates 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

Funding Capacity Analysis: CIP is a Funded Plan

7

• Plan is a funded plan: FY 2018 Transfer from General Fund = $315.308 Million• 19.01 cents of 61.50 cents recommended property tax rate: 

• FY 2018:  $271.993 Million• Debt Service: $196.473 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: $43.315 Million for Debt Service (17% of Debt Service 

Revenue)

Continuum of Projects

8

Horizon

Projects are Not Included in CIP: Project timing, priority, business case, or funding are still being determined.

FY19 to FY24 Planned

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

FY18 Funded Projects

Projects will be Appropriated as part of the Budget:  Typically adopted by BOC in Capital Projects Ordinance

Summary

9

• 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.

District of ColumbiaHistory of the District of Columbia

Functions as a City, County, State and School District

1801 Created

1846 Alexandria County portion returned to Virginia

1878 Congress establishes three member Board of Commissioners

1961 23rd Amendment “Right to Vote for President”

1967 President appoints first Mayor

1973 Congress passes Home Rule Act; popularly elected Mayor, 13-member Council

Mid-1990s Control Board instituted; Independent CFO created

Mid-2001 Control Board activities suspended

10

District of ColumbiaInfrastructure Challenges

11

Since 1988 the American Society of Civil Engineers (ASCE)infrastructure report card has scored the nation’sinfrastructure a “D” on a scale of “A to F.”

Arlington Memorial Bridge that connects D.C. and Virginiais 5 years away from only allowing foot traffic if it’s notreplaced.

The District has spent billions on schools reconstructiondue to long-term lack of adequate maintenance.

METRO!!!

District of ColumbiaDistrict’s Current Financial Status

12

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

District of ColumbiaCurrent Capital Planning Process

13

6-year capital improvement program

4-year balanced financial plan, which incorporates the six-year capital plan

Street condition assessments performed by DDOT to setpriorities

Capital needs beyond the 6-year CIP, or unfunded currentneeds, are not addressed

District of ColumbiaLong‐Range Capital Financial Planning

14

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

District of Columbia

Approach to Develop Long-Range Capital Financial Plan (LRCFP)

15

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

District of ColumbiaAsset Tree Approach

16

District of ColumbiaThe DC ‘Waterfall’ Analysis

17

District of ColumbiaReinvestment Rate Comparison

18

(Amounts in USD millions)

Canada

Asset TypeCurrent Asset

Value1Average AnnualInvestment2

Avg. Reinvestment Rate

Current Reinvestment Rate(National Average) 3

Horizontal Infrastructure(i.e. roads, sidewalks, bridges, etc.) $3,523.1 $159.4 4.5% 0.8% ‐ 1.1%

Vertical Infrastructure(i.e. facilities, buildings, etc.) $6,425.1 $56.2 0.9% 1.7%

Equipment ‐ IT ‐ Fleet $315.3 $112.3 35.6% 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.

Washington, D.C.

District of ColumbiaUnfunded Capital Needs

19

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 10-15 year period

District of ColumbiaAnnual Funding Shortfall

20

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 2017 2018 2019 2020 2021 2022 6 Year Total

Unfunded CapitalMaintenance Projects 309.5        324.8        345.5        270.2        345.2        371.7        $1,967.0Unfunded NewCapital Projects 439.3        366.2        447.5        494.3        224.4        252.6        $2,224.2Total UnfundedCapital Needs $748.7 $691.0 $793.0 $764.5 $569.6 $624.4 $4,191.2

District of ColumbiaCurrent 6-Year CIP (FY2017-2022)

21

CARSS identifies unfunded capital needs not financed in 6-year CIP

District of ColumbiaApproach to Developing Funding Solutions

22

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

District of ColumbiaFunding Solutions

23

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

District of ColumbiaA Discussion of Return on Investment (ROI)

24

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

District of ColumbiaExample of an ROI Calculation for Fleet

Value MeasurementCost of the Investment $3,000% Increase in Value 65.0%Old Asset Value $5,000New Asset Value $6,950Change in Value $1,950

Extended Life ‐ Years 3                                      Cost to replace Asset $30,000% of Interest on Cost Avoidance 4.0%Annual Interest Avoidance $1,200Total Cost Avoidance over extended life $3,600

Average Annual Operating Expense $600

% Change to operating Expense 60.0%Annual Operating Savings $360Total Savings $1,080

Investment $3,000Gain or Loss on Investment $6,630

Years of Return 3                                      Annual Net Gain from Investment $1,210

Annual ROI 40.3%

Total

Change to Market Value of Asset

Value of the Increased life of the Asset

Change in Future Operating Expense Costs

Asset Type:  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.

25

District of ColumbiaWhat 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

District of Columbia

27

What about Metro?

District of Columbia

28

Operating Revenue & Maintenance Funding Gap(in $millions)

Total is approx. $21 Billion

District of Columbia

29

Capital Budget Revenue & Funding Gap(in $millions)

Total is approx. $15.6 Billion

District of Columbia

30

10-Year Funding Gap Summary

See the full Pro Forma for greater details 

CIP Funding Gap 6,157.05$            Maintenance Budget Gap 1,300.29$            Total 7,457.34$            Annual Average (10 Years ‐ FY 2017‐FY 2026) 745.73$                

($ Millions)

District of Columbia

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!

31

Asset TypeCurrent Asset 

Value Average Annual 

Investment  % Reinvestment TargetPublic Transit ‐ WMATA 39,640$                   792$                         2.0% 3.9%

Mass Transit ‐ Metro($ millions)

Reinvestment in Mass Transit

District of Columbia

32

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

Summary of Metro Issues

District of ColumbiaImpacts of No Additional Funding

33

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.

District of Columbia

34

Conclusions

District of ColumbiaNext Steps for D.C.

35

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

District of Columbia

Any questions on why reinvesting in capital is important?

36