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
- 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.