Multi-Year Capital Planning

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Type: 
Best Practice
Approved by GFOA's Executive Board: 
February 2006
Background: 

Infrastructure, technology, and major equipment are the physical foundation for providing services to constituents. The procurement, design, construction, maintenance, and operation of capital assets are a critical activity of governments 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 citizens without a sound multi-year capital plan that clearly identifies capital needs, 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: 

GFOA recommends that state and local governments prepare and adopt comprehensive, fiscally sustainable, and 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’ 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. Governments should develop a capital asset life cycle for major capital assets. The capital asset life cycle should include costs to operate, maintain, administer and renew or replace the capital asset. This will assist in identifying the need and schedule for capital asset replacement or major renewal. In addition, using information such as development projections, strategic plans, comprehensive plans, facility master plans, and regional plans; governments should identify present and future service needs that require capital infrastructure or equipment. In this process, attention should be given to:

  • Infrastructure improvements that support private development and the good of the public
  • Changes in policy or community entity needs
  • Incorporating input and participation from major stakeholders and the general public
  • Projects with revenue-generating potential
  • Analyze the non-financial impacts of the project (e.g., environmental) on the community

Determine financial impacts. GFOA recommends that the full extent of the capital project/asset and the associated life cycle costs be determined when developing the multi-year capital plan. In this process, attention should be given to:

  • The scope and timing of a planned project should be well defined in the early stages of the planning process
  • Governments should identify and use the most appropriate approaches when estimating project costs and potential revenues
    • If a government’s internal resources are not sufficient to estimate a capital project's cost, revenues and/or life cycle costs, outside assistance should be procured
  • For projects programmed beyond the first year of the plan, governments should adjust cost projections based on anticipated inflation
  • 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
  • The ongoing life cycle costs associated with each project should be quantified, and the sources of funding for those costs should be identified
    • Life cycle costs will impact future annual operating budgets

Prioritize capital requests. Though the initial prioritization process may be impacted by legal requirements and/or mandates, GFOA recommends that, when evaluating capital requests, governments should first prioritize based on:

  • Health and Safety - Priority should be given to high risk safety issues that require a capital project to correct
  • Asset Preservation - Capital assets that require renewal or replacement based on capital asset life cycle
  • Service/Asset Expansion/Addition - Infrastructure improvements needed to support government’s policies, plans, and studies

In this process, attention should be given to:

  • Coordination with related entities 
  • Allow submitting agencies to provide an initial prioritization
  • Incorporate input and participation from major stakeholders and the general public
  • The impact on operating budget impacts resulting from capital projects
  • Apply analytical techniques, as appropriate, for evaluating potential projects (e.g., net present value, payback period, cost-benefit analysis, life cycle costing, cash flow modeling)
  • Use a rating system to facilitate decision-making

Develop a comprehensive financial plan. GFOA recommends that governments develop a viable overall multi-year financing plan covering the multi-year period of the capital plan to ensure that the proposed capital plan is achievable within expected available resources. Financing strategies should align with expected project requirements while sustaining the financial health of the government. Governments undertaking a capital financing plan should:  

  • Anticipate expected revenue and expenditure trends including their relationship to multi-year financial plans and ongoing impacts to the operating budget due to the capital plan
  • 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
  • Consider sources and uses for debt service
  • Ensure reliability and stability of identified funding sources
  • Evaluate the affordability of the financing strategy, including the impact on debt ratios, applicable tax rates, and/or service fees
Committee: 
Economic Development and Capital Planning
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.