The capital infrastructure built and maintained by local government is essential for a thriving community
However, the deficiencies in our communities’ infrastructure are well documented. A big part of the challenge is deciding how to allocate a limited budget between competing projects and interests. Usually, these competing interests seek to gain as much as possible from the budget for themselves. When everyone does this, the budget becomes overburdened, and the financial foundation of local government becomes compromised.
GFOA recommends that 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 and contain the following components:
- 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.
- 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.
- 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 considerations, service, and asset preservation.
- 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.
Revised Best Practice - Multi-Year Capital Plans
Governments should prepare and adopt comprehensive, fiscally sustainable, and multi-year capital plans to ensure effective management of capital assets.
Capital Planning Best Practices
GFOA best practices on capital planning cover capital planning policies, environmentally responsible practices, master plans, use of technology, and capital planning communications.
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Integrate Environment, Social and Governance (ESG) Considerations in Planning
Successful execution of a capital plan is often linked to the government’s ability to finance the designated projects, as a matter of intergenerational equity. Debt plays a key role in funding capital projects for many governments, and with municipal investors heightening both their demand and scrutiny of ESG risks with a nexus to credit and in some cases, the utilization of designated bonds, the integration of these metrics in risk disclosures and in ongoing continuing disclosures to investors is increasingly crucial in the drafting of capital plans. Acknowledging the risks and opportunities of ESG factors help a government to choose the financing technique that best meets its cost and risk profile. GFOA recommends integrating ESG into capital planning by:
- Indicating any project that has a direct or related E, S or G material risk or measurable benefit with a brief description to inform finance officers in charge of obtaining funding
- Summarizing potential ESG projects in the final Capital Plan to highlight the initiatives for public consumption
- Considering prioritizing debt financing for ESG projects