Programming Capital Facilities

A growing body of evidence indicates that the deterioration of the urban infrastructure is a very serious problem of national scope. Articles in the popular press, research sponsored by various federal agencies, and a series of congressional hearings have contributed to increased national concern and debate as to the status of water and sewer systems, health and educational facilities, streets, bridges, and public facilities in our cities and towns.

The Infrastructure Problem from the Local Viewpoint

Recognition of the seriousness and magnitude of the problems of the urban infrastructure unfortunately comes at a time when resources are con-strained at all levels of government. A pronounced decline in aggregate local spending for capital improvements has been evident since the 1960's. During recent period of fiscal pressures, many local governments also have deferred maintenance spending as a "temporary measure" to ease their financial burdens. Such spending deferrals, however, have only multiplied future repair needs and investment requirements. Public officials and administrators have had to confront a number of difficult, complex, and often politically sensitive decisions.

The programming of capital facilities should be based on a system of priorities which, in turn, should be linked to the goals and objectives set forth in a capital facilities plan. Procedures must also be developed for the continuous evaluation of services and facilities. The process by which limited public resources are allocated among a wide range of competing improvement needs should include the following key elements:

o A basic inventory and a set of indicators for assessing the condition of the infrastructure systems of the community.

o Determination of current conditions and range of potential infra-structure improvement needs.

o Analyses of the maintenance, repair, and replacement options for different improvement proposals (including the "do-nothing" option).

o Analyses of risks and uncertainties associated with various investment options, culminating in a ranking of investment proposals.

o Evaluation of financing options.

o Selection, programming, budgeting, and scheduling of specific improvement projects.

Local practices for allocating limited resources to capital needs often are based on traditional engineering standards. While such standards are helpful, they simply are not sufficiently comprehensive to provide needed information on trade off options for proposed improvements. Highly subjective assessments may be based on limited systematic information regarding infrastructure conditions, the impacts of proposals, available financing options, or an analysis of repair and replacement options. Local discussions concerning priorities among competing projects often are intensely political debates. And all too often, in the absence of sound information and analysis, the "squeaky wheel" approach to decision-making prevails.

Estimation of Current Infrastructure Conditions

Capital improvement commitments should be based on an assessment of major components of the local infrastructure--monitored over time and compared to benchmark data where possible. Priorities among capital projects can be more readily determined once the conditions of individual segments of the infrastructure are clearly identified. Specific analysis of repair and replacement alternatives can be undertaken when information on the condition of the current infrastructure is combined with cost accounting data on maintenance spending.

Application of Geographic Information Systems (GIS) techniques can be of considerable assistance in maintaining an inventory of infrastructure conditions. Once the data are loaded into the GIS, periodic updates and analyses can be accomplished with relative ease. Appropriate assessment procedures should be identified for each of the basic systems: streets, bridges, transit vehicles, water and sewer networks, and so forth. Three categories of indicators should be considered:

(1) Engineering-type assessments such as measures of water pipe capacity loss, bridge condition ratings, etc.;

(2) Performance measures such as number of sewer line stoppages, frequency of bus breakdowns; service calls for water line repairs, etc.; and

(3) Service impact indicators such as numbers of citizen complaints and losses arising from system failures (e.g., water main breaks, basement flooding incidents from sewer back-ups).

Appropriate indicators should be drawn from a variety of sources, including engineering practices and federal and state rating schemes. A small group of indicators for each system should be selected which offer valid measures of conditions and for which reliable information can be obtained over time. The selection will be facilitated by seeking the advice of professional groups and by examining the experience of other local governments that have implemented such assessment procedures. Efforts should be made to identify assessment systems that are reliable (e.g., that minimize dependence on judgments which may differ among surveyors) while at the same time, are practical (e.g., that minimize extensive data gathering or use of expensive equipment in the assessment process).

Where possible, benchmarks should be established for the selected performance measures, such as system failures and breakdown rates, and standardized definitions should be prepared for each indicator. This information, coupled with rules of thumb developed by practitioners, should provide measures of the mean and range of performance levels against which the local infrastructure can be compared and evaluated.

The product of this task should be a description of appropriate condition indicators and procedures for obtaining information on a regular (e.g., annual) basis. Estimates should be made of the data collection costs and of the reliability/validity of the procedures. Special attention must be given to the cost-saving trade-offs of collecting data for condition assessments. In some cases, new procedures will be warranted. In others, existing information can be utilized. Often the computerization of data will be required. A low and a higher cost option should be identified for all data collection approaches.

Replacement Analysis

A replacement analysis provides an assessment of the trade-offs among four options: (1) replace the facility or equipment; (2) rehabilitate or under take a major overhaul; (3) continue to provide current maintenance with emergency repairs as required; or (4) cut back maintenance spending and defer repairs. The fourth option may be the least expensive in the short-run, but usually is the most costly in the long term. Replacement analysis provides local governments with information on the likely costs, impacts on service levels, and risks of the choices involved.

Ideally, depreciation curves should be developed for different com-ponents of the infrastructure. Such curves show the rate of deterioration as a function of such factors as age, original construction material, climate, intensity of use, and the like. Unfortunately, while some general guidelines concerning useful service durations do exist, these typically do not relate to individual segments of the local infrastructure.

Procedures must be formulated for replacement analysis that seems feasible and appropriate for local governments. The technical literature from the related fields of engineering economy, capital budgeting, cost-benefit and cost-effectiveness analysis should be examined. Much of the work in these fields has focused on private sector choices, which have the simplifying advantage that the outputs of investments, as well as the costs, can be expressed adequately in dollar terms.

But the public sector also has to consider non-monetary impacts, such as water quality, transportation delays, number of sewer stoppages and backups, and the like. Infrastructure maintenance issues can be discussed primarily in terms of dollars. Even in these cases, however, it will generally be necessary to undertake a brief analysis of service-level impacts to ascertain that these are not reduced by an otherwise economically preferable option.

Equipment replacement models use methods of operations research in an effort to minimizing future net costs by estimating the appropriate time for replacement. Optimal replacement occurs when operating and maintenance costs (plus loss of resale value) of existing equipment exceed the annualized cost of replacement plus the operating and maintenance cost of the new equipment. In short, the cost of maintaining the existing equipment for another year is compared to the cost of buying new equipment and operating it for the same period.

Cost-benefit analysis has been popular in the examination of trans-portation alternatives and in the assessment of water resource projects. In cost-benefit analysis, non-monetary products are translated into monetary terms by imputing dollar values to outputs (such as travel time saved, lives or injuries avoided, the value of recreation time, etc.). The problems of how to meaningfully impute dollar values to service-level impacts and secondarily, how to handle distributional effects, are likely to limit the utility of cost-benefit analysis at the local level. In cost-effectiveness analysis, outputs are expressed in different units, with the results presented in the form of trade-offs rather than cost-benefit ratios.

In addition to the basic principles of the various forms of economic analysis, the detailed procedures should include:

o Estimation of costs. Local governments often have difficulty in using information from maintenance records, engineering estimates, and bids to project costs of various alternatives. Procedures for the explicit consideration of full costs, i.e., operating and maintenance costs, as well as investment costs, should be developed when feasible. The use of statistical cost analysis techniques should be explored to make better estimates of future costs.

o Discount rates. Discounting is important in considering the time stream of expenditures and benefits (and opportunity costs). Appropriate discount rates for local analyses, however, often are unclear. Often these measures, if stated in monetary terms, represent dollar imputations rather than actual dollar outlays.

o Distributional effects. Procedures should be developed to examine the distributional effects of investment choices within a locality. The numbers of citizens affected, as well as their location and demographic, economic and social characteristics, should be considered. Condition indicators often can be disaggregated by neighborhoods, districts, etc.

Ranking Capital Project Requests

Capital projects may be divided into four major categories, as summarized in Exhibit 2. The decision process associated with each of these categories may vary considerably, depending upon the quantitative and qualitative information accessible and the options available.

In all likelihood, for any given budget period, the overall cost of proposed capital projects will exceed the available financial resources. Therefore, decisions regarding capital project requests should be based on measurable and defensible criteria which establish priorities among needs. Information derived from the previous tasks (infrastructure condition assessments, repair and replacement cost options, service impacts) can provide a basis for priority ratings. Such procedures should seek to combine criteria to provide an overall summary score, without losing the backup information on each individual criterion for each proposal. Economic costs and benefits often can be quantified in such priority systems. With few exceptions, however, social benefits and costs have yet to reach this level of quantification. Various "political factors" seldom are included among such criteria but are brought to bear on the final rankings.

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Exhibit 2. Categories of Capital Improvements Projects

Repair and Renovations: Involves the maintenance of existing facilities and equipment in satisfactory condition. Projects often are much less expensive than those in other categories, and as a consequence, are easier to evaluate. Examples include: replace of a pump that is supplying water from an artesian well; a new roof for the city garage to replace one that is causing significant water damage to the facility. Such projects often do not require elaborate quantitative or qualitative evaluations.

Compliance with Government Regulations/Safety Requirements: Projects often are mandatory and must be implemented within a specified time to avoid significant fines, costly legal battles, and even heavy court judgments. The objective is to determine the most cost-effective way to satisfy the government mandate or safety requirements. Examples include: modification of public buildings to meet the requirements of the Americans with Disabilities Act; replacement of outmoded and unsafe elevator that violates the city code and represents a substantial liability in the event of an accident; replacement of air conditioning equipment to meet Environmental Protection Agency guidelines.

New Construction/Major Renovations: Typically involving the most expensive projects, decisions in this category often must rely on an evaluation of qualitative benefits. The costs of such projects can be estimated, but the benefits often are not subject to quantitative dollar measurement. Examples include: an addition to the public library, including a facelift for the old facility; a new heating/cooling plant to replace an outmoded and inefficient one; a new office building to accommodate city personnel currently housed in rental spaces. Reduced utility and maintenance costs resulting from a new plant and the rental savings should be quantified and included as benefits in the evaluation.

Implementation of New Programs: Commitments to implement new programs or expand existing programs often result in significant capital costs which may not be readily apparent and/or fully considered as part of the program decision. New equipment may have to be leased or purchased. New or expanded facilities subsequently may be required to accommodate the program initiatives. Examples include: new accounting procedures to provide improved information on which to make more timely decisions, which may require a substantial investment in computing hardware and software and a local area network to fully utilize their potential; an expanded pre-natal health care program, which may require the leasing of space to increase convenience for access to such services.

Systems for assigning priorities can be divided into two approaches: (1) those that stress intangible values, and (2) those that seek to quantify various criteria to develop a numerical scoring system. Each of these approaches has its merits and its shortcomings, and to the extent possible, elements from each should be incorporated into a sound priority classification system.

Under an intangible approach, preference is given to projects that contribute to "the protection of life, health, and public safety." A second important consideration assigns priority to projects designed to meet current deficiencies in existing facilities, based on some standard of service. While deficiency criteria often are expressed in rather general terms, it may be possible to establish some quantifiable measures based on these general statements. These criteria can then be applied to determine the essential level of service and the harm arising from a deficiency of service. It often is difficult, however, to develop measures that are comparable across functions lines (e.g., parks versus schools).

Priority consideration also may be given to projects designed to conserve or maintain some existing properties, investment, or resources, or those that demonstrate some substantial economic or social benefit to the community. Established facilities may depend on new projects to realize their full potential, and therefore, such projects also might be given a high priority, as would projects that are self-supporting or self-liquidating. Special consideration may also be given to projects for which substantial state or federal subsidies are available. Finally, special consideration would be given to emergency situations.

A six-way breakdown of priorities is shown in Exhibit 3, along with criteria for assigning capital projects to each of these categories. An examination of the suggested criteria will reveal several areas in which more measurable indices could be developed.

Adopted from: Alan Walter Steiss, Local Government Finance: Capital Facilities Planning and Debt Administration (Lexington, Mass.: Lexington Books, 1978), p. 38.

Hatry, Millar, and Evans have suggested eelevent criteria for the evaluation of capital projects, as summarized in Exhibit 4. Most cities require a description or justification of each project as part of the departmental submissions. Often these statements are so general, however, that the process of comparing and selecting among competing projects becomes very subjective. For these evaluation criteria to be useful, information should be provided on each of the relevant factors.

In recent years, a number of governments have begin to identify a set of ranking criteria against which each capital improvement proposal is rated. Numerical weights are assigned to each criterion and used as multipliers to calculate an overall summary score for each proposal. The resulting summary scores are then used to rank the proposals. The criteria usually are a mixture of economic, political, social impact, and distributional considerations.

Under a numerical priority system, the criterion judged to be most important or most significant is given the highest score (frequently based on units of ten or some multiple of ten). All other factors are then ranked in relation to this score. Thus, "protection of life and maintenance of public health" may be ranked as the most important criterion and given a score of 100. "Conservation of resources" may be judged to be nearly as important and thereby, given a score of 90. On the other hand, "aesthetic and cultural values" may be ranked relatively low, scoring only 20 points. These categories often are further divided into a number of subcategories and scores accumulated for any given period. It should be evident that any effort to develop such an "objective" approach must be based, to a large degree, on subjective judgments.

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Adapted from Harry P. Hatry, Annie P. Millar, and James H. Evans, "Guide to Setting Priorities for Capital Investments," Guides to Managing Urban Capital, Volume 5 (Washington, DC: The Urban Institute Press, 1984), p. 9.

While priority systems should have some degree of flexibility, they must be stable enough to offer substantial justification for the scheduling of projects and the allocation of funds within the capital improvements program. The priority system--whether developed on a more subjective, intangible basis or on a numerical system--must be tailored to the par-ticular goals and objectives of the individual jurisdiction. One locality may be interested primarily in furthering industrial growth and development. Another may have tourism and the development of the recreational industry as a basic objective. A third may place primary emphasis on the preservation of a well-maintained residential atmosphere. In the final analysis, the planners and administrators must exercise their best professional judgment in working with the various operating agencies in assigning priorities. At the same time, it must be recognized that in government, ". . . the actual choice and establishment of final priorities are still accompanied by the political process of compromise, a give-and-take between all groups concerned." [2]

Ranking procedures are not intended to make decision making on capital improvement proposals "automatic." They are not a substitute for judgment and consideration of the political environment. Rather, they provide more substantive information--in effect, making explicit issues and trade-offs that are always present but often hidden.

Capital Improvements Program

When all proposed projects have been examined and analyzed, a composite capital improvements program should be prepared for review by and adoption by the chief executive and legislative body. A capital improvements program (CIP), usually spanning a five to six year period, represents the more immediate and more detailed portions of the long-range capital facilities plan. Governments have found with experience that five to six years is a convenient period for the detail programming of capital expenditures, permitting sufficient lead time for the design and other preliminary work required by such projects. Projects included in the CIP should be arrayed according to their priority ranking.

The responsibilities for capital facilities planning are shared by a number of groups and individuals within government: the chief executive, the legislative body, various operating departments, the finance agency, and the planning agency. Each plays an important role in the decision-making process. As Coughlin has observed: "Each group attempts to look at the program as a whole and make decisions about its parts. But, because of its particular function and position, each group sees the problems with a slightly different emphasis." [3]

Ultimately, the decisions regarding capital expenditures must rest with the chief executive and the legislative body. As the elected repre-sentatives of the people, these officials must share a primary concern for the broader interests and the welfare of their constituents. However, their particular function and position dictates that they emphasize different aspects of the capital improvements program. The chief executive must assume a position that places primary emphasis on middle-range objectives, falling somewhere on the continuum between the short-range perspective of the finance agency and the longer-range viewpoint of the planning agency. The chief executive must also pay particular attention to the political consequences of capital expenditure decisions. The governing body must also take cognizance of the political implications of decisions, but generally tends to gravitate toward more immediate program objectives, placing particular emphasis on the cost factors involved. As elected officials, members of the city council or county board are most sensitive to potential taxpayer (voter) reactions to the costs of major improvements.

The drawbacks to this approach, in terms of the time required to carry out the process and the compromises that often are necessary, should be obvious. As one student of government has put it: "Rome wasn't built in a day--but it would have taken a heck of a lot longer if the construction proposals had to go through our modern form of democratic government." To circumvent the delays which arise from this approach, the capital facilities plan and capital improvements program must be developed with a spirit of close coordination and cooperation among the various groups involved.

When adopted, the CIP should be made available in report form to civic groups and interested citizens in addition to being distributed to the operating departments. The capital program report should cover three main topics:

(1) Explanation of the various considerations and policies brought to bear on the development of priorities, that is, legal requirements, magnitude of projected capital needs, the fiscal resources of the jurisdiction, and so forth.

(2) A listing of the major projects now under construction or for which funds have been appropriated.

(3) A detailed description of the capital improvements program and budget for (a) the next fiscal year; and (b) the following five years, with a listing of projects by agency and by priority.

The detailed description of each project should include a brief statement as to its general purpose and reason for its inclusion in the CIP. Capital costs, operating costs, the source of funds, the method of financing, and the financing schedule should be set forth in the report for each project.

Even after legislative action has been taken in adopting the CIP, funds must still be made available. Therefore, after a capital budget has been adopted, another opportunity for review occurs at the time appro-priations are made, or in the case of an issuance of general obligation bonds, at the time the referendum is placed before the voters. Of course, even after appropriations are made, changes and adjustments are still possible prior to construction or acquisition. If the original project requests are based upon a sound planning foundation, however, the need for such changes should be minimal.

Gaining Political Support

A capital facilities plan has a far better chance of success if it has political support from the outset. In communities where bond elections must be held, the referendum vote provides an opportunity to build public backing for the entire capital plan. Unfortunately, local governments have not been particularly successful in promoting bond referenda. The local business community, which requires adequate infrastructure support to be cost competitive, seldom has been enlisted as an effective partner in designing the capital plan and generating public support for it.

Few cities faced infrastructure problems of the scale of Cleveland's in the late seventies. The capital facilities of the metropolitan area had deteriorated badly through neglect. The city had temporarily defaulted on its bonded debt and therefore, access to normal sources of capital financing had been severely limited. The newly elected mayor and the business community joined in launching the Community Capital Investment Strategy. The Greater Cleveland Growth Association convened business leaders and the heads of regional authorities, the county, and the city to begin a systematic study of the capital investment that Cleveland had to make to restore its infrastructure facilities. The mayor and business leaders campaigned for an increase in the local income tax, part of which would be dedicated to financing the new capital plan. This commitment has made it possible to turn around two decades of erosion in capital facilities in Cleveland. Business support has been vital to a commitment to capital financing in other communities.

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