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V. PROGRAMMING CAPITAL FACILITIES

The Infrastructure Problem from the Local Viewpoint

Responsibility for the allocation of limited public resources among competing needs to assure reliable infrastructure systems largely rests with local government officials.

Continuous evaluation of services and facilities should include the following key elements:

o A basic inventory and a set of indicators for measuring and assessing the infrastructure.

o Determination of current conditions and range of potential improvement needs.

o Analyses of the maintenance, repair, and replacement options

o Analyses of the risks and uncertainties associated with the various investment choices.

o Evaluation of financing options.

o Ranking of the investment proposals based on the preceding analyses.

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

Local practices often are based on inadequate information or traditional engineering standards.

o Highly subjective assessments are used with little information on infrastructure conditions, proposal impacts, financing options, or repair and replacement options.

o In the absence of sound information and analysis, the "squeaky wheel" approach to decision-making prevails.

Task 1: Estimation of Current Infrastructure Conditions

Corrective action must be based on assessments of major components of the local infrastructure --monitored over time and compared to benchmark data where possible.

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 complaints and losses arising from system failures (e.g., water main breaks, basement floodings from sewer back-ups).

Assessment systems should be reliable (e.g., minimize dependence on judgments which may differ among surveyors) and practical (e.g., minimize extensive data gathering or use of expensive equipment in the assessment process).

o Indicators should be drawn from a wide variety of sources, including engineering practices and federal and state rating schemes.

o Benchmarks should be established for performance measures, such as system failures and breakdown rates.

o Standardized definitions should be prepared for each indicator.

Estimates should be made of data collection costs and reliability/validity of the procedures.

The product of this task should be a description of appropriate condition indicators and procedures for obtaining indicator information on a regular (e.g., annual) basis.

Task 2: Replacement Analysis

Condition indicators should point out elements of the infrastructure that have problems, suggest the current extent of these problems, and indicate projects for improvements.

Local governments have 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.

Replacement analyses assess the trade-offs among the four options by providing information on the likely costs, impacts on service levels, and risks of the choices involved.

Depreciation curves show the rate of deterioration as a function of such factors as age, original construction material, climate, intensity of use, and the like.

An impact analysis should be made to ensure that service levels are not reduced by an otherwise economically preferable option.

Equipment replacement models seek to minimize future net costs by estimating the time at which operating and maintenance costs (plus loss of resale value) exceed the cost (annualized) of replacement plus the operating and maintenance cost of the replacement equipment.

Cost-benefit analysis translates nonmonetary products into monetary terms by imputing dollar values to outputs (such as travel time saved, lives or injuries avoided, the value of recreation time, etc.).

Cost-effectiveness analysis expresses outputs in different units, with the results presented in the form of trade-offs rather than cost-benefit ratios.

Full costs (i.e., operating and maintenance and investment costs) should be given explicit consideration. Maintenance records, engineering estimates, and bids are major sources of information.

Discounting considers the time stream of expenditures and benefits (and the opportunity costs thus foregone).

Distributional effects of investment choices must be considered, including the numbers of citizens affected, as well as their location and demographic and socio-economic characteristics.

Task 3: Consideration of Risk and Uncertainty

Sensitivity analysis assesses the relative magnitude of changes in costs and output indicators if key elements have different values than those considered most likely.

Contingency analysis permits the construction of alternative future scenarios and an examination of the effects of each scenario for each maintenance or replacement option.

Probabilities can be applied to uncertain events so that an "expected value" and/or a distribution of likely total costs and outcomes can be generated for each alternative.

Discount rate can include an uncertainty factor to reduce net benefits computed in future years.

Qualitative statements should be made about the relative amount of uncertainty and risk involved in each alternative.

Risk analysis involves modeling situations to provide estimates of the probability of major consequences of certain governmental actions.

Procedures should be developed for making the trade-offs in investment decisions more explicit.

Task 4: Consideration of Financing Options

In considering the financing options in each infrastructure area:

o Sources of capital funds should be clearly delineated;

o Availability of specific matching grants to subsidize any further capital expenditures should be identified;

o Steps that could be taken to finance further capital outlays should be outlined; and

o Ramifications of pursuing these options should be assessed in terms of their relative costs and service level impacts.

Financing methods must be evaluated in terms of the fiscal policies of the community and in light of the particular capital facility needs.

"Pay-as-you-go" approach: (1) encourages local government to "live within its means"; (2) avoids the added cost of interest payments; (3) conserved credit for times of emergency when ample credit may be vital; and (4) minimizes premature commitments of funds.

The pay-as-you-go approach may result in an undue burden being placed on present taxpayers to finance some future need from which they may not fully benefit.

Accumulation of a reserve fund (sometimes called a capital reserve) can be thought of as the opposite of borrowing--a portion of current revenue is invested each year to accumulate funds to initiate some particular project in the future.

A sound borrowing policy seeks to conserve rather than exhaust credit.

Interest on municipal bonds is exempt from federal taxation (and from state taxes in the state in which it is issued).

General obligation bonds are backed by the "full faith, credit, and taxing power" of the issuing jurisdiction

Revenue bonds are backed by a pledge of the revenues generated by the facility being financed.

Special assessment bonds are based by specific sources of revenues, i.e., assessments against those who benefit from the improvement.

Task 5: Ranking Capital Project Requests

Decisions regarding capital project requests should be based on measurable and defensible criteria which establish priorities among needs.

A priority system reflecting the intangible approach is shown in Exhibit 1, along with criteria for assigning capital projects to each of these categories.

Eleven criteria for the evaluation of capital project requests are summarized in Exhibit 2.

Under a numerical priority system, the criterion judged to be most important or most significant is given the highest score, with other factors then ranked in relation to this score.

The priority system must be tailored to the particular goals and objectives of the jurisdiction.

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." [1]

Exhibit 1. General Criteria for Capital Facilities Priority System

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

A capital improvements program (CIP) usually spans a period of 5 to 6 years to provide sufficient lead time for the design and other preliminary work required by such projects.

The capital improvements program should cover three main topics:

(1) Explanation of the various legal requirements, magnitude of projected capital needs, fiscal resources of the jurisdiction, etc. that bear on the development of priorities.

(2) Listing of major projects under construction or for which funds have been appropriated.

(3) Detailed description of the CIP and capital budget for (a) the next fiscal year and (b) the following five years, with a listing of projects by agency and by priority.

Capital costs, operating costs, source of funds, method of financing, and financing schedule should be set forth for each project.

Another opportunity for review occurs when appropriations are made, or in the case of an issuance of general obligation bonds, at the time the referendum is placed before the voters.

Exhibit 2. Suggested Evaluation Criteria

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.

Capital Costs and Debt Burden

The tax burden generated by the capital improvements program is determined by annual capital costs, when measured against tax resources and available subsidies.

Direct net debt is the gross debt of a given jurisdiction less all revenue bonds, other self-supporting debt, and cash flow notes.

Overall net debt is the sum of direct net debt and the proportionate share of the debt of other overlapping government units (e.g., county, school district, special purpose district)--the total burden imposed on a given property base by all local jurisdictions empower to incur debt.

Per capita debt is a measure of the amount of debt borne by each resident, determined by dividing the amount of outstanding debt (either direct net debt or overall net debt) by the population of the jurisdictions.

Debt to property value ratio measures the burden on a locality's ad valorem tax base.

When the tax or debt burden becomes too great for public resources, it may be necessary to reduce the level of improvements scheduled until their costs fit to the available resources.

Standards of service must also have a degree of "built-in" flexibility; to be meaningful, they must represent actual performance or benefits.

Gaining Political Support

A financing plan has a far better chance of success if it has political support from the outset.

Local governments have not been particularly successful in promoting bond referenda.

Local business community requires adequate infrastructure support to be competitive, but seldom has been enlisted as a partner in gaining public support for the capital plan.

Endnotes

[1] William B. Rogers, "Fiscal Planning and Capital Budgeting," in Planning 1954 (Chicago: American Society of Planning Officials, 1954), p. 96