1. If I Had $1,000,000: An Effective Capital Budgeting Process
DAY ■ MAY 23, 2017
2:00 - 3:15 PM
If I Had $1,000,000: An Effective Capital Budgeting Process
MODERATOR
Patrice Sutton Burger
Finance Director, Village of Libertyville, IL
Nicole Kreiser
SPEAKERS
Debt Manager, Wake County, NC
Darryl Street
Senior Financial Policy Advisor, Washington, D.C.
David Clark
Director, Capital Improvements Program,
Washington, D.C.
#GFOA2017

2. 7 - Year Capital Improvement Planning
CIP Project Prioritization and Plan Development

3. Presentation Overview: CIP Development
Needs Assessment
Project Prioritization
Cost Estimation
Funding Capacity Analysis

4. Needs Assessment Comprehensive Master Planning
Critical Needs Assessment
Facility Condition Assessments
Roofs
HVACs
MEP (Mechanical, Electrical, Plumbing)
Paving
Flood Control Infrastructure

5. Wake County CIP Priorities
Ensure life, safety, and basic environmental concerns.
Provide operating expense savings.
Maintain the integrity of current capital assets.
Improve existing facilities, technology systems and infrastructure to meet emerging needs and higher service levels.
Without expanding the County's existing role, add new facilities and systems based on approved plans.
Expand the County's service delivery role with investments in facilities, infrastructure, and new technology.
Match contributions by partners to support community and systems infrastructure.

6. In Depth Cost Estimation
Estimates Provided By:
Consultants
Staff in Facilities Design and Construction and General Services Administration
Projects Typically Funded One Year Design, Second Year Construction to Allow for Budget Refinement
Annual Updates of CIP allow for Updates to Inflation Factors and Estimated Project Costs for 7-Year Horizon

7. Funding Capacity Analysis: CIP is a Funded Plan
Plan is a funded plan: FY 2018 Transfer from General Fund = $ Million
19.01 cents of cents recommended property tax rate:
FY 2018: $ Million
Debt Service: $ Million (76% of Debt Service Revenue)
WCPSS Cash Funded Capital: $35.56 Million
WTCC Cash Funded Capital: $10 Million
County Cash CIP: $29.9 Million
Portion of Article 40 and Article 42 sales tax revenue (30% and 60% respectively)
FY 2018: $ Million for Debt Service (17% of Debt Service Revenue)

8. Continuum of Projects Horizon
FY18 Funded Projects
FY19 to FY24 Planned
Horizon
Projects will be Appropriated as part of the Budget: Typically adopted by BOC in Capital Projects Ordinance
Projects are Planned and Included in CIP: Revenues are assigned to projects. Updated annually – scope and costs may change, or ultimately may not be funded
Projects are Not Included in CIP: Project timing, priority, business case, or funding are still being determined.

9. Summary
Understand Needs through Master Planning and Comprehensive Annual Needs Analysis
Prioritize Those Needs. Review Priorities to Ensure Consensus with Prioritization Approach
Review Costs Through Budget Development Process. Update Costs Projected in Future Years in Annual CIP Development
Fiscally Constrain the CIP. Understand Funding Capacity and Plan Projects Accordingly.

10. Functions as a City, County, State and School District
History of the District of Columbia
1801 Created
1846 Alexandria County portion returned to Virginia
1878 Congress establishes three member Board of Commissioners
rd Amendment “Right to Vote for President”
1967 President appoints first Mayor
1973 Congress passes Home Rule Act; popularly elected Mayor, 13-member Council
Mid-1990s Control Board instituted; Independent CFO created
Mid-2001 Control Board activities suspended
Functions as a City, County, State
and School District

11. METRO!!! Infrastructure Challenges
Since 1988 the American Society of Civil Engineers (ASCE) infrastructure report card has scored the nation’s infrastructure a “D” on a scale of “A to F.”
Arlington Memorial Bridge that connects D.C. and Virginia is 5 years away from only allowing foot traffic if it’s not replaced.
The District has spent billions on schools reconstruction due to long-term lack of adequate maintenance.
METRO!!!

12. District’s Current Financial Status
District has to finance and provide the infrastructure needs of a state, county, city and school district
The District enjoys a growing population, economy and tax base
Fully-funded pension and OPEB trusts
Strong bond ratings (AA to AAA category) and strong level of reserves
Results in low overall costs of borrowing
Relatively low current paygo levels

13. Current Capital Planning Process
6-year capital improvement program
4-year balanced financial plan, which incorporates the six- year capital plan
Street condition assessments performed by DDOT to set priorities
Capital needs beyond the 6-year CIP, or unfunded current needs, are not addressed

14. Long-Range Capital Financial Planning
Long-range capital financial plan was developed as part of the OCFO Strategic Plan and Council legislation
Incorporates the current 6-year CIP and all other infrastructure needs, unconstrained by funding
Reflects maintenance needs for all current assets
Reflects bond capacity limits and existing pay-as-you-go resources
Identified funding gaps and determines optimal funding solutions

15. Approach to Develop Long-Range Capital Financial Plan (LRCFP)
Obtained software to inventory all capital assets, including condition assessments
Developed new capital projects, unconstrained by funding, as well as costs for maintenance of all assets
Developed criteria to score, rank and prioritize all projects
New projects and maintenance of existing assets
Determined funding capacity by year under current fiscal constraints
Debt capacity, local funds, federal funds, etc.
Identified Public-Private Partnerships (P3s) where private sector funding could assist

16. Asset Tree Approach

17. The DC ‘Waterfall’ Analysis

18. Reinvestment Rate Comparison

19. Unfunded Capital Needs
Total capital needs identified (FY2017–FY2022) as $10.5B
Less the District’s share of WMATA’s future capital needs
Less projects to be potentially funded as P3s (approx. $1B to $1.5B)
District’s current CIP is approx. $6.3 Billion
Fund the highest priority capital needs
Still leaves approx. $4.2 Billion of unfunded capital needs
These unfunded capital needs can be reasonably financed over a year period

20. Annual Funding Shortfall
Capital maintenance projects shortfall of $1.97 billion
Average annual shortfall of approx. $325 million
Roughly matches total annual depreciation of District assets
New capital projects shortfall of $2.22 billion
Average annual shortfall of approx. $370 million

21. Current 6-Year CIP (FY2017-2022)
CARSS identifies unfunded capital needs not financed in 6-year CIP

22. Approach to Developing Funding Solutions
Utilized CARSS to identify funding gaps by year for capital needs
Developed a long-range capital financial plan optimization model to determine the lowest cost solution to finance the capital funding gap

23. Funding Solutions
Strong annual revenue growth provides future borrowing capacity
Aggressive program of monitoring existing debt for refinancing opportunities and debt retirement provides additional future borrowing capacity
Optimal funding solution is to borrow up to the 12% statutory debt limit (Debt Cap) and fund remaining shortfall with paygo

24. Calculated the value, by asset type, and computed an ROI for each
A Discussion of Return on Investment (ROI)
Calculated the value, by asset type, and computed an ROI for each
Change in the value
Value of the increased life of the asset
Change in future expected O&M expenses
The overall weighted ROI for investment in “capital maintenance” projects is just over 5% annually

25. Example of an ROI Calculation for Fleet
In this example we assume there is a need to replace an engine in a vehicle at a cost of $3,000. The vehicle has a current value of $5,000, and replacing the engine will add 3 years to the life of the vehicle.

26. What do we get for the money? ROI
Assumptions
Using FY 2017 Data, if we fully funded the gap:
We'll retain 65% of the value of our fleet investments - which includes depreciation.
The investment cost avoidance calculation is based on 75% of our investment being new vehicles. The remaining 25% of costs are for capital expenses (chassis, engines, transmissions etc.) and thus avoid the purchase of new vehicles, which would have a market value of 5 times the current value of the major vehicle parts we're investing in.
The operating impacts are calculated based on the use of an average annual fleet maintenance cost of 10% of the original market value during it's final 3 years of useful life.
The cost savings is based on the fact that we would have replaced the vehicles and/or major systems on time, and thus maintenance would drop back to 'normal' levels.
Change to Asset Value
$ M
Value of Increased Life
$ 2.65 M
Reduction of Operating Expenses
$ 5.29 M
Total
$19.40 M

27. What about Metro? 27

28. Operating Revenue & Maintenance Funding Gap
(in $millions)
Total is approx. $21 Billion

29. Capital Budget Revenue & Funding Gap
(in $millions)
Total is approx. $15.6 Billion

30. 10-Year Funding Gap Summary
See the full Pro Forma for greater details

31. The less than satisfactory reinvestment rate!
Reinvestment in Mass Transit
Why do we need $15.6 Billion of capital investment over the next 10 years to reach a state of good repair?
How did we get almost $7 Billion behind?
The less than satisfactory reinvestment rate!

32. Summary of Metro Issues
Allows WMATA to reach a State of Good Repair in 10 years
SGR total capital needs are estimated by WMATA at $15.6 Billion
Represents a maintenance gap of $1.3 billion and a capital gap of $6.2 Billion (total 10-year combined gap of $7.5B)
Far exceeds reasonable capacity of the compact jurisdictions
A dedicated regional funding source is essential to achieve a State of Good Repair
A dedicated funding source collecting approx. $650M annually, beginning in January 2019, can cover both the maintenance and capital funding gaps, as well as additional critical capital needs
Without a dedicated funding source in place by January 2019, jurisdictions will not be able to fund WMATA’s capital needs
Summary of Metro Issues

33. Impacts of No Additional Funding
Estimated cost of rush hour (only) trip delays are estimated at between $153M and $235M annually
Passenger safety risks will continue to increase and traffic congestion will continue and worsen
Approx. $25 billion of development has occurred near metro stations over the past 8 years
Future development and economic growth could stall
Economic forecast implies regional, state and local government tax revenue growth from 2.5% to 4% annually
Reducing the economic forecast by just 0.25% to 0.50% results in annual losses to compact area taxes, collectively, ranging from $1 billion to $2.3 billion, respectively, after ten years.

34. Conclusions 34

35. Next Steps for D.C.
Aggressively pursue opportunities to refund existing debt and use savings to fund infrastructure needs
Increase pay-as-you-go funding by $325 million per year by FY2019
Represents just 3.7% of the general fund budget or slightly more than just one year of revenue growth
Pursue projects with P3 potential to engage private sector funding and solutions
Pursue and secure a dedicated regional funding source and/or federal assistance to address Metro’s funding needs

36. Any questions on why reinvesting in capital is important?
36 36