Capital Program Management Challenges/Opportunities
In contrast to Federal Chairman Bernanke's comment that the recession may be showing signs of ending, local governments may be facing more challenges before seeing this broader ray of hope. The latest National League of Cities Survey of city finance officers found that once again, the "delaying or canceling planned infrastructure projects" was in the top two methods of covering budgetary shortfalls. The depth of the pessimism surrounding city finances according to the survey is at a twenty four year high. Added to this is the expectation that "the lag between declining economic conditions and local revenue impacts, all indications point to worsening city fiscal conditions in 2010, 2011 and beyond." (NLC Research Brief on American Cities, City Fiscal Conditions in 2009)
This dismal news about the outlook for city infrastructure budgets brings to mind some important principals of good Capital Program Management.
- Continuous planning
- Dynamic Prioritization
- Long Term Planning
Continuous Planning:
For many jurisdictions the thought of rebalancing their CIP on a monthly basis is a daunting task. However we have found that agencies that have invested in technology and processes are able to do this with minimal ongoing effort. For example, when revenue that supports debt service begins to show a decline, they are able to project the impact of this trend onto their long-term revenue projects that will identify which projects are at funding risk. This in turns cascades to the allocations that are available for capital projects. This financial constraint will allow an accurate assessment of which projects if prioritized dynamically should be cut.
The financial constraint is not the only impact on the capital budget. We are finding more and more that jurisdictions are facing full time position cuts as the constraint that has the highest impact. If a jurisdiction does not have enough engingeers/project managers to oversee the projects, those projects cannot be undertaken even if they have access to revenue.
The corollary to the constraint arguments is the consideration of the total costs of ownership of the new vs. old infrastructure. We find that few jurisdictions are able to capture consistently across their entire capital program the savings or offsets that are created by the lower costs of ownership on new assets vs. aged ones.
Dynamic Prioritization:
Our research indicates that most agencies have a fluid consensus approach to project prioritization. This fluid approach is characterized by a series of facilitated meetings by a capital planning committee with representations from finance, public works, utilities and other departments with capital projects. This approach ensures that the nuances to project justification and funding are fully considered. This approach has the advantage of not having to work through a systemic prioritization scheme. The main drawback to this method in the current constrained revenue environment is that projects must be continually reprioritized, which requires multiple facilitated meetings that are labor intensive.
We are finding that more agencies are heeding the suggestion of the GFOA's Capital Maintenance and Replacement (2007) Recommended Practice. This Recommend Practice suggests starting the prioritization process with a comprehensive needs assessment based on asset conditions. We find that the growing adoption of Enterprise GIS systems and advanced assessment management programs helps facilitate this approach.
Prioritization by asset condition can be further supplemented by two more levels of ranking that allow for a dynamic prioritization process. First level is the ranking at the department level following a criteria-driven methodology that considers both quantitative and qualitative parameters. Second is ranking projects across all departments based on the stated goals of the overall organization. While in some cases these are well defined, for the most part this final level is a political process wherein the concerns of the public is transmitted through the elected officials. A solid and comprehensive project impact analysis can provide the information base to provide the best support to this democratic prioritization process.
Long Term Planning:
The need for long term planning is well understood by our readers. However the more tactical rationale as applied to the current constrained revenue situation may need additional clarification. In Nicole Westerman's "Managing the Capital Planning Cycle (Government Finance Review June , 2004) article, Westerman points out that the Costa Mesa Water Distinct approach to a long term ten year plan is able to achieve some short term goals. She notes "By projecting rates over a ten year period, the district is able to absorb one-time revenue shortfalls or unexpected expenditures without being forced to react with rate increases; moreover, by increasing rates in small annual increments-rather than steep, sudden hikes-increases are aligned with the financial plan and have lagged the rate of inflation for the last five years. These increases go virtually unnoticed compared to most tax or rate increases."
We believe that when the current economic down turn inevitably comes to an end, jurisdictions that execute these principals will be well positioned to quickly ramp up their capital programs with renewed efficiency.