Capital planning provides both short-term and long-term perspective.

• Author: Maurer, Marcia
• Position: Financial planning

Most finance officers have heard about the need for long-term financial planning, a collaborative process that allows for strategic thinking about an organization's future. However, long-term financial planning doesn't just provide perspective over a relatively long period of time--it also provides solutions to many short-term issues. In this era of competing resources, long-term financial planning will help your jurisdiction focus on decisions that will accomplish the goals set forth in the long-term plan. (1)

The biggest component of the long-term financial plan is the capital plan. The most obvious reason to include the capital plan is that capital projects require an enormous amount of capital and operating expenditures, both of which must be included to present a comprehensive picture of expenditure projections. Another reason to include the capital plan in the long-term financial plan is that capital projects, whether they are constructed or purchased, are commonly financed by issuing debt, and a capital plan allows a jurisdiction to see the amount of debt capacity available. (2) It also allows the amount of the debt service to be factored into the financial plan, which may cause increases in projected rates, fees, and other forms of revenue.

Capital planning is crucial for a number of reasons.

1. New capital assets require a substantial outlay of funds over a number of years. For example, a new sewer pipeline project for the Sacramento Regional County Sanitation District (SRCSD) cost $51 million and took seven years to plan, design, and construct.

2. New capital assets require ongoing operations and maintenance costs, which need to be factored into future budgets and long-term financial plans for future years. For instance, a new park will require on-going maintenance, which may require additional labor as well as more equipment.

3. New capital assets are usually debt-funded, requiring ongoing debt service payments. The process of issuing debt also requires that a jurisdiction maintain certain bond coverages (the ratio of pledged net revenue to debt service), and a capital plan will identify the amount of revenue needed for both debt service and coverage requirements.

4. Capital spending is uneven between fiscal years because projects vary from year to year. The rate of spending also changes as projects are delayed or accelerated, depending on a variety of conditions.

   A jurisdiction that ignores capital planning and decides to fund new capital projects "when the money is available" is likely to run into problems. Development could be slowed because infrastructure is lacking, and needed services might not be available. There is also a risk of not replacing assets on a cost-effective basis--replacing them too soon, which means spending resources before it is necessary or not replacing them soon enough, which can wind up costing more than necessary because of the amount of wear and tear on the infrastructure.

   WHEN TO START PLANNING

   The first stage of the capital plan should be the master plan. The Government Finance Officers Association (GFOA) recommended practice, The Role of Master Plans in Capital Improvement Planning, states that master plans are used as a blueprint for the future. They should identify jurisdictional needs ten to 25 years into the future and include economic, land use, and infrastructure development needs. The master plan acts as a framework for the capital improvement plan (CIP), which identifies present and future needs requiring capital infrastructure. The CIP is for three to five years and lists the projects and capital programs planned for the community including the corresponding...