Capital Facilities Planning: If There’s No Math, You’re Not Doing It Right

Each fall, local elected officials scrutinize and debate their municipal budgets, with plenty of teeth gnashing and hand wringing, and frequently under the watchful eyes of residents concerned about whether they’ll be subjected to a 1% property tax increase. Unfortunately, the hyperfocus on a one- or two-year budget can obscure a much more important topic — long-term planning for capital facilities.

In Third Promise of GMA Revisited: the New Urban Growth Area Guidebook, author Pat Dugan notes that capital facilities planning is the piece of the Growth Management Act (GMA) that local governments have made the least progress toward achieving. The problem is as much about building facilities to support new development as it is about the substantial expense of maintaining that infrastructure. Ignoring those long-term costs, especially by deferring critical maintenance to help balance this year’s budget, is a sure-fire way to hurl your jurisdiction toward financial distress.

There are five important reasons to invest in careful capital planning:

1. Big capital projects can be unmanageable and unaffordable if they become necessary all at the same time. With a plan, you can spread those projects out, so you don’t have to pursue them all at once.
2. It’s cheaper to maintain facilities than let them degrade. As a simple example, a roof that is allowed to degrade to point of leaking or collapse is more expensive to repair than one that hasn’t reached that point. Similarly, it’s much cheaper to maintain new pavement than completely rebuild a road that’s been allowed to fail.
3. Planning is about considering projects as part of a program, not just individual activities. Before you authorize a project, you want to be able to consider the opportunity cost as well as the project’s impact on the funding sources you’ll be using to pay for those projects. For example, if you authorize a utility project that exceeds the cost you projected when you set utility rates (or that wasn’t included at all in that rate-setting calculation), you’ll likely have to increase those rates to cover the cost of all the projects in your program.
4. You may miss opportunities to raise revenue if you’re not projecting realistic future costs. In Anacortes, where I serve on city council, a failure to plan for the replacement cost for our three-million-gallon water tank meant that we had years of artificially low water rates and no fund reserve. To catch up, we had to raise rates much more than we would have if rates had been set appropriately years before.
5. A good capital facilities plan (CFP) provides transparency, for the benefit of the voters, into the condition of their infrastructure and the performance of the elected officials who are charged with managing it. It’s much easier to balance an annual budget if you ignore the very real costs of maintenance of your capital facilities. A good CFP keeps government honest about those tradeoffs.

Legal Requirements

RCW 36.70A.070(3) and WAC 365-196-415 require a GMA city or county to include in your comprehensive plan a CFP element consisting of an inventory of existing facilities, a forecast of future needs, and a financing plan. Let’s look at each element.

Inventory

The inventory should cover all existing capital facilities owned by public entities, showing their locations and capacities. WAC 365-196-415(2)(a)(iv) recommends that a jurisdiction “periodically” review and update its facilities inventory, at least at every periodic comprehensive plan update.

Forecast of future needs

The forecast of future needs should include the proposed locations and capacities of expanded or new capital facilities, but also the conditions of your existing facilities and what will be required to keep them operational.

Financing plan

The financing plan should cover how you will deliver those capital facilities. The GMA requires a detailed plan for the next six years, within projected funding capacities and clearly identified sources of public money that have a “reasonable assurance of availability,” per WAC 365-196-415(2)(c). But the CFP should include at least high-level financial planning for the entire 20-year planning period. A financing plan is the most important component of your CFP, and if you can’t make the math work you need to reassess your growth plan, which is another requirement under RCW 36.70A.070(3) and WAC 365-196-415.

In case it isn’t clear that the Washington State Legislature intends for an agency's CFP to be taken seriously, RCW 36.70A.120 requires a GMA jurisdiction to “perform its activities and make capital budget decisions in conformity with its comprehensive plan,” including its CFP. They’ve also linked many critical funding sources to the CFP. For example:

• RCW 82.02.050(5)(a) allows impact fees to be collected and spent only on facilities in the CFP element.
• RCW 82.46.010(2)(b) allows real estate excise tax revenue to be spent only on capital projects in the CFP (with some exceptions).
• RCW 82.14.370(3)(a) allows rural county economic development sales tax revenue to be spent only on those public facilities “serving economic development purposes” that are listed in a city’s or county’s comprehensive plan (or the county’s overall economic development plan).

Additionally, many state-run programs require a project to be listed in your CFP to be eligible for their grant programs.

Best Practices

Some CFPs end up being nothing more than long wish lists of projects for an agency, with little attention to the financial calculations and analysis necessary to make them realistic or useful. To be useful, your CFP must be an interactive calculation that balances the expense of adding a project with revisions to fee and rate schedules. Try these tips below.

Carefully define “capital facility”

The GMA requires you plan for each of the “public facilities” and “public services” defined in RCW 36.70A.030. But you can articulate thresholds below which a project doesn’t qualify as a “capital facility.” For example, you might include only those projects that cost $20,000 or more, have a specified minimum life expectancy, and that aren’t already covered by your fund for equipment rental and repair.

Clearly articulate the effect of including a project in the CFP

The word “plan” implies intention. If you let your CFP balloon into a wish list, staff will assume they should pursue each of the projects listed in it, including facilities that you’re not really sure you want to pursue and/or that you can’t afford.

Include optional projects that aren’t required to maintain your Level of Service, but call them out

Maybe you’d like to build a splash park, but such a feature is not required to maintain your Level of Service (i.e., what is necessary to support development) for parks. Go ahead and include it in your plan — but clearly list it as an optional project that will only proceed if funded by grants or donations. Note that those are the only types of projects that can have uncertain funding over the six-year planning period.

Estimate all the costs of new facilities

Project additional staffing, utility, and maintenance expenses, and include these projections in the description of each capital facility featured. Your city might be able to afford, for example, a new fire boat (especially if you win a grant to offset the purchase cost), but can you also afford the escalating costs of fuel, moorage, cleaning, repairs, and most importantly, additional staffing?

Consider inflation

When considering costs over time, always use inflation-adjusted figures. Pushing projects into the future may help you balance this year’s budget, but the costs increase the further out you push them while your property tax revenue likely will decline. For instance, if you assume the average inflation rate is about 1.6% per year, the cumulative effect of inflation over 10 years is almost 20%. Note that 1.6% is substantially higher than the annual 1% property tax increase that municipal governments are allowed to take.

Sync your budget updates with your CFP

WAC 365-196-415 states that your agency should update its six-year financing plan at least biennially but RCW 36.70A.130(2)(a)(iv) allows you to amend your CFP anytime you amend the budget, so update your plan every time you pursue a new capital project or adjust the cost of a project.

Sync your CFP with your impact fees and connection fee schedules

Changing your CFP project list should result in changes to your financing mechanisms, such as your impact fee schedules, utility rates, or connection fees. Your staff and elected officials should internalize this — if you add costs, you must also add revenue. Resist the urge to defer that revenue conversation. It’s only by not immediately performing the relevant calculations that you can convince yourself the plan doesn’t matter.