Prioritizing capital investments; capital improvement program: Part 2
Selecting which capital investments are made is an important part of a government’s capital improvement program. Rarely can one afford to do everything so setting priorities is critical.
March 21, 2014 - Author: Kurt H. Schindler, Michigan State University Extension
It is a rare local government that can afford to do everything it may have to do in its capital improvement program. For a quick review of what a capital improvement program (CIP) is see part one of this series. So part of the job of creating a CIP is to rank, or prioritize, each project into an order. Then those near the top of the list (the most important, or most pressing) are funded and other projects wait for attention in a later year.
Ranking is not easy, and is sometimes avoided due to the political perception of “winners” and “losers”. This essay walks through some hints on how to prioritize CIP projects. The ranking should have some basis on the local government’s adopted master plan. The master plan is the main guiding document for a community’s future development. If the community does not have a planning commission (thus does not have a master plan) then priority should be based on community objectives as defined by the elected board or council.
A well done CIP will have proposals from various officials and departments in the local government. So, in the final analysis the ranking will include and be a combination of the master plan, objectives from the elected body, and the needs of each department in the local government. In addition, there should be coordination with neighboring governments; special purpose governments (e.g., school district, authorities, DDA); and state, federal and tribal governments.
- PRIORITY 4: Essential: Urgent, high priority, address an emergency, remedy a condition dangerous to public health, welfare and safety, compliance of regulatory, critically needed community program, vital to the economic
- PRIORITY 3: Desirable: High-priority projects done as funding becomes available, validity of timing have been established
- PRIORITY 2: Acceptable: Worthwhile if funding is available, deferred to a subsequent year if budget reductions are necessary
- PRIORITY 1: Deferrable: Low-priority projects, desirable not essential
It is a best practice to have an objective way to measure and rank projects. One example is to set up a form for departments to submit capital projects (which is also used for projects from the elected body, master plan, and so forth. On the form prompt for things like:
- Title, description, location, purpose
- Justify need for project
- Explain relationship to other projects
- Cost of project (submit detailed budget)
- Estimated annual income from projects
- Estimated annual operation costs for the project
- Status of plans/specifications
- Year construction of project should start
- Rank/importance of project within department submitting it
With the information on the form, the process can include setting up point systems to rank each project. Rankings (scoring a project) can be based on things like:
- Conformance with community plan (Planning Commission decides this)
- Health and safety projects get a higher rating
- Scheduled replacement projects (regular rotation of motor vehicles, computers, roof, etc.) get a higher rating
- Expected length of time the Capital Project will last
- Higher based on if the facility used year-round or less
- Has phased funding for the project been included in prior year's budgets?
- Does not have significant environmental impacts
- Results in lower energy consumption
- Results in lower operation and maintenance costs.
There can be many additional criteria to reflect the ‘big picture’ goals of a local government. Some cities place importance on energy savings, so projects that accomplish that get more points, others focus on public safety, or economic development, and so on.
Just because a CIP project is not funded in any given year, does not mean it goes away. It stays in the CIP for the next year. Each year the CIP is updated, removing completed projects, adding new needs, and re-prioritizing. As one works down the list, eventually various projects are done.
The Government and Public Policy team at Michigan State University Extension are currently developing curriculum for an intense Fiscal Sustainability training for local government officials which includes more on this topic. We expect to pilot the training in the first half of 2014, with general availability later in 2014. If interested please contact Eric Scorsone or the author of this article.
Other articles in this series:
- Balancing one year’s government budget is just the start to long-term fiscal sustainability
- Financing capital investments; capital improvement program: Part 3