Mayor and Council



   For the meeting on:

  November 5, 2012
   Department:   Finance
   Responsible staff:  Stacey Webster, Budget and Finance Manager
  phone: (240) 314 - 8407
  SWebster@rockvillemd.gov


Subject
Capital Improvements Program

Recommendation
Staff recommends that the Mayor and Council receive the presentation regarding the City's Capital Improvements Program and offer guidance or direction as necessary.

Discussion
This agenda item provides an overview of the City's Capital Improvements Program (CIP). The CIP maps the City’s capital investment plan over a five-year period. This investment consists of new buildings and facilities, significant ongoing maintenance, and improvements to current facilities. The CIP is both a fiscal and planning device that allows the City to inventory and monitor all capital project costs, funding sources, departmental responsibilities, and project schedules. Each year, the CIP is reviewed within the context of ongoing City, County, State, and Federal planning programs and policies, as well as the City’s Master Plan. Capital investments normally involve major City projects that have long useful lives.

According to the City's Financial Management Policies CIP, projects are usually defined by one or more of the following six categories:

  1. The acquisition of land for a public purpose.
  2. The construction of a significant facility, e.g., a building or a road, or the addition to or extension of an existing facility.
  3. Nonrecurring rehabilitation or major repair to all or part of a facility, such as infrequent repairs that are not considered to be recurring maintenance, provided the total cost per fiscal year is more than $100,000.
  4. Any specific design work related to an individual project falling within the above three categories.
  5. Any long-term project funded through a grant where the establishment of a CIP project is a condition of the grant, regardless of the amount of funding per fiscal year.
  6. A significant one-time investment in tangible goods of any nature, the benefit of which will accrue over a multi-year period such as a new phone system or vehicle acquisitions over $100,000.

The new year of the CIP, along with any unspent prior appropriations, comprise the capital budget for each project beginning July 1 of each fiscal year. The remaining four years of the CIP serve as a financial plan for capital investments. The five-year financial plan is reviewed and updated anually, and the Mayor and Council adopt both the capital budget and the five-year financial plan.

In addition to the City's five-year CIP, there are many documents and processes that exist that help guide the City's strategic and long-range planning. It is important for the City to think beyond the five-year CIP in order to fully understand the City's infrastructure and other capital needs. Some examples of strategic and long-range planning documents and processes include the Sidewalk Prioritization process, the Comprehensive Master Plan, the Bikeway Master Plan, the IT Strategic Plan, and general neighborhood plans.

CIP Funding Sources
The CIP is financed by several different funds, including the City's enterprise funds (Water, Sewer, Stormwater Management), the Speed Camera Fund, and the Capital Projects Fund. The enterprise funds and the Speed Camera Fund are mainly supported by each individual fund, along with bond proceeds for the enterprise funds. The Capital Projects Fund supports all tax supported general CIP projects like recreation facilities, transportation improvements, asphalt and concrete, etc. Historically, the three largest funding sources used to finance the Capital Projects Fund include transfers from the General Fund, bonds and developer contributions.

It has been the City's practice to fund a majority of the capital program with a combination of transfers from the General Fund and bond proceeds. Neither Maryland State law nor the City Charter mandates a limit on municipal debt. However, according to the City's Financial Management Policies, the City will strive to maintain its net tax supported debt at a level not to exceed 1.0 percent of the assessed valuation of taxable property within the City and will strive to ensure that its net tax supported debt per capita does not exceed $1,200 for FY 2013. In addition, the City will strive to ensure that its net tax supported debt per capita as a percentage of Federal adjusted gross income does not exceed 2.5 percent and that its amortization rate shall be at least 25 percent in five years and 50 percent in ten years. Lastly, required annual tax supported debt service expenditures should be kept at or below 15 percent of the City's annual adopted General Fund expenditures in order to promote budgetary flexibility to respond to changes in economic conditions.

Pay-Go Transfer
Over the past five years, most of the funding for the tax supported Capital Projects Fund has come from transfers from the General Fund. The City calls this type of funding pay-as-you-go or pay-go funding. In a typical year, the CIP budget is adopted with a pay-go transfer as a funding source. After the previous fiscal year is closed and the City’s financial audit is complete, staff evaluates the City’s General Fund fund balance and will recommend an additional pay-go transfer if possible. This recommendation is usually made through the first budget amendment of the new fiscal year. The mid-year transfer to the Capital Projects Fund can be used to fund a specific project or can go to the cash balance for future use. A five-year history of pay-go transfers is included in Table 1, and a more detailed ten-year history is included in Attachment A.

TABLE 1: History of Pay-Go Transfers to the Capital Projects Fund
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
Adopted Budget
$2,365,002
$4,453,695
$4,100,000
$3,141,000
$3,967,000
$3,900,000
Mid-Year Appropriation
5,466,498
4,080,000
(1,722,000)
715,000
4,348,055
-
Total
$7,831,500
$8,533,695
$2,378,000
$3,856,000
$8,315,055
$3,900,000

Bond Proceeds
The second largest source of funding for the Capital Projects Fund is the issuance of bonds. The City issues bonds to finance large infrastructure related projects. Long-term borrowing should not be used to finance current operations or normal maintenance and should only be considered for significant capital and infrastructure improvements. Over the past several years, the number of projects funded by bonds has decreased (Table 2) and the dollar value per project funded by bonds has increased (Attachment B). This correlates with the City's shift to funding large infrastructure projects with bonds and using pay-go for all other projects. Bonds have been issued to fund projects supported by the Capital Projects Fund twice over the past six years. Some of the larger projects that have been supported by bonds include the Police Station, the Senior Center, the Gude Drive Maintenance Facility, Water Main Rehabilitation, and the Blue Plains Wastewater Treatment Facility.

TABLE 2: Number of Projects Funded with Bond Proceeds and Associated Dollar Amount
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013*
Capital Projects Fund
13 projects
$11,791,459
-
-
4 projects
$17,941,000
-
-
Refuse Fund
2 projects
$2,082,541
-
-
-
-
-
Sewer Fund
1 project
$6,126,000
-
-
2 projects
$5,330,000
2 projects
$6,757,000
1 project
$6,414,000
SWM Fund
-
-
-
-
-
1 project
$2,008,700
Water Fund
1 project
$1,750,000
3 projects
$13,122,800
-
2 projects
$4,541,000
1 project
$3,083,000
2 projects
$3,459,500
*The FY 2013 bond issuance is based on the FY 2013 adopted CIP.

Developer Contributions
The third largest source of Capital Projects Fund financing is developer contributions. These contributions are payments that developers make to the City in support of public improvements, such as transportation improvements. Developer contributions peaked in FY 2005 with the redevelopment of Town Center. Developer contributions are not a stable revenue source for the Capital Projects Fund and can only be used to fund specific improvements usually in certain planning areas in the City according to the agreement between the City and developer.

TABLE 3: History of Adopted Developer Contributions
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
Capital Projects Fund
$399,531
$218,688
$13,000
$13,000
$590,985
$1,354,270
Water Fund
-
-
-
-
121,500
-
Total
$399,531
$218,688
$13,000
$13,000
$712,485
$1,354,270

Five-Year Cash Flow - Capital Projects Fund
The CIP budget includes a Capital Projects Fund cash flow (Attachment C) that projects the cash balance for the Fund over a five-year period. The cash flow includes all projected revenues coming into the fund and all expenditures going out of the fund. The beginning cash balance for the Fund is $12.2 million in FY 2013 and the ending cash balance for the Fund equals $136,777 in FY 2017. The cash flow is different from the information presented on the individual CIP project sheets because the cash flow recognizes actual revenue and expenditure activity, while the CIP project sheets include the actual budget appropriation. For example, a construction project may have an appropriation of $1.0 million in FY 2013 (the budget), but actual spending may occur over three years (the cash flow).

The FY 2013 cash flow includes the FY 2013 pay-go transfer of $3.9 million and future pay-go transfers in the amounts of $4.5 million in FY 2014 and $5.0 million each year from FY 2015 to FY 2017 (consistent with the General Fund Five-Year Forecast). Other revenues in the FY 2013 cash flow include two years of outside revenues from a developer contribution and grant reimbursements, as well as a nominal amount of interest earnings on the Fund. The City does not budget for outside revenue sources such as grants or developer contributions unless a formal award letter or agreement has been signed. No new bond issues are assumed in the Capital Projects Fund for FY 2013 through FY 2017; however, there are planned bond issues for the Water, Sewer, and Stormwater Management funds.

When comparing total revenues and expenditures each year, the cash flow shows that, in any given year between FY 2013 and FY 2017, expenditures exceed revenues. This means that, over the five-year period, the City is spending down the cash balance in the Fund in order to meet annual obligations. This practice has worked well in the past because the City has been able to re-balance the cash flow each year with additional mid-year appropriations.

Cash Flow - Enterprise Funds
Similar to the Capital Projects Fund, each year staff prepares cash flows for each of the enterprise funds. The City uses the cash flows to set the enterprise fund rates, which are set based on targeting a specific cash level after a certain period (five years for Refuse and Stormwater Management and ten years for Sewer and Water). These rates are set at levels needed to fully cover debt service requirements as well as operations, maintenance, administration, and capital improvement costs. The ability to afford new debt for enterprise operations is evaluated as a part of the City’s annual rate review and setting process. Debt service coverage ratios are calculated annually for all of the City’s enterprise funds. A minimum of a 1.2 coverage ratio should be maintained for each of the enterprise funds. 

Funding Future CIP Projects (Tax Supported)
There are several approaches the City could consider when evaluating how to fund future CIP projects. First, the City could continue the practice of transferring the prior years' operating savings, when available, to the Capital Projects Fund via a mid-year budget amendment. This practice is consistent with the City's Financial Management Policies and does not rely on the issuance of additional debt. With this approach, the Capital Projects Fund is re-balanced each year, with the goal of having a positive balance after the fifth year.

Related to the first approach, and consistent with the new Fund Balance statement number 54 issued by the Governmental Accounting Standards Board (GASB), the Mayor and Council could designate a portion of the General Fund's fund balance as either committed or assigned to the CIP. Under this scenario, the City would hold on to operating savings in the General Fund and restrict these savings for future transfer(s) to the Capital Projects Fund. Similarly, the Mayor and Council could commit or assign the fund balance in the Capital Projects Fund in order to "save" for future projects. This approach would allow the Capital Projects Fund to accumulate a large cash balance, which would then be used for a future project.

The last approach is the continued use of debt to help fund large infrastructure related projects. If the Mayor and Council decide to issue additional debt in the Capital Projects Fund, accompanying each debt issue will be an assessment of the City’s capacity to repay the debt. The assessment will address the effects on the current operating budget, as well as identify the resources that will be utilized to repay the debt. Long-term borrowing will not be used to finance current operations and will only be considered for significant capital and infrastructure improvements. The City will try to keep the average maturity of general obligation bonds at or below 20 years.

Unfunded CIP Projects
Each year, the City evaluates the funding requests of projects in regards to the priorities and financial resources of the City. One tool in the evaluation process is the City's formal CIP Prioritization Process. Through this process, projects supported by the Capital Projects Fund are prioritized by an interdepartmental committee based on the needs of the Rockville community and the vision of the Mayor and Council.

As a result of the CIP evaluation, some projects may receive no funding (fully unfunded) or receive only a portion of the funding needed to complete the tasks as detailed on the project sheet (partially unfunded). Funding for the unfunded projects is considered by the Mayor and Council as revenues are received and new priorities are established. The FY 2013 adopted CIP includes 30 projects that are either fully or partially unfunded (Attachment D). Over half of the unfunded projects represent major maintenance projects or improvements to existing infrastructure. These projects remain in the CIP in order to indicate a known need in the Rockville community. For a complete list of projects that were funded in FY 2013 or are funded in a future year, please refer to Attachment E.

In addition to the unfunded projects in the current CIP, other capital requests come up during the fiscal year from the Rockville community. In October of each year, letters are mailed to all Rockville neighborhood and homeowners' associations encouraging them to submit ideas for consideration as part of the next year's CIP development process. These requests are considered each year, as the City Manager's proposed budget is updated annually to reflect the changing needs of the Rockville community.

Mayor and Council History
In preparation for the FY 2014 budget season, the Mayor and Council directed staff to prepare several finance worksessions to begin in October 2012. This is the third in the series of several worksessions intended to provide information for the Mayor and Council and assist with the development of their budget priorities as the FY 2014 budget process gets underway.

Meeting Date
Agenda Item
October 15, 2012 State of the FY 2014 General Fund Budget
City Employee Compensation
October 29, 2012 Capital Improvements Program (CIP)
November 19, 2012 Reducing the City Budget, What it Means to Cut Costs
December 3, 2012 City Contracting
Biennial Budgeting
December 17, 2012 Costs and Revenues Associated with New Development

Fiscal Impact
There is no direct fiscal impact as a result of this item; however, any direction from the Mayor and Council will be incorporated into the FY 2014 budget preparation process.

Next Steps
Staff will incorporate the direction from the Mayor and Council into the FY 2014 budget preparation process.

Attachments
Attachment A - 10 Year History of the General Fund Pay-Go Transfer and Bond Issues
ATTACH A_CIP Pay-go History.pdfATTACH A_CIP Pay-go History.pdf

Attachment B - History of Bonds Issuances by Project
ATTACH B_Bond Issues by Project.pdfATTACH B_Bond Issues by Project.pdf

Attachment C - FY 2013 Adopted Capital Projects Fund Cash Flow
ATTACH C_Capital Projects Fund Cash Flow.pdfATTACH C_Capital Projects Fund Cash Flow.pdf

Attachment D - Unfunded Projects in the FY 2013 Adopted CIP
ATTACH D_FY 2013 Adopted Unfunded Projects.pdfATTACH D_FY 2013 Adopted Unfunded Projects.pdf

Attachment E - Funded Projects in the FY 2013 Adopted CIP
ATTACH E_FY 2013 Adopted Funded Projects.pdfATTACH E_FY 2013 Adopted Funded Projects.pdf

Department Head:



Gavin Cohen, Chief Financial Officer
Approved on: 10/15/2012

City Manager:

Barbara B. Matthews, City Manager
Approved on: 10/25/2012