Is your local government doomed to fail because you failed to plan? Do you have a formal plan to replace capital assets one year, three years, five years, or 10 years from now? Many governments don’t and are blindsided. I hear finance officers’ concerns regarding this all the time. “It’s very hard to budget for these items if they don’t tell me about them,” and, “They approve this big project and have little or no idea how to pay for it.”
What Steps Can You Take?
- Identify the new items along with what old items that will need replaced and when.
This step is easier said than done. It will take the commitment and cooperation of many government officials and department heads. Consider the following:
- Establish a formal committee. The committee should include, but not necessarily be limited to, finance and budget officials, directors in charge of departments with significant capital assets and top management making the decisions to spend the money on capital assets. The benefit of a formal committee is that it brings people with the capital asset replacement knowledge together with people making decisions and budgeting. Don’t be surprised if you will need to also involve various types of engineers. Engineers can give you valuable information regarding what will need to be replaced, when replacement is needed, as well as estimated costs.
- Prioritize. Once the wish list has been created by the committee, you will have the diplomatic task of prioritizing these projects. Some projects are easier to prioritize especially if one of your projects is a requirement of the Environmental Protection Agency (EPA).
- Devise a plan on how to pay for these items.
This step again will require input from everyone on the committee. Decisions will need to be made regarding the financing of the approved projects. How do we pay for it? Do we simply set aside some of today’s cash reserves, increase fees, taxes, or rates, obtain grants, or issue debt? These are difficult decisions and the answer could be one or a combination of all these options. Many local governments in Ohio are struggling financially due to operating costs rising faster than revenues. State and federal grant cutbacks and increased competition to obtain these grants also have a negative impact. Consider the following:
- Budgeting. Is your government budgeting for these projects one to five years into the future to determine if expected revenues are sufficient to cover expected operating costs, as well as these capital project expenses and/or related debt payments? Many local governments in Ohio are only required to budget one year ahead so preparing an internal budget tool providing two to five years of future operating information would be a big change to the normal routine. However, it would be a very important first step that affects the rest of your financing decisions.
- Cash Reserves. Do you have sufficient excess cash reserves today to pay for current and future capital asset costs? If so, do you have a plan in place to make sure that cash is going to be there in the future? If not, you might need to consider doing rate/fee studies to determine if rate increases are necessary and when. I have been getting many calls lately from local governments asking me how they can legally start to save money for payment on future capital asset projects. The Ohio Revised Code does give guidance on this as follows:.
- “Ohio Rev. Code § 5705.13(C) provides that a taxing authority may create one or more capital projects funds to accumulate resources for the acquisition, construction, or improvement of fixed assets, including motor vehicles. Each fund must be created by ordinance or resolution. The resolution or ordinance must identify the asset(s) to be acquired, the amount needed to be accumulated, the period over which the amount will be accumulated (with a limit of ten years from the date of the resolution or ordinance), and the source of the resources. Money may be transferred to the capital projects fund from any other fund that could acquire the fixed assets. If a contract for the fixed asset(s) has not been entered into before the ten-year period expires, the money is returned to the fund from which it was transferred or that was originally intended to receive it. The taxing authority may rescind a capital projects fund at any time with the accumulated resources being returned to the fund from which they came.”
- Issuing Debt. Issuing debt is a very common method of financing capital assets. Is it the best option for your government? Maybe, but maybe not. Many factors impact the answer to that question. Are interest rates favorable? Are debt covenants, if any, too restrictive? Are cash flows sufficient to pay the debt? You might consider seeking the advice of bond counsel regarding the debt market and also consider seeking the advice of a CPA to help you determine if it makes sense economically to issue debt instead of using your government’s own cash reserves.
- Grants. A large number of state and federal grants are out there. Does your government have a qualified grant administrator proactively researching what grants are available? If not, consider hiring one or at least contract with one. Chances are good that a good grant administrator will more than pay for themselves.
There are cities throughout the United States that are struggling financially, and some have even declared bankruptcy. Don’t let your city fall prey to financial woes – start planning today for capital asset costs.
This article was originally published in Publicly Speaking, a Rea & Associates enewsletter, 4/17/2014.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.