Capital Investment Projects and Their Role in Ashland’s Budget

In my career I have built models that evaluate capital projects, their return on investment, payback period, and ultimate priority within the macro picture of the business. Additionally, I have developed metrics that assist in prioritizing which projects get the go ahead, versus those that wait. Such analysis is a challenge because the variables between projects are rarely “apples to apples.” However, choices still need to be made, prioritization is critical, and successful capital programs require detailed study of the systems supported by the proposed projects. The magnitude may sound daunting, but really when broken into steps, the process acts like a preventative maintenance manual for a business’ key systems.

Before we jump to capital improvement projects it helps to first understand the definition of a capital asset. Capital assets consist of plant, property or equipment that hold a useful life greater than one year and are not saleable in the course of daily business. The dollar threshold is not specifically prescribed in the formal definition and can fluctuate between business models.

In Ashland, our city defines capital assets as equipment or land with a value greater than $5K and a useful life greater than one-year1

Now with capital assets firmly in mind, lets fast forward to capital investment projects (CIP).  Not surprisingly, capital investment projects constitute large dollar value, long-term projects, focused on the improvement or expansion of a capital asset. The City of Ashland maintains a Capital Improvement Project Plan that spans 20 years of planning, the first six years with greater financial detail.

How does a project make it on to the Capital Improvement Project Plan? Each enterprise fund for our city has a master plan. No, we are not in a Marvel Comic with a plot to take over a metropolis, but we are a city that plans the needs within each enterprise fund (Water, Electric, Wastewater, Street Fund) over a 20-year time horizon. (Curious about enterprise funds? Read more here: https://paulamhyatt.com/2020/08/08/transferring-dollars-from-enterprise-fundsits-like-ghostbusters/) Each fund’s master plan takes into consideration the current conditions of the fund’s existing assets, the service level targets, the demand on the assets by our population, the components that make up the asset, system maintenance, regulatory requirements and a full financial analysis over a 20-year period. Nothing to it, right!? These master plans, not surprisingly, are dynamic and fluid documents requiring periodic review and update.

Master plans also inform the Capital Improvement Project Plan. The detailed planning provided by the city’s master plans outline the capital assets requiring purchase, build out and improvement. These capital investment projects, identified within the master plans, are then pulled into one Capital Project Investment Plan used in our budget process. One of the benefits of a Capital Improvement Project Plan is allowing for identification, definition, and prioritization of projects such that the city avoids increased costs associated with major unplanned maintenance expense and deferred maintenance.

Now how does all this translate into our budget? Our biennium budget appropriates CIP funding for the two-year period reflected in the budget. If the time to complete the project spans four years, only two years of funding is appropriated in the biennium budget. The Capital Improvement Project Plan is traditionally approved by Council ahead of being plugged into the biennium budget document.  

Funding of the projects comes from fees for service collected by the enterprise funds, system development charges, and in the case of Wastewater and Streets, the Food and Beverage Tax. The Food and Beverage Tax of 5% was approved by Ashland voters to be allocated first to pay the debt of the current wastewater treatment plant. Remaining revenues are then split between Parks and the Street Fund. Our current budget, in forecasting the Food and Beverage Tax revenue for the 2019-2021 biennium, originally build in a 3% increase in Food and Beverage Tax revenue. Rightfully the budget also calls out that a reduction in revenue will result in a need to re-evaluate capital improvement projects2.

Today, with Covid-19 harshly impacting our small businesses, especially those who contribute to the Food and Beverage Tax, Ashland is forecasting a 50% reduction from 2019-2021 biennium budget projections. Subsequently, capital improvement projects are rightly being downsized or delayed3.

I believe that prioritization of capital investment is critical, and in particularly challenging financial times, approval of such initiatives require intense evaluation and justification. Most importantly, all projects must be evaluated within the context of the full capital plan. When taken individually, a project may appear as a priority and a sound investment. When presented in the context of all projects competing for the same finite resources, the prioritization may look drastically different. Comprehensive understanding of the plan is essential to choosing the right project, at the right time, for the right reason, or potentially choosing not to act on a project at all. 

Curious about Ashland’s CIP Plan?  You will find it here: http://www.ashland.or.us/SIB/files/Capital_Improvements_Program_2019-2039_Final(2).pdf

Resources:

  1. http://www.ashland.or.us/Files/October_2019.pdf
  2. http://www.ashland.or.us/SIB/files/Administrative%20Services/2019-21%20Budget%20Document/City_of_Ashland_2019-2021_Biennium_Budget.pdf
  3. https://www.ashland.or.us/Files/August_2020_2.pdf

One thought on “Capital Investment Projects and Their Role in Ashland’s Budget

  1. Hi Paula,

    This is excellent information! I hope we can have a discussion about it on United Seniors of Ashland (USA). People want to have a civil discussion about issues and concerns and USA Is a well monitored site to guarantee that civility.

    Jackie Bachman Board Member, Community Relations OHRA (760) 889-5122 Jackie.bachman53@gmail.com

    >

    Like

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