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HomeMy WebLinkAboutFY 2002 Capital Investmentital Investment LOCATION OF CAPITAL BUDGET MATERIALS IN THE FY2002 BUDGET • Program 9000: FY1998- FY2000 Capital Budget Financing and Funding Sources .................................................................. ............................9 -1 to 9 -10 • FY2002- FY2006 Capital Improvement Plan and Cash Capital Plan Overview ........................... 21 to 27 • Capital Improvement Plan Project Descriptions ..................... ............................... Appendix A -1 to A -31 INTRODUCTION Everything the Town does, from providing services to its residents and citizens, to equipping employees to effectively perform their jobs, requires the existence of certain basic physical assets. These assets include streets, water mains, parks, buildings, large equipment and technology. They must be purchased, maintained and replaced on a timely basis or their usefulness in providing public services will diminish. The information contained in this section is intended to accomplish the following goals: • Identify the sources of funding for capital investment • Acknowledge the interrelationship between Capital Investment and Debt Policy • Provide detailed information regarding the Five Year Capital Improvement Plan • Explain the current debt situation of the town; and • Recognize the importance of multi -year planning for capital investment and debt management DEFINITION OF CAPITAL PROJECTS A capital project is a major, non - recurring expenditure involving one or more of the following: Acquisition of land for a public purpose; Construction of, or addition to, a facility such as a public building, water or sewer lines, play field, etc.; Rehabilitation or repair of a building, facility; provided the cost is $25,000 or more and the improvement will have a useful life of 10 years or more; • Purchase of equipment costing $25,000 or more, with a useful life of 5 years or more (all cars are defined to be non - capital items); • Any planning, engineering or design study related to a specific capital project. The 1996 Capital Budget Team report identified "small ticket" capital projects, which are traditionally paid for with cash (pay -as- you -go financing), as projects with a useful life of less than ten years and a cost of under $1,000,000. (See list of "small ticket capital projects on p.22). This report further stated that "Cash financing is most appropriate for projects of reasonable size, for regularly recurring projects, to match grant funds, for projects that can be staged to spread out costs, for projects producing substantial immediate benefits, and for projects with reasonably short useful lives." Article 42 of the 1998 Town Meeting defined a different concept of renewal capital projects. Capital renewal projects, which maintain existing assets, differ from capital improvements that are new assets or major increases in assets. The renewal category includes predictable, regularly occurring and non - controversial maintenance projects for existing assets that cost between $25,000 and $1,500,000. Article 42 recommended that the average annual renewal cost for these core operating assets be appropriated in a single article together with an appropriation to a stabilization fund. This concept has been partially implemented beginning in 1999, by grouping together routine, non - school capital renewal funding in a single article. The Cash Capital Report The 1999 Cash Capital Report built on these concepts to propose a policy framework and five - year cash capital financing plan. Projects and assets that are appropriate for general fund cash capital financing include categories on the next page. • Routine Town Building Rehab /Renewal (Envelope and Systems) • Routine School Building Renewal • Portable Classrooms • Design for Large Projects* • Fire Vehicles and Equipment • Non - Enterprise DPW Equipment • Non - Revenue Generating Recreation Facility Renewal • New and Upgraded Playfields and Playgrounds • Storm Drainage • Fire Alarm System Upgrade • Ongoing Street Resurfacing • Traffic Signal Replacement • Sidewalks • New and Replacement Technology (for Town, Schools, WAN, Library, GIS) • Unanticipated Opportunities Assumptions: To be financed by 5% of General Fund S * If voters approve a debt exclusion for the project, design costs will be included as part of the debt exclusion. The Cash Capital Committee's recommended five -year cash capital plan specifically excluded general fund "big ticket' capital projects which are proposed to be funded by debt exclusion. The large backlog of street resurfacing projects was grouped with other "big ticket' projects for capital planning purposes. The following list identifies major anticipated large capital needs. As of press time for this budget, recommendations as to timing and sequencing of these projects have not been made. Large General Fund Capital Projects • Elementary Schools Renovation • Street Reconstruction and Resurfacing Backlog • DPW Operations Building • Intergenerational /Senior Center • New Elementary School Construction • Landfill Closure • Fire Facility Upgrade • East Lexington Library Renovation • Land Acquisition Assumptions: To be financed by Debt Exclusion if approved by voters. Timing of projects to be framed by Blue Ribbon Committee. Other Potential General Fund Capital Costs • Unanticipated School Building Needs • Emergencies - e.g. Natural Disasters FUNDING OF CAPITAL INVESTMENT The following funding sources are used to finance the town's capital investment: Cash for Immediate Capital Investment (Cash Capital) —The town regularly appropriates funds from the general fund and the enterprise funds to finance short -tern, small project -based capital investment. Stabilization Fund —In recent years, the Town has made use of the policy of appropriating a small portion cash capital funding to a stabilization fund. This funding source is then set aside and used to mitigate the costs of capital items in future years. Debt Service —The Town has traditionally financed large capital projects with debt. Funding for debt service derives from the General Fund Tax Levy (either under the Proposition 2 % levy limit or from a voter approved debt exclusion — see glossary for definitions) or from the Enterprise Funds. Other Sources — The town uses dedicated state aid and grant funding to finance capital investment. RELATIONSHIP BETWEEN OPERATING BUDGET AND CAPITAL INVESTMENT The real estate tax levy threshold imposed on communities in Massachusetts by Proposition 2'' /z has, for numerous years, required the Town of Lexington to balance the operating budget by compromising and postponing its investment in capital improvement projects. Operating budget demands for financial resources grew faster than the revenues available and financial resources were further strained, leaving little flexibility for capital investment. For these reasons, among others, in recent years the Town of Lexington has been unable to allocate substantial funding for its capital projects. During this period of little or no investment, cash capital needs accumulated rapidly in many neglected areas. This continuous neglect resulted in assets prohibitively expensive to maintain and threatened the provision of services. Recently, as the resources for capital investment have been obtained through the implementation of the 5% cash capital policy, new issues surrounding the relationship between the operating and capital budgets have been raised. Having learned from past years the damage that can be done by investing heavily in the operating budget to the detriment of capital, the Town must now look to those issues that may arise from too ambitious a capital program. In order to maintain a healthy capital- operating relationship, the Town is working to ensure that any capital projects taken on by the Town have the operating resources necessary to support them. Specifically, the technical, manpower and maintenance resources needed to protect the Town's capital investments These must be accounted for in the operating budget in order to maintain long -term investments made in the Town's infrastructure. RELATIONSHIP BETWEEN CAPITAL INVESTMENT AND DEBT POLICY: THE CASH CAPITAL PLAN Decision - makers saw the importance of developing an effective and politically viable capital investment strategy. In 1999, the Town Manager recommended that the Town scale back its issuance of future long -term debt service obligations and develop instead a cash capital financing policy that would take advantage of the projected decrease in existing long -term debt obligations over the course of the next five years. The Cash Capital Committee prepared a report for the Board of Selectmen in 1999. In July of that same year, the Board of Selectmen conceptually approved the policy recommended by the Cash Capital Committee. Under the newly developed cash capital policy, the Town would earmark 5% of its general fund revenues to fund capital investment projects through the cash capital plan and to pay existing debt service and issuance costs in fiscal year 2001 and beyond. Initially, most of the 5% dedicated to capital projects will be needed to pay outstanding debt service. However, by controlling the issuance of long term debt, eventually, debt service payments will decline as annual principal amounts are repaid. The amount by which debt service on current outstanding borrowing decreases can be dedicated to finance cash capital projects. As annual principal amounts are repaid and debt service declines, the amount available for cash capital would increase annually. The decline of debt service obligations will not occur immediately and this creates a problem for cash capital in FY2001 and FY2002. The use of short -term borrowing has been considered as a means to alleviate this problem. Short -term borrowing can be structured to make more funding available in the early years of the plan, by rolling over the borrowing and avoiding principal repayments until FY2004 when permanent debt service is lower. FIVE -YEAR CAPITAL IMPROVEMENT PROGRAM The five -year Capital Improvement Program shown on the following pages includes all capital investment needs identified by departments over the next five years. The five -year Cash Capital Plan for the General Fund is a critical element in this integrated five -year Capital Improvement Program. The cash capital plan has been developed within the comprehensive policy framework adopted by the Board of Selectmen. It defers many important projects beyond the year for which funding was originally requested, but addresses all small capital needs within the context of the five -year planning period. A second element in the Capital Improvement Program is 5 -year capital planning for Enterprise Funds. The Water and Sewer Enterprise Funds are financially able to support all capital needs projected over the five -year planning period. The Recreation Enterprise Fund is able to fund capital investment only for revenue producing assets, such as the golf course and the swimming pool, while other capital needs are requested from the General Fund. The final element is the appropriate planning mechanism for and the use of debt exclusion for "big ticket' capital projects. At the time this budget went to press a plan and schedule for addressing these projects had not been developed.