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Engineering and planning aspects and the identification and evaluation of financing mechanisms must come together to develop and implement a successful capital funding plan. Photos: City of Kingman
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Impact fees are a means of assigning the cost of growth to new development. Equating impact fees with a no-growth policy is a common misconception.

Raising capital to meet utility renewal and replacement requirements is an ongoing challenge. Meeting service requirements of a growing population, new homes and businesses, or new recreational needs can make a public works manager feel like taking early retirement. Municipal services and capital facilities are more costly to provide, and asking people to pay more for these services attracts greater attention and scrutiny than in the past. The problem is resource scarcity in the face of increased regulations and a deteriorating infrastructure.

A public works manager handling all these concerns has little time to build what is really needed: a solid case for the requested funding. With the competition for funds and the public pressure to keep taxes low, we must become savvy about putting together a capital improvement plan (CIP) that will convince the city manager, finance administrator, and members of the city council of the importance of each item in the CIP.

Successful implementation of a capital funding plan requires two elements to come together: the engineering and planning aspects and the identification of alternative financing mechanisms. With the responsibility to provide reliable infrastructure and services comes the need to prepare for budget sessions, bringing strong support not only for the projects, but also for potential funding approaches.

One approach is impact fees, which can be an important funding source for meeting the capital needs associated with growth. Although there may be valid reasons not to place the entire costs of growth on new property owners and developers, impact fees can fund a portion of growth-related capital needs and free other funding and revenue sources for other capital needs. Impact—also known as investment or development—fees are a one-time charge to new or expanding development to reflect the cost of providing the needed capital facilities for the new residents.

According to Jim Lewis, finance administrator for Salt Lake City, his city was one of the first to implement a reservoir and supply line fee in the 1960s, which was charged to all new customers and developers. Due to the collection of those impact fees, the city has been able to keep water rates below national averages and still construct growth-related capital improvement projects. “We in Salt Lake City do not believe there is a down side to impact fees if they are calculated correctly and based on the cost of future growth-related projects,” said Lewis.

Depending on the community's objectives and economic situation, funding growth-related CIP projects from impact fees could be preferred over other funding sources. For example, Prescott Valley, Ariz., has been growing more than 9% annually over the past 10 years, and the town has chosen to assess impact fees instead of increasing property taxes to finance new facilities, including a new library, expansion of police services, civic facilities, and capacity expansion of existing roads.

“Our citizens have stated very clearly and loudly that growth should be paid for by those who require the services,” said Larry Tarkowski, Prescott Valley's town manager. “To that end, impact fees have been and will be critical to funding the town's growth-related needs.”

Limited Funding and Competing Needs

The explanation of why additional funding is needed to cover a proposed CIP can be challenging, sometimes raising questions about the current staffing level and the ability of existing facilities to meet needs without failing. Step one of the funding process, then, is to justify the current expenditure levels, which may require benchmarking to demonstrate system or service operations needs. Engineering studies also may be required to provide estimates of the remaining useful life of various system components, which would support renewal and replacement funding. A master plan that includes a condition assessment is often the first step to developing a defensible CIP.

Inevitably, a CIP has two aspects—growth, and renewal and replacement (R&R). Under-funding a CIP is a common practice of a budget process. Under-funding occurs because it is difficult for councils or boards to understand the implications of not funding R&R—pipes buried in the ground that are meant to last for 50 years or more. Yet, growth is only one of the funding needs competing with R&R; operating costs also can draw funds away. When user charges are supporting both growth and R&R, the temptation is to assume that certain infrastructures will last longer than is reasonable. This budgetary practice often becomes a continuous deferral of capital projects and leads to more costly emergency repairs because of insufficient funding.

A utility master plan typically contains an engineering design including capacity and regulatory needs. A city master plan may contain a broad perspective from a city planner's viewpoint, focusing on zoning areas, overall population growth, transportation needs, park acreage, city services, amenities, and facility locations. Developing the financial plan involves matching cash flows from sources of funds with the schedule of capital projects. Linking these into one clear picture will be invaluable in helping make the case for a CIP.

Garnering ample support for a CIP is critical and requires having answers to most potential questions and conveying the need for all items in the CIP. That involves evaluating the funding alternatives to cover the uncertainty in projected growth and service requirements. It also requires prioritizing funding options and identifying the consequences of not funding proposed capital projects (that is, looking at delayed or cancelled projects and evaluating the potential reductions in total expenditures and service levels). This may require teaming with a finance administrator to build the best funding approach.