RPVCCA_CC_SR_2013_04_30_04_Infrastructure_Management_PlanCITY OF
MEMORANDUM
4o RANCHO PALOS VERDES
TO:
FROM:
DATE:
SUBJECT:
REVIEWED:
HONORABLE MAYOR &CITY COUNCIL MEMBERS
DENNIS McLEAN,DIRECTOR OF FINANCE &~
INFORMATION TECHNOLOGY
APRIL 30,2013
INFRASTRUCTURE MANAGEMENT PLAN
CAROLYN LEHR,CITY MANAGER ~
Project Manager:Kathryn Downs,Deputy Director of Finance &Information to
Technology
RECOMMENDATION
Receive and file this report prepared by the City's infrastructure management plan team.
BACKGROUND
Based upon the recommendation of Tim Schaefer of Magis Advisors,the City's Financial
Advisor,the City Council adopted a reimbursement resolution On August 21,2012 which
allows the City to reimburse its Reserves in the event the City Council decides to issue
debt for the San Ramon Project after construction begins.Subsequently,on December 18,
2012,the City Council approved an agreement with Magis Advisors,to prepare the
financing plan for the San Ramon Canyon Stabilization Project.
The City's Financial Advisor has encouraged an overall review of infrastructure
replacement in conjunction with the City's ability to fund replacement in the future.This
overall review includes development of an Infrastructure Management Plan (referred to as
the "IMP"until an appropriate name is established)that would provide a long-term road map
for the systematic rehabilitation of the City's infrastructure.The initiation of the IMP would
begin with the preparation of an infrastructure condition assessment (an Infrastructure
"Report Card")by a consultant.The report card will provide a basis for the development of
a long-term infrastructure capital maintenance and replacement/rehabilitation plan and
funding plan.In contrast,the Five-Year Capital Improvement Plan is a mid-term view of
quantified projects and funding sources.
The City's Financial Advisor and members of staff in both the Public Works and Finance &
IT departments have participated in the kick-off the development of the IMP and this Staff
Report.The development of the IMP,a long-term,strategic approach is consistent with a
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April 30,2013
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"Best Practice"promulgated by the Government Finance Officers Association.In a
particular Best Practice most recently revised in 2010,the GFOA recommends,in relevant
part:
"...that local,state and provincial government establishes a system for assessing
their assets and then appropriately plans and budget for any capital maintenance
and replacement needs.This includes ...developing a policy to require a complete
inventory and periodic measurement of the physical condition of all existing capital
assets.The assessment should document the established methods of condition
assessment,including any that are used to evaluate below-ground infrastructure."
With limited financial resources and other demands,a decision regarding the financing of
the San Ramon Project should be made in conjunction with the development of the IMP.
The 2012-.13 Work Plan for the Finance Advisory Committee (FAC)includes the task to:
"Review the Financing Plan for the San Ramon Canyon Stabilization Project".At its
meeting on March 6,2013,the FAC prepared a recommendation that a decision about
debt financing the San Ramon Project be postponed until after an IMP is underway.
Funding the Rehabilitation of City Infrastructure
Any community's capital financing process involves numerous major decisions and making
long-term commitments.Such a process is integral to the development of the Capital
Improvement Plan,which the City performs annually.However,the CIP does not address
long-term strategy-it simply funds those projects that have been identified by other
means,leaving the remainder of the infrastructure at risk of having insufficient resources
for its replacement.Without a capital financing strategy,some communities may seek to
avoid debt altogether in order to avoid associated interest costs.To do so may place the
community at risk of having insufficient funds to replace major assets when needed.
Thereafter,the use of debt may become the only choice for funding such replacement.
Other communities may overly rely on debt to meet their capital needs and by doing so
may underestimate the impact of such reliance on the community's future financial
resources.
An effective capital financing strategy promotes financial strength and flexibility;and,it
controls the cost of replacing or acquiring capital assets over time.The development of an
effective capital financing strategy starts with a thorough assessment of the physical
condition of the community's existing assets and makes realistic projections of the probable
replacement costs of those assets.Once those steps are completed,then the problem is
"solved"to the best combination of debt and cash funding that is consistent with the
community's needs and its available financial resources.
The City has recorded $127.8 million of capital assets on its books ($202.4 million of
assets,less $74.5 million of depreciation as of June 30,2012).This includes $43.2 million
of land and construction in progress,which is not depreciated.Other than land,capital
assets fall into 2 categories:equipment and infrastructure.The City provides for
replacement of its equipment by maintaining a $1.8 million Equipment Replacement Fund,
roughly equivalent to the estimated costs to replace the equipment that has been
capitalized (individual items with costs of $5,000 or more).
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The GFOA Best Practice also recommends:
"Each government should establish an on-going source of funds in both the capital
plan and budget for the repair and renewal needs of its assets consistent with this
best practice."
There is no such replacement fund for the City's infrastructure.On the City's books,
infrastructure is carried at its historical cost of $157.5 million,less $73.2 million of
depreciation.About one-quarter of the infrastructure cost was estimated at 1973 value,
when the City was incorporated and assets were transferred from the county.Most of the
infrastructure has estimated useful life ranging from 30 to 50 years.We can roughly
estimate the hypothetical replacement cost of this infrastructure with a simple calculation.
If the increase of the Consumer Price Index (CPI)is applied to the historical cost of the
assets (average of 3.35%since 1973),then today's estimated replacement cost is about
$331 million.If this estimated replacement cost in nominal dollars is evenly distributed
over a 50 year period,the rate of infrastructure rehabilitation spending would be about $6.6
million per year (or about 180%of the City's annual transit occupancy tax revenue).The
actual replacement cost of the City's infrastructure assets may be greater than this
hypothetical estimate.In addition,this hypothetical estimate does not provide for any
enhancements of infrastructure,only the rehabilitation of existing infrastructure.
Development of the IMP
To develop a comprehensive strategy for consideration while making a "debt vs.cash"
decision on the San Ramon project,the City may wish to consider the following five
elements:
1.Inventory and evaluate the current physical condition of the major components of
the City's infrastructure.
2.Estimate the useful life,remaining useful life,and replacement costs ofthose major
components.
3.Select and quantify infrastructure components that will ultimately require funding.
4.Project or forecast the current and future funding of the City's reserves to pay for
the future repair or replacement requirements of the major components.
5.Establish a funding plan designed to achieve the desired funding levels to offset the
anticipated expenditures using accumulated cash,debt or a combination thereof.
The first element will be accomplished with the development of the IMP.The second and
third are activities which will be analyzed by the Public Works Department as the IMP is
refined through the master planning process.The fourth is a combined effort of the Public
Works Department and Finance,as priorities,resources and budgetary constraints permit.
The fifth element would be a result of deliberation by the City Council,perhaps as a
companion to the discussion and adoption of the City's Capital Improvement Plan at each
year's budget adoption.
The decision to issue debt or draw down reserves for paying the City's share of San
Ramon Project costs would be based on better data once the above process is underway.
Such a decision need not await completion of the IMP,but would benefit from a more
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concrete understanding of the IMP process and evaluation.Staff expects that the City's
Financial Advisor will make a preliminary presentation based upon the initial findings
resulting from the IMP in late 2013.
Timeline for Development of the IMP and San Ramon Project Financing Decision
IRS regulation 1.150-2 is the guidance referred to in the reimbursement resolution adopted
by City Council on August 21,2012.In order to reimburse itself for the costs of the San
Ramon project with proceedS of debt,the City must sell the bonds within 18 months of the
date that the City pays the first construction invoice.Since construction began in April,it
seems likely that the first invoice will be paid sometime in May.If that first payment occurs
in May 2013,then the bonds would have to be sold by November 2014.
Staff expects to recommend a professional services agreement to the City Council on May
21,2013 to retain a consulting firm to develop the Infrastructure Report Card.Staff
expects that the initial draft of the IMP could be completed before the end of 2013.
Although Staff expects that completion of the IMP would require about two years,we also
expect that the City Council could be provided sufficient information to make a decision to
issue debt or draw down reserves for paying the City's share of San Ramon Project costs
in early 2014.St~ff expects that six to nine months should be sufficient time to issue debt
within the rules of IRS regulation 1.150-2,if the City elects to do so.
Attachments:
GFOA Capital Asset Assessment,Maintenance and Replacement Policy (2007 and 2010)
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BEST PRACTICE
Capital Asset Assessment,Maintenance and Replacement Policy (2007 and 2010)(CEDCP)
Background.Capital assets include major government facilities,infrastructure,equipment and networks that
enable the delivery of public sector services.The performance and continued use of these capital assets is
essential to the health,safety,economic development and quality oflife ofthose receiving services.
Budgetary pressures often impede capital program expenditures or investments for maintenance and replacement,
making it increasingly difficult to sustain the asset in a condition necessary to provide expected service levels.
Ultimately,d.eferring essential maintenance or asset replacement could reduce the organization's ability to provide
services and could threaten public health,safety and overall quality of life.In addition,as the physical condition
of the asset declines,deferring maintenance and/or replacement could increase long-term costs and liabilities.
Government entities should therefore establish capital planning,budgeting and reporting practices to encourage
adequate capital spending levels.A government's financial and capital improvement plans should address the
continuing investment necessary to properly maintain its capital assets.Such practices should include proactive
steps to promote adequate investment in capital maintenance and replacement and necessary levels.
Recommendation.The Government Finance Officers Association (GFOA)recornmends that local,state and
provincial governments establish a system for assessing their assets and then appropriately plan and budget for
any capital maintenance and replacement needs.This includes:
1.Developing a policy to require a complete inventory and periodic measurement of the physical condition
of all existing capital assets.The assessment should document the established methods of condition
assessment,including any that are used to evaluate below-ground infrastructure.This physical condition
inventory and measures used should be kept current,with facility condition ratings updated every one to
three years.l
This inventory should contain essential information,including:
a.Engineering description
b.Location
c.Physical dimensions and condition
d."As-built"documents
e.Warranties
£Maintenance history
g.Replacement costs
h.Operating cost information
i.Usage statistics
j.Book value
k.Original Useful Life
1.Remaining Useful Life
2.Establishing condition/functional performance standards to be maintained for each type of capital assets.
The condition measures and related standards should be understandable and reliable.Such standards may
be dictated by mandated safety requirements,federal,state,or provincial funding requirements,or
1 The frequency of physical condition rating and asset inventory updates may vary depending on several factors,including the
asset age and type,likelihood of degradation,and ease at which assessments can be conducted.
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applicable engineering and other professional standards,2 including available software models.Use these
standards and a current condition assessment as a basis for multi-year capital planning and annual budget
funding allocations for capital asset maintenance and replacement.Assets near high risk areas such as
hospitals may require a higher standard of performance and require a higher frequency of condition
assessment.
3.Evaluating existing assets to detetmine if they still provide the most appropriate method to deliver
services.Maintenance and replacement plans for assets should then be prioritized in accordance with
overall goals and objectives to maintain expected service levels.Consider developing financial policies
that identify and dedicate fees or other revenue sources to help achieve this goal.Also consider a
procedure of performing a condition assessment prior to replacing a major asset or acquiring a new asset.
4.Allocating sufficient funds in the multi-year capital plan and annual operations budget for condition
assessment,preventative maintenance,repair and replacement of capital assets in order to continue the
provision of services that contribute to public health,safety,and quality oflife of the public.
Each.government should establish an on-going source of funds in both the capital plan and budget for the
repair and renewal needs of its assets consistent with this best practice.The Capital Improvement
Program (CIP)should also include projections based on the remaining useful life and replacement costs
over the next three to ten years regarding the government's intended future investment in these facilities
and the estimated impact of these investments toward achieving the minimum or adequate-performance
rating for each asset type or class.If the assets are part ofthe function of an enterprise fund,the rates,
fees and charges may need to be adjusted to meet the funding requirements.
5.Monitoring and communicating progress toward stated goals and the overall condition of its capital assets
with appropriate controls to ensure the validity and accuracy of the information.This process should
describe how actual facility condition and performance compares to the targeted standard for each asset
type.Governments should also review and report the operating impacts related to capital investments
during project implementation and for a specified time period following project implementation.
Governments should likewise monitor and report on the delivery of capital projects by establishing
standards for planning,designing and constructing capital projects.3
6.At least every one to three years,providing a "plain language"Report on Capital Facilities to elected
officials and made available to the general public that describes:
a.Condition ratings jurisdiction-wide compared to established policy standards
b.Condition ratings by geographical area,asset class,and other relevant factors
c.Indirect condition data (e.g.,water main breaks,sewer back-up complaints)
d.Replacement life cycle(s)by infrastructure type
e.Funding sources for assets,including any restrictions that might be imposed on use and/or
disposal
f.Year-to-year changes in net value of assets
g.Actual expenditures and performance data on capital maintenance compared to budgeted
expenditures performance data (e.g.,budgeted street miles,reconstructed compared to actual)
2 These measures include state govemment-established standards,bridge sufficiency ratings,Pavement Quality Index (PQI)
or Pavement Condition Index (PCI),Facility Condition Index (FCI),etc.Indirect measures such a water main breaks,sewage
overflows,etc.,are also available for certain asset types.
3 Measures to assess the delivery of capital projects may include budget soft versus hard costs,schedule and budget
variations,change orders,quality of construction,and architectural/engineering estimates versus actual delivery.
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h.Long-term trends extending over the prior four to six or more years.Year-to-year expenditure
figures are less valuable due to general inflation rates and the changing supply and cost of
construction contractors and contract bids over time.
Other more "global"measures such as replacement cyc1e,4 year-to-year comparisons of work
completed (e.g.,miles of sewers,water mains,street lights,etc.,repaired/replaced),book value,
etc.,may also be used.5
References.
•GFOA Best Practice,Considerations on the Use ofthe (GASB 34 Reporting Model)Modified Approach to
Accountfor Infrastructure Assets,2002.
•John Vogt,Capital Budgeting and Finance:A Guide for Local Governments,ICMA,2004.
•Nicole Westerman,Managing the Capital Planning Cycle:Best Practice Examples ofCapital Program
Management,Government Finance Review,2004.
•GFOA Best Practice,Capital Project Budget,2006.
•GFOA B'est Practice,Establishing the Estimated Useful Lives ofCapital Assets,2007.
•GFOA Best Practice,Capital Project Monitoring and Reporting,2007.
•GFOA &National Advisory Council on State and Local Budgeting Best Practices in Public Budgeting
(Practice #s 2.2,5.2,6.2,11.5)
•EPA,The Clean Water and Drinking Water Gap Analysis,2002.
• A WWA,Dawn ofthe Replacement Era:Reinvesting in Drinking Water Irifrastructure,2001.
Approved by the GFOA's Executive Board,March 5,2010.
4 "Replacement cycle"means the number of years to replace/reconstruct an entire infrastructure network assuming an
average annual level of replacement.Example:500 miles of concrete surface streets in network!10 miles average annual
miles of streets replaced equals a 50-year replacement cycle.This can be compared to the engineering estimate of the
useful life of the average concrete surfaced street.
S Other useful measures of level of effort or condition can be found in internal government database,including department
annual reports,fixed asset account records,GIS systems,etc.
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