The Planners Role in the Capital Improvements Plan: District of Columbia

UAP 5784: Paying for Growth: Planning & Funding Capital Improvements and Facilities Spring Semester 2011 Professor: Terry Holzheimer, Ph.D.; FAICP

Matthew Steenhoek 2011-02-28

The Planners Role in the Capital Improvements Plan: District of Columbia Matthew Steenhoek 2011-02-28

Unlike many cities that have to look as high as the County or State seat for approval on their budget and Capital Improvements Plan (CIP), the government of the District of Columbia must receive budgetary approval from Congress each year. The District of Columbia Home Rule Act of 1973, which gave the District the ability to select a Mayor and City Council by popular election, details out the annual budget reporting and approval process that is required. Section 444, Multiyear Capital Improvements Plan, sets the requirements for the District CIP. The CIP is to include the forthcoming fiscal year and at least four fiscal years thereafter. As well as explanations for changes in the cost of capital projects and information about the projects relationship to other planning and project efforts in the District, the CIP must specify status of bonds, loans, and costs incurred (Office of the General Counsel, Council of the District of Columbia, 2008). In practice, the Districts CIP projects for the current fiscal year and includes five out years. The District is only authorized to spend funds on projects that are included in a congressionally adopted CIP and which have received the requisite financing approval. FINANCIAL STRUCTURE OF THE DISTRICT OF COLUMBIA One fiscal requirement imposed by Congress on the government of the District of Columbia is a maximum annual debt service on General Obligation Bonds to 17% of projected revenues in the current year. The District has taken measures to more strictly restrict the limit of issuance of debt by passing the 2009 Debt Ceiling Act which limits the debt service on all tax supported debt to 12% of General Fund expenditures (Goverment of the District of Columbia, 2010). Currently, the District has a debt ceiling percentage of 10.53% with an outstanding taxsupported debt of $7.87 billion and projects a FY2011 debt service cost of $627.74 million on all tax-supported debt. The bulk of the Districts outstanding debt are in General Obligation (GO) Bonds and Income Tax (IT) Bonds with approximately $2.96 billion and $2.89 billion, respectively (Government of the District of Columbia, 2011).

For the CIP, the District attempts to create a responsible balance between debt and PayAs-You-Go (PAYGO) capital funding. In the FY2011 budget, the District relies heavily on GO/IT Bonds which account for more than 75% of the total CIP funding. Currently only $10.1 milllion, or 1.1% of the funding, is allocated to PAYGO funding (Government of the District of Columbia, Page 2 of 10

2011). Within the bond mix, the District is beginning to rely more heavily on IT bonds for projects that previously have been financed by the traditional GO bonds. While the IT bonds do not have the full faith and credit of the Government of the District of Columbia securing them, they are a statutory first lien on the Districts personal income and business franchise taxes and have received higher ratings than the Districts GO bonds. As a result, the District is able to save significant money in debt service costs by shifting more debt towards the IT bonds that have more favorable terms (Government of the District of Columbia, 2010). The 2010 IT Bond ratings are as follows: Standard & Poors (S&P) AAA, Moodys Aa2, and Fitch AA. These ratings indicate that the IT Bonds have High or Highest (S&P) Quality investment attributes (Government of the District of Columbia, 2010). The Districts GO bonds trail closely behind with ratings of A+ from S&P, Aa2 from Moodys, and AA- from Fitch. While not on par with some of the neighboring jurisdictions, such as Arlington, VA which maintains a triple triple-A rating, the District has seen drastic improvements in the past 15 years since it was downgraded to junk bond status by all three agencies in 1995 (Government of the District of Columbia, 2011). In addition to adjusting debt mechanisms to obtain more favorable terms, the Districts CIP includes a shift in funding which increases the utilization of PAYGO funding. By FY2016, the use of GI/IT Bonds is projected to be reduced by $330K to less than 60% of the total CIP funding share. Correspondingly, there is a significant increase in use of PAYGO which accounts for 30% of the total CIP funding in FY2016 (Government of the District of Columbia, 2011). Mayor Gray addressed this change in a November 22nd, 2010 speech stating that he will devote 25% of all local revenue growth to Pay-As-You-Go capital funding in order to gradually shift the District towards a more sustainable approach to capital investments. PAYGO is an inherently more sustainable funding mechanism because the funding comes from actual revenue already received in lieu of taking on additional debt service obligations.

Current projections show a fiscal outlook that would cause the debt ratio to exceed the 12% limit as early as FY2015 (Government of the District of Columbia, 2011). While the aforementioned adjustments to IT Bonds and PAYGO financing will help to minimize the debt service costs, the District must look for additional savings measures as it moves forward in creating the FY2012 budget and CIP. According to David Clark, Director of the Capital Improvements Program in the Office of Budget and Planning, reductions of approximately $40 Page 3 of 10

million per year from the current projections will be required in order to maintain a debt ratio below 12% in 2017, the final out year in the forthcoming FY2012 CIP (Clark, 2011). To help to prioritize expenditures in the CIP, the Mayor has indicated that he will appoint a blue ribbon panel of experts in transportation, infrastructure, and planning/economic development who will make recommendations on the CIP. Additionally, he has placed a freeze on all capital projects not yet underway (Government of the District of Columbia, 2011). CREATION OF THE CIP

The District agency principally responsible for the creation of the CIP is the Office of Budget and Planning (OBP) within the Office of the Chief Financial Officer. OBP starts the annual CIP process in November with a budget kickoff meeting that provides agencies with a general outlook for the CIP, including their budget call instructions for updates and funding requests. OBP uses an internet-based Budget Formulation Application that has been

developed to standardize agency requests and to place curbs on agency requests based on past projections and funding restraints (Clark, 2011). These updates include aspects of the project such as timeline, feasibility, community impact, expenditure requirements, estimated costs, and operating budget impacts. Further, each agency must provide OBP with a prioritized list of potential capital projects.

Requests generated by the individual agencies are disseminated by OBP to the members of the Capital Budget Team (CBT). Led by a representative from the Office of the

City Administrator, the CBT includes the Chief Financial Officer, Deputy CFO for Budget and Finance, and Deputy CFO for Finance and Treasury. In addition, the CBT is advised by the Directors of the Department of Real Estate Services, the Office of the Chief Technology Officer, the Department of Real Estate Services, and the Office of Planning (Government of the District of Columbia, 2010). Utilizing staff support provided by OBP, the CBT develops CIP recommendations using a three-step analysis.

Project justification is the first phase of the CBT project request analysis. This phase evaluates the relationship between the request and the requesting agencies overall mission as well as whether the project is duplicating efforts of another agency. In this capacity, the CBT plays an important role in minimizing waste and excess caused by agency overlap. In this initial

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phase of the review, the CBT also confirms that the requested expenditure is indeed a capital expense and not an operating expenditure.

To qualify as a capital expenditure, the project should have a useful life of at least five years or add to the physical infrastructure of other capital assets, should exceed a minimum dollar threshold of $250,000, should enhance the productivity or efficiency of District services, and should be carefully planned in accordance with the Comprehensive Plan (Government of the District of Columbia, 2010). It is through this review mechanism that the Office of Planning is able to assert the goals set forth in the Comprehensive Plans against the actual projects that are being requested for approval in the CIP.

Within the Office of Planning is the Capital Planning Unit (CPU) whose purpose is to work closely with other District agencies to conduct demographic and economic trend analysis, develop and refine facilities master plans and CIPs, and link capital investments to the achievement of the goals of agency performance and of the Comprehensive Plan (District of Columbia Office of Planning, 2006). The practice of linking capital investments to these two goals is critical to ensuring that the limited funding available for capital investment is utilized wisely and efficiently. In the 2010 update of the Comprehensive Plan, the District focused on the inclusion of an implementation element that links each of the 626 action items to the responsible agencies, describes time frames and funding implications, and works to ensure that the Comprehensive Plan does not become an idle and unreferenced report since it is the blueprint to help us continue on our path toward becoming a more inclusive city (Office of Planning, 2010).

Cost Analysis is the next stage of review after the CBT has determined that the requested project is justified. In this phase, overall cost estimates are developed with the assistance of the Department of Public Works and the Office of Property Management. This review looks at the proposed project costs and provides validation for these items. To present a more holistic picture of the cost implications associated with each budget request, this phase also includes estimates of future operating costs to ensure that the on-going liabilities of a project, once implemented, are held in account.

The final step in the CBT review process is Financing Analysis which is lead by the Office of the Chief Financial Officer (OCFO). When funding sources are selected and Page 5 of 10

committed for a given item in the CIP, the source of funds must be carefully aligned with the useful life of the project. OCFO will review the useful life of the project and present the information to the Office of Finance and Treasury (OFT). With this information, OFT can structure and develop funding strategies that align capital projects with appropriately phased financing vehicles (Government of the District of Columbia, 2010).

Upon completion of this review, the CBT will then evaluate projects based on their physical attributes, feasibility, and impacts on the community. This review not only evaluates the physical impact a capital project will have on the surrounding area but also the economic and social impacts associated with the capital project. Because of the scope and scale of major capital projects, each project must be considered on its temporal attributes as well. Capital projects typically consist of five key phases: design, site acquisition, project management, construction, and equipment (Government of the District of Columbia, 2010). Funding requests are developed to correspond with these phases, and they are used to track project milestones and evaluate the rate at which a project in progress is spending allocated funds. Each phase can have considerably different requirements for funding, and these varied outlays must be taken into account to actively manage the anticipated year-to-year cash flow.

Once all of the varied review criteria are taken into account, the CBT prepares and submits a proposed CIP to the Mayor for approval. The CIP is but one of six separate volumes that accompanies the Executive Summary of the Proposed Budget and Financial Plan. There is a separate volume in the Budget which deals strictly with the Highway Trust Fund (HTF). These are projects and funding sources that could be considered part of the overall CIP but which are currently reviewed through separate channels and procedures. The District Department of Transportation (DDOT) is the sole beneficiary of the HTF funds. Generally, the Federal Highway Administration provides 80% funding for approved projects (Government of the District of Columbia, 2010). The plan created by DDOT for the HTF funds is known as the Transportation Improvement Program (TIP), and it follows a similar budget-year-plus-five-outyear format as the CIP. The TIP is processed and reviewed by the Metropolitan Washington

Council of Governments (MWCOG) and is certified each year by the Federal Highway and Federal Transit Administration. This certification ensures that the federal funding of TIP projects will remain. While the scope and character of many of the projects that are included in the TIP are akin to those in the CIP, the budget requests of the TIP follow a very different course of review in order to be included in the Mayors proposed budget. Page 6 of 10

BUDGETARY REVIEWS AND APPROVALS

The Mayor works with the CBT to finalize their portion of the budget and includes it in the overall proposed budget. The budget will be submitted to the City Council for their review and approval on April 1st (Government of the District of Columbia, 2011). Once with the Council, the budget is divided amongst the Councils subcommittees for review and recommendations for the Committee Of the Whole. While with the subcommittees, two public hearings will be held for each agency. The first hearing is designated to review the performance of the agency during the past year, and the second hearing is to review the specifics of the requested CBT budget included in the majors financial plan. It is during these hearings that the public is granted the greatest opportunity to provide direct input on the items of the CIP (or other budget items) (Clark, 2011).

After the subcommittees have had an opportunity to review the agency's budget requests, meet with representatives from each agency, and hear public input during the hearings, the Committee Of the Whole will meet in late May to approve the budget through a Budget Request Act and to make any amendments they deem necessary. The Committee Of the Whole is headed by the Council Chairman and includes all members of the City Council. The budget that the Committee Of the Whole approves is sent back to the Mayor for final approval and sign-off. If any item is not approved, the Mayor may exercise a line-item veto, which must be accompanied by an explanatory statement (Goverment of the District of Columbia, 2010). Once returned to Council for an additional vote and once an agreement is reached between the Mayor and Council, this budget becomes known as the Consensus Budget.

The Consensus Budget then leaves the local government creation, review, and approval process and, in June, is sent into federal review channels by way of a Budget Request Act submission to the President of the United States. The Mayor sends a brief transmittal letter with the budget, which outlines the basics of the budgets spending plan and provides background on the measures taken by the District to provide a balanced budget as well as highlights of the Districts past years accomplishments. The FY2011 budget was the fifteenth consecutive balanced budget and is entitled Maximizing Efficiency. Balancing the FY2011 budget required a significant draw down of the Districts Fund Balance, and there are efforts in the new Gray Page 7 of 10

administration to rebuild the Fund Balance to pre-recession levels (Government of the District of Columbia, 2011). The Mayors submission of a balanced budget is a legal requirement codified under section 603(c) of D.C. Official Code 1-206.03(c) (Goverment of the District of Columbia, 2010). Ultimately, the Districts budget is transmitted from the President to the House and Senate as a Budget Request Act, where it is referred to the subcommittee involved with District affairs and appropriations. According to Clark, the budget generally passes through Congress as it came with potentially some modifications to Federal Grand funding but Congresss appropriation of funds is technically through an act that is separate from the approval of the Budget Request Act sent by the President for the District of Columbia. This Congressional act is not required to include the provisions of the Budget Request Act and ultimately of the District of Columbias budget and CIP (Goverment of the District of Columbia, 2010). Due to the District of Columbias unique relationship with the Federal Government, DC has a CIP and budget approval that is unlike anywhere else in the Nation. While this may create certain procedural strains, the CIP process has been developed to accommodate these additional levels of review and approval. The official role of the Office of Planning in the CIP process in the District has been one of cursory review in the first stage of the CBT review process. This step is sequenced to help ensure that items not in accordance with the Comprehensive Plan are not moved forward in the CIP. Reports from members of the Office of Planning and Office of Budget and Planning indicate that this critical role was compromised during the recent administration. By not providing the Office of Planning with a proper seat at the table for the CIP process, a wealth of valuable input was not collected and utilized (Driggins, 2011). The planned blue ribbon panel under Mayor Gray is hopefully a move back towards allowing the Office of Planning and the Comprehensive Plan to play a more active and guiding role in creating the Capital Improvement Plan.

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Works Cited Clark, D. (2011, February 15). Director of Capital Improvements Program in Office of Budget and Planning. (M. Steenhoek, Interviewer) District of Columbia Office of Planning. (2006). Office of Planning's Capital Planning Unit: An Overview. Washington, DC: Office of Planning. Driggins, K. C. (2011, February 18). Associate Director, Citywide Planning, Office of Planning. (M. Steenhoek, Interviewer) Goverment of the District of Columbia. (2010). FY 2011 Proposed Budget and Financial Plan, Volume 1, Executive Summary. Washington, DC: Government of the District of Columbia. Government of the District of Columbia. (2010). FY 2011 Proposed Budget and Financial Plan, Volume 6, FY 2011 - FY 2016, Capital Appendices. Washington, DC: Government of the District of Columbia. Government of the District of Columbia. (2010). FY 2011 Proposed Budget and Financial Plan, Volume 7, FY 2011 - FY 2016 Highway Trust Fund. Washington, DC: Government of the District of Columbia. Government of the District of Columbia. (2010). Income Tax Secured SIFMA Index Bonds, March 12, 2010. Washington, DC: Government of the District of Columbia. Government of the District of Columbia. (2011). General Credit Update, February 10, 2011. Washington, DC: Government of the District of Columbia. Office of Planning. (2010). Moving From Vision to Reality, A Comprehensive Plan Progress Report. Washington, DC: The Government of the District of Columbia. Office of the General Counsel, Council of the District of Columbia. (2008, July 15). District of Columbia Home Rule Act, Public Law 93-198; 87 Stat. 774. Home Rule Act, Amended through July 15, 2008. Washington, DC, USA: Government of the District of Columbia.

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