Capital Improvement Programming: Cases for Study
Use this information to answer the next four questions:
The city of Red Wing, Mn, is preparing a capital improvements
plan for the next five years, beginning with 1985. The plans are
re-examined annually. The city has current tax revenues of $4,359,000;
the budget can be expected to grow at a 2% rate over the next
few years. The city maintains a conservative debt/revenue ratio
of 10%. The current tax debt is $200,000, which is being retired
in equal increments over the next five years. New bonds will cost
7% for a 10-year issue, with a 1% issue fee (and no discount factor).
The city has been receiving $100,000 a year from federal revenue
sharing, and floats a maximum of $750,000 a year in revenue bonds.
The city has a capital reserve fund of $50,000 per year.
The city council has adopted the following weights for the CIP
criteria: Health (5), Safety (5), Economic Development (3), Cost/Benefit
Ratio (3), Quality of Life (1), and Housing Stock (1). Of the
top 15 capital improvement projects, three are slated to be funded
specifically by revenue-sharing money (ratings for the various
CIP criteria are in parentheses):
- an IBM minicomputer for city hall ($50,000),(0,0,2,0,1,0)
- a project to renovate the library and convert it to current
technology ($150,300) (0,0,1,3,0,0)
- and a program to renovate the civic auditorium ($741,000),
(2,2,3,1,0,0)
A new motor grader for the streets department ($150,000), (0,1,3,1,0,0)
will be funded from the capital reserve fund.
Two projects are slated for revenue bonds:
- a district heating project ($500,000),(3,1,1,2,3,2)
- and a harbor access project ($1,634,000),(0,2,3,3,1,0).
The remaining projects are to be funded by whatever funds are
available:
- Hiawatha water reservoir repair ($60,000),(3,3,2,0,0,0)
- a new sewer rodder ($45,000), (3,1,0,0,0,0)
- Pottery neighborhood area improvements ($185,0OO),(1,1,2,2,0,2)
- Prairie Island access road ($100,000, although in 1990 there
will be additional charges of $3,500,000),(2,3,3,3,0,2)
- annual sewer reconstruction ($35,000, every year),(3,3,3,2,0,0)
- special oil storage buildings ($121,000),(3,3,0,0,0,0)
- waterline extensions on Tile and Featherstone streets ($45,000),(2,0,3,1,1,3)
- new lights for the athletic fields ($35,000),(0,1,0,2,0,0)
- and upgrading the facilities at the public cemetery ($37,300),(3,1,0,1,0,0)
- Calculate the annual capital improvement budget for these
projects, continuing the analysis for five years or until all
the projects have been funded.
- Suppose the council decides that it had not given proper consideration
to the criterion weights, and upon reconsideration has decided
that the proper weights are: Health (5.5), Safety (4.5), Economic
Development (3.5), Cost/Benefit Ratio (2.5), and Housing Stock
(1.5). What difference (if any) do these new weights make in the
ranking of the projects? What does this imply about the sensitivity
of the tool to criterion weights?
- Suppose the city hires a new manager, and she takes a more
aggressive position in relation to debt. The new debt/revenue
ratio is now 14%. What difference will that make in the five-year
capital improvement budget?
- Suppose the manager decides that annual five-year CIP budgets
are too exhausting, and decides to go to do a new budget every
four years. How will this change affect your strategy in dealing
with retained debt capacity? What difference will that make in
the five-year budget you prepared earlier?
5. The top 10 capital improvement projects for the East Central
Economic Development Region, and their relative ranking, are as
follows:
14 New city hall and fire hall, Isanti city
9 Repair fire hall, Dalbo city
7 New courthouse, Isanti city
7 New fire truck, Sturgeon Lake
6 Senior citizen center, Chisago County
5 Tri-county jail, Isanti-Kanabec-Pine counties
3 Hospital remodeling, Mora city
3 Water system addition, Mora city
1 Sewer replacement in industrial block, North Branch city
1 New fire hall, Rush city.
Assuming the commissioners used the six criteria on the spreadsheet,
and ignoring the possibility that commissioners might deviate
from the criteria to favor pet projects, reconstruct the scoring
and weighting that might have been used.
© 1996 A.J.Filipovitch
Revised 11 November 96