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)

 

1.           Calculate the annual capital improvement budget for these projects, continuing the analysis for five years or until all the projects have been funded.

 

2.           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?

 

3.           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?

 

4.           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.


 

609

 

 

1996 A.J.Filipovitch
Revised 11 March 2005