Bringing Resilience into the Capital Planning Process
Achieving long-term resilience requires rethinking the entire model of infrastructure performance, and the full lifecycle of the assets involved.
Traditional capital planning and project development processes don’t always consider long-term resilience. Existing financial and capital planning models usually focus on delivering the capital project, not the outcome—the public service—that benefits the community. Infrastructure capital projects are supposed to be a means to an end—providing public services that benefit residents. People don’t want storm sewers: they want to keep their neighborhoods from flooding. People don’t want bridge crossings and stairways; they want to be able to get to the places they need to go. Achieving long-term resilience requires rethinking the entire model of infrastructure performance and the full life cycle of the assets involved.
Expanding the Scope and Term of Capital Project Analysis
Everyone wants to cut the ribbon on a new project. Relatively few people want to show up three or five or ten years after it opens and pick up the broom to operate or maintain it. There is a bias in infrastructure finance (sometimes called the “the ribbon versus the broom”) towards spending money on capital costs, and not “wasting” it on operations and maintenance (O&M) or administration. The bias also occurs because fewer tools have been developed to specifically address operational and maintenance costs vs. capital costs.
For most cities, analyzing a potential capital project ends after construction. While impact on the operating budget might be estimated at a high-level, it’s rare to specifically allocate O&M costs to a specific project. O&M arrangements, liabilities, and challenges are not usually addressed in capital planning. This means cities can build up a severe backlog of O&M funding, and may be unable to optimize lifecycle costs since O&M isn’t analyzed in detail.
Avoiding the “Death Spiral” of Deferred Capital Maintenance with Diverse Funding Streams
Most cities do conduct some analysis of operational costs and future renewal needs, and the Government Finance Officers Association (GFOA) recommends (but does not require) that the impact on future maintenance costs be discussed. For example, the City of Pittsburgh includes operational savings/positive impact on operational budget as one of its criteria for selecting capital projects. Its capital plan describes the anticipated impact of each project on the operating budget, and prioritizes ones that will likely result in savings.
Yet traditionally, capital and operating budgets are not directly linked. Even when operational impact is considered when a project is built, commensurate revenue is not programmed or earmarked. Instead, agencies often have a fixed amount of funding for operating and maintaining the capital assets under their jurisdiction. This creates a permanent, structural defect in most city budgets: the number of capital assets grows every year, but the funding to operate and maintain them doesn’t.
When the inevitable shortfalls happen the response is to “spread the peanut butter thinner” and try to lengthen out the maintenance cycle. These actions may be the best way for an agency to weather budgetary uncertainties in the short term, but in the long term, they lead to even more backlogs in O&M, which lead to deteriorated assets. Once that happens, the capital shortfall also increases, since it is generally more expensive to fix an asset in worse condition. Degraded service quality can also lead to lower property values and greater inequity, as residents dependent on the infrastructure experience less reliable service.
This failure can have catastrophic consequences for future infrastructure delivery. Many urban transit agencies in particular are caught up in a “death spiral” of deferred maintenance leading to degraded service, leading to lower service base (e.g., ridership), leading to even less funding for capital maintenance. When operational funding relies even partially on user fees, agencies are less able to weather short-term service disruptions or plan for long-term resilience.
The 40-year-old Washington Metropolitan Area Transit Agency (WMATA) has been plagued by a legacy of deferred maintenance, resulting in increasing delays and accidents over the past decade. In 2016 the agency engaged in an aggressive “Back 2 Good” investment program to try to arrest the death spiral of unreliable service leading to reduced ridership and fares. Metro invested a record $16 billion in improving core services, leading to the number of on-time trips rising from 56% to 89%. Even if the system’s financial challenges are by no means solved, the program has helped to halt the slide in ridership. Yet Metro, New York’s Metropolitan Transportation Authority, and many other infrastructure agencies still struggle to catch up with the backlog of deferred maintenance.
While the agency struggles to obtain funding for its maintenance backlog, Metrorail stations increase property value markedly. A 2011 report estimated that 27% of the assessed value in WMATA’s region lay in the 4% of the area that was within ½ mile of a Metrorail station. When the privately funded New York Avenue Metrorail station was constructed in the “North of Massachusetts Avenue” (NoMa) area, assessed valuation increased 300 percent in 6 years. Not all of that value increase can be attributed to Metrorail access; but much of the development attracted to the station hinged on the availability of rail access. According to Governing Magazine, 93 percent of office projects under development are within ½ mile of a Metro station. Capturing some of that value to preserve the service that created it is a difficult sell to Metro’s regional partners, but broadening the revenue base will be key to preserving the agency’s future.
The Vicious Cycle of Deferred Maintenance.
The Virtuous Circle of Increased Investment and Diversified Revenue Base.
Applying Outcomes-Based Financing to Infrastructure
Outcomes-based financing is one approach that may help address the structural gap between capital and operating budgets. Under “pay-for-success” or outcomes-based financing, investors wishing to invest in projects that create a measurable, beneficial social impact (known as impact investors) provide funding for innovative programs designed to deliver social goals.
An investment is made to scale up an innovative program or service, with a specific goal or set of goals (such as reducing recidivism or increasing high school graduation rates). Investors get repaid only if the desired goals are achieved.
This approach allows governments and nonprofits to experiment with new ways of doing business—without having the government take on the financial risk that the new approaches won’t work. If governments set and measure performance targets appropriately, the savings and additional tax revenue from the outcomes produced by the program will create a return greater than the government’s payout to investors.
Outcomes-based financing can help cities tap into the cost savings and future value created by infrastructure development as well. An outcomes-based approach could improve infrastructure projects in three ways:
- A pay-for-success approach automatically focuses on results, not the capital facilities that are used to deliver it. If an operational or programmatic investment can substitute for a capital one, pay for success may reduce or eliminate the need for municipal capital investments, in some cases. For example, a program that helps landowners or neighborhoods construct their own green stormwater infrastructure might reduce the need for additional city sewer capacity. Programs that reduce recidivism will reduce the need for new jail cells; programs that improve public health may reduce the need for additional hospital beds or dialysis facilities.
- The involvement of impact investors may also lead cities to measure more closely how their infrastructure projects affect social outcomes, such as economic development, racial and income equity, and environmental quality. Infrastructure agencies are used to measuring benefits as part of generating support for project funding. They are rarely called upon to measure the impact of their projects on equity and environmental quality, after construction. Having financing tied to equity and environmentally based outcomes will add a layer of rigor and accountability.
- Finally, impact investment can serve as the venture capital of government, allowing new technologies and approaches to be tested at the risk of the private market. This will accelerate innovation and the adoption of new approaches for delivering equitable and resilient infrastructure.
The first application of a pay-for-success model for environmental infrastructure was the DC Green Bond (see case study on page 56), which combined a form of traditional bond with an outcomes-based approach. Impact investors with an interest in funding green projects provided funding to install green stormwater infrastructure, a technology less proven than more expensive “gray” solutions. If the infrastructure performs up to the standard set by the DC government, the investors will receive a market return. If the infrastructure does not perform as expected, the investors will receive a 0.5% return on their original investment. If the infrastructure performs better than anticipated, the investors will achieve a higher rate of return. This allowed the government to transfer the risk of an unproven green technology to impact investors willing to assume it.
Applying Life Cycle and Resilience Analysis to All Projects
As previously mentioned above, most existing capital planning processes end shortly after project construction. Performance-based, long-term analysis is more likely to occur when the public sector is considering entering into alternative procurement arrangements, including Public-Private Partnerships (P3s). Bringing in any kind of external partner—even another public agency—naturally forces greater definition of what activities need to happen, at what performance level, and which entities will be taking responsibility for them.
P3 analyses are often conducted as “value for money” studies, documenting the greater potential value that could be created via a P3 arrangement. Compared to analyses of traditional projects, analyses of potential P3s usually feature:
- Longer analysis timeframes—usually through the life of the asset;
- Detailed life cycle cost analyses, including consideration of whether a higher initial capital investment might be more optimal to reduce ongoing O&M cost;
- Specific O&M and capital maintenance and renewal plans;
- Consideration of resilience in the long term, including climate changes, sea level rise, cultural changes, and business cycles that might affect the asset; and
- Community impacts in the short and long term, including considering equity of revenue sources, financing tools, delivery strategies, and outcomes.
Traditionally procured projects do analyze most of these aspects, but generally not with the rigor and long term of an alternative procurement analysis. Going through this analysis—even if a P3 option is not chosen—can be beneficial to the project. When operations and maintenance remain “in house,” it’s often not considered necessary to fill in the details. Part of the accountability achieved with P3s may be due to the need to explicitly define performance targets into the future, rather than private sector efficiencies or innovation.
By bringing in an external partner that will inspire the same accountability—extending the timeframe of analysis and documenting specific costs and risk—public agencies may be able to reap some of the performance benefits that are associated with long-term P3s.
By doing long-term, performance-based analyses for all projects, even traditional ones, public agencies may also be able to get support for receiving some of the resources that would have been dedicated if a long-term P3 model had been selected. When a long-term P3 option is chosen, the public agency is usually contractually obligated to pay the private partner for the operations and maintenance of the project. If a public option is chosen, there is usually no similar long-term dedication of O&M funding to the project. Documenting future needs and maintenance activities can also help with succession planning and workload balance for a workforce whose careers will probably not extend past the life of a particular project.
Creating New Paradigms in Flight: Mapping the Baseline
New paradigms for project development often involve changing how agencies relate to each other or to private partners. In order to get buy-in from stakeholders on the innovation, agencies have to understand how a proposed innovation might change from multiple perspectives.
Agencies often understand their individual roles in a process, but lack a holistic understanding of the steps, costs, and risks involved for all of the other participants. If cities undertake innovation without understanding how the current framework works for master developers and sub developers, it’s impossible to understand how changes might affect their costs and profits in the short and long term. For example, on the Saint Paul green stormwater initiative, master developers wanted to know the all-in cost of the new approach, and what the long-term costs would be for the sub developers who would purchase and develop individual parcels. They were familiar with how to manage stormwater costs under the current system, but had concerns about what the new costs would be, when they would be incurred, and who would pay for them. Without that knowledge, cities may face resistance from stakeholders who may be disadvantaged by the proposed innovations.
This is particularly true for complex infrastructure projects, where the sponsoring agency is unlikely to have experience across all project aspects. Transit agencies need to understand the dynamics of local retail and housing markets if they are planning on transit-oriented development as part of their financing strategy. If they offer up space or lease arrangements that don’t align with market needs, the project may not succeed. Flood control agencies need to understand the dynamics of the insurance market in order to tap into potential premium rebates for reducing the risk of catastrophic loss. To gain this kind of holistic view, agencies need to create time and space for discussions with public and private stakeholders, outside of the deadlines and context of a particular project.
In an ideal world, there would be plenty of time and space to design a perfect process. In the real world, it’s hard to focus on process improvement without the impetus of having a specific project that will benefit from it. Sometimes the adjustments made to accommodate a single innovative project can benefit the entire portfolio. However, the significant staff time invested in trying to deliver one innovative project, or to participate in a multi-disciplinary process, should be “amortized” over the entire capital plan. Otherwise, this kind of innovation won’t happen, because it will look as if one project is consuming far more than its due share of staff time and attention.
Asset Management Systems: Using Information to Inform Funding Plans
Long-term resilience can also benefit from holistic asset management systems. One way to “run a city like a business” is to record the value and condition of existing infrastructure, and document the costs to renew, rehabilitate, and maintain it. Cities are also increasingly inventorying land and real property assets, facilitating urban land reuse and potential revenue-generating activities.
Using Asset Inventories to Predict Future O&M and Renewal Needs
Cities like Pittsburgh, PA, are using Cartegraph, a GIS-based asset management system, to help gather information about current conditions and maintenance costs for its infrastructure assets. By combining it with the city’s work order system, staff can determine how often repairs and maintenance were needed on city-owned buildings, and how much they cost in staff time and materials. This information can be used for budget forecasting, and for prioritizing capital repairs that can avoid future costs. When a comprehensive asset inventory is already in place, it provides critical information that can help advance individual projects, and allows optimal prioritization of funding among the entire portfolio. It can also allow cities to forecast future workforce needs.
Surplus Land Development and Swaps
Another form of alternative delivery is funding infrastructure through private development of existing facilities or surplus land. For example, construction of the new Long Beach Civic Center was primarily funded by private development of the site of the old civic center. The developer entered into a long-term DBFOM P3 and accepted an availability payment that was capped at the current operating cost of the old civic center. Under the transaction, the city’s cost for a new civic center was limited to its existing outlays for operations and maintenance.
In addition to making use of surplus land, a city may also be able to realize value from swapping parcels with the private sector. For example, valuable, well-located land may be used for a purpose (such as parking cars or storing maintenance vehicles) that could be relocated to a lower cost location without a loss of efficiency. The original sites could then be sold or leased for a higher use, such as a retail mail or hotel, and generate enough funding to construct a facility at a new site, or for other projects.
In 2015, the City of Portland, ME, swapped a city-owned parking lot for a parcel that would enable them to relocate their public works department that was located in a prime downtown area. The swap freed up the former Public Works site for higher-value waterfront redevelopment, increasing economic activity and property values.
Potential Advantages to Land Swaps
Cities may be able to capitalize on surplus land and/or allow use of an existing facility in exchange for construction of a new one.
Potential Limitations to Land Swaps
Real estate valuation is an art, not a science, and public agencies may get criticized for selling or swapping assets without adequate return. It may be difficult to foster an open, transparent process in a real estate environment where developers are used to transacting deals behind the scenes.
Incentivizing Generating Revenue from City-Owned Land and Capital Assets
Most city assets are managed by individual city departments or enterprise agencies, rather than centrally. Information about these other assets is often contained within multiple departments, in multiple formats, and managed with different policies. Centralizing information about city-owned assets facilitates potential land swaps, joint development, and other revenue-generating opportunities.
Often, city processes don’t contain any incentives for departments to consider revenue-generating arrangements, because any proceeds are dedicated to either the General Fund or specific uses, not back to the department. Given this, agencies are more likely to “sit on their assets” than try to use them for revenue generation.
Government accounting practice (as recommended by the Governmental Accounting Standards Board) is to value assets at historical cost, not at book value. This can understate the wealth of cities substantially, as the historical cost of real property and facilities lags far behind the current book value. This also makes it difficult to identify potentially monetizable or saleable assets.
In the City of San Francisco, for example, any surplus city land must first be considered for affordable housing development. This is a logical response to the severe housing crisis in the city, but doesn’t provide an incentive for agencies in control of assets to invest the staff time and potential transaction costs of trying to find a way to make use of an underutilized asset. Cities that find ways for departments to share in the proceeds may find greater success in identifying and making use of potentially monetizable assets. For example, the State of Virginia passed a law to incentivize use of surplus property by state departments, providing that up to 50 percent of the proceeds from surplus property sales can be returned to the agency that controlled the state-owned property.
In Australia, the federal government provided an incentive to provincial governments to consider making use of surplus assets, either through long-term leases or outright sales to the private sector. The program was termed “asset recycling” because it required provincial governments to reinvest proceeds from the leases into other infrastructure. The incentive payments represented an additional 15% of those proceeds, and were also dedicated to infrastructure. Cities in the United States have also benefited from the sale of surplus land. Street and pedestrian improvements and affordable housing in San Francisco’s Hayes Valley neighborhood were funded by the sale of surplus California state land (facilitated by the removal of a freeway in the area). The resulting land was transformed into 22 housing sites, seven of which are designated as affordable.
Removal of the Central Freeway in San Francisco’s Hayes Valley neighborhood freed 22 parcels for development, including seven designated for affordable housing.