Capital Planning 101

Looming over the bustling streets of Paris, Notre Dame sits on a small island in the middle of the Seine River, a cultural touchstone that has stood for more than 800 years. Construction of the cathedral alone took nearly 200 years. These days, infrastructure doesn’t take quite that long to complete – but projects often span years and require careful planning to ensure they are appropriately budgeted for, align with organizational goals, and will be managed to maximize value and lifecycle. This is the capital planning process.

What is Capital Planning?

Simply put, capital planning is asset management. It’s integral to the development of long-term plans for both public and private entities, and when it is done appropriately, it ensures that organizations and agencies can fulfill major goals and projects. Notre Dame is one example of an infrastructure project, but modern capital planning also encompasses projects related to education, healthcare, technology, and utilities.

The capital planning process can broadly be defined in four parts:

1. Identifying needs,
2. Determining a financial impact,
3. Prioritizing requests, and
4. Developing a financial plan

Identifying Needs

Capital planning must begin with an identified need. Do transit systems require investment? Are school buildings sufficient, or will new ones need to be built? Are hospitals using quality medical equipment? Are local water treatment facilities operating at the level they should be? Are the electric grids capable of supplying the demand put on them? Determining the needs of the community will allow governments to appropriately budget which assets must be renewed or replaced.

Determining Financial Impact

With needs identified, governments will need to determine the financial impact of the projects that have been selected. This entails detailing the full scope of the project and its complete life cycle cost. Capital planning projects may take anywhere from 5 to 25 years to complete, so governments need to know what the entire cost of investment will be early in the process.

Prioritizing Requests

When considering which initiatives to invest in, it is best practice to prioritize projects based on health and safety, followed by service and then asset preservation. Projects can then be ranked according to their urgency, the budget available for funding them, and their projected impact. This ensures governments are prioritizing the most valuable projects.

Developing a Financial Plan

Because capital planning is a multi-year (or even multi-decade) process, governments must develop a plan to finance the projects and assets in their care. Taxes, loans, bonds, or grants may be utilized as sources of funding. Ultimately, the financing strategy that governments select in the capital planning process needs to align with the project requirements without straining their financial health.

Supporting Capital Planning Efforts

Capital planning is a critical component of management for governments and public institutions. It makes large-scale and long-term investments possible and serves current and future generations of the community. Without capital planning, meeting the current and long-term needs of community members becomes incredibly difficult. A fully prepared capital plan removes that difficulty. Reach out to one of our financial professionals today if you need assistance implementing a capital plan.