Appendix G: Planned Capital Projects Overview

CAPITAL PLAN OVERVIEW

The City of Somerville’s Capital Investment Plan is an long-range investment program for the City’s future. This plan is created with the underlying goals of upgrading and modernizing the City’s aging infrastructure and facilities, laying the groundwork for expanding the City’s economic base, and helping to improve the City’s diverse and important neighborhoods. The Capital Plan is a list of projects deemed to be either critical, recurring or ongoing, as well as all projects not yet scheduled.

The Capital Investment Plan documents projected spending for equipment and construction projects over the next ten years, providing policymakers the opportunity to coordinate City needs, plan for future risks and strategies, as well as begin working towards funding solutions.

• A Capital project is defined as a major, non-recurring expenditure that generally meets all of the following criteria:
• Massachusetts General Laws permit the City to issue bonds to finance the expenditure
• The expenditure is a facility, object, or asset costing more than $50,000,
• The expenditure will have a useful life of 10 years or more for buildings or building components and five years for vehicles and equipment; and
• Planning, engineering, or design services may be considered capital when such services are integral to a construction, renewal, or replacement project that meets the criteria for a capital expenditure.

Projects and assets that do not meet these requirements are considered operating expenses and are included in the operating budget.

Examples of typical capital projects include:

• New public buildings (including equipment & furnishings)
• Significant alterations, additions, or improvements to existing buildings
• Land improvements, acquisition, and development
• Equipment replacement and/or refurbishing
• Street construction and major resurfacing
• Water main construction and rehabilitation
• Long-range planning studies

CAPITAL PLANNING PROCESS

The Capital Investment Plan is prepared from a city-wide perspective. There is no assumption of a budget quota for individual departments. Capital budget requests are submitted by Department Heads to the Finance Department accompanied by detailed cost estimates of capital costs and ongoing impact on the operating budget. The Finance Department evaluates the City’s overall financial situation and, within this larger context, each department’s request is compared to existing recommendations and to any long-term

planning for that department.

Important questions raised in the process include: Does the request reflect an interdepartmental planning effort? Has the department considered all sources of funding? Has the Department undertaken a cost/benefit analysis? The Finance Department looks for evidence of longer term planning for departmental needs, of planning for maintenance expenses, and of interdepartmental collaboration.

While most departmental requests have merit, the City’s projected financing resources fall short of accommodating all requests. Very difficult decisions must be made as to what projects receive funding in any given fiscal year. In reviewing the requests of the operating departments, the Administration reviews proposals based on the following criteria:

1. Public Health & Safety: Is the project necessary to protect public health and safety?
2. External Commitments: Is the project required to comply with external statutory requirements?
3. Fiscal Prudence: Does the project leverage outside dollars, activate development, or reduce City operating costs?
4. City Services: Does the project enable or enhance the City’s ability to deliver municipal services?
5. Equity: Does the project promote racial, social, economic, or geographic equity?
6. SomerVision: Does the project advance the goals of SomerVision 2040?
7. Climate Forward: Does the project advance the goals of Somerville Climate Forward?

Projects are graded using a rubric on a scale from 1-5 and weighted according to the following point weighting (out of a possible 115 points) in CY21:

• 25 Public Health & Safety
• 20 External Commitments
• 20 Fiscal Prudence
• 10 City Services
• 10 Equity
• 12.5 SomerVision
• 17.5 Climate Change

A maximum total of 115 points can be earned by each project. Once project scoring is complete, proposals are compared to others of the same type (Buildings, parks/open space, and infrastructure) in order to inform decision-making for the upcoming construction season. Projects with lower scores can get fast-tracked based on scoring a five in public health & safety or external commitments.

The CIP prioritization process results are reviewed by the Mayor’s Office and combined with financial projections, project readiness, and project sequencing information in order to make final decisions on which projects are ultimately moved forward.

SOURCES OF FUNDING

Projects scheduled for the upcoming year in the Plan generally represent the city’s most immediate investment priorities. Projects that are included in any documents are not guaranteed for funding as the CIP is only a reflection of the needs within the City. The Capital Investment Plan is intended to be a fluid document that will be subject to change each year as priorities and project readiness shift, and as additional information on funding streams becomes more defined. Loss of state aid, emergencies, unforeseen and extraordinary expenditures in the operating budget, higher than anticipated borrowing costs, and federal grant cutbacks are all factors that can force a change in the assumptions of the Capital Investment Plan.

Funding for the current year of the Plan is submitted to the City Council for appropriation. Each item is considered separately in accordance with the Massachusetts General Laws.

The potential funding sources for the City’s capital investments are:

Available Funds (Free Cash) – The City regularly appropriates General Fund “Free Cash” to finance short term, small capital investment projects in their entirety. Funds may be appropriated directly from the General Fund Tax Levy to the Operating Budget.

Enterprise Fund Proceeds – The City Operates the following Enterprise Funds: Water, Sewer, Ice Rink, and Dilboy Field. The policy of the City of Somerville is to recover the full budgetary cost of water and sewer operations and capital replacement from water and sewer use charges. Debt Service and issuance costs associated with water and sewer projects are financed from water and sewer use charges. Program receipts from the operation of the Veterans Memorial Skating Rink and the Dilboy Field may be used to finance capital projects for these respective entities.

Enterprise Fund Retained Earnings – The accumulated earnings of an Enterprise fund may be used to fund capital improvements. The earnings flow to an Equity Account known as “Retained Earnings” and are certified annually by the State Department of Revenue.

Debt Service – Projects funded by debt service refer to those expenditures that are acquired through borrowing, the payments for which may or may not aff ect the next fiscal year, but in any event are paid for over an extended period of time, usually three to twenty years. Those extended payments include both principal and interest, usually referred to as “debt service”. The City has traditionally financed large capital projects with debt service. Debt Service can be appropriated under the General Fund Tax Levy, from Enterprise Funds, or from Stabilization Funds.

Stabilization Funds – Massachusetts General Law, Chapter 40, Section 5B provides for the establishment and maintenance of Capital Project Stabilization Funds. The Mayor and the City Council may vote to appropriate sums of money into a Stabilization Fund for purposes of accumulating sums for future capital project financing. Appropriations may be made from a Stabilization Fund by a two-thirds vote of the City Council for any purpose for which the City is authorized to borrow under Chapter 44, Sections 7 and 8. The City’s largest Stabilization Funds are the Capital Projects Stabilization Fund (Pay-As-You-Go Projects) and the Assembly Square Stabilization Fund (Parks & Park Improvements).

Unexpended/Unobligated Bond Proceeds – Unexpended and unobligated balances from bond proceeds, may be appropriated on the motion of the Mayor by the City Council, and used as a financing source for a new capital improvement projects with an asset life similar to the original issue.

District Increment Financing – M.G.L. Chapter 40Q authorizes cities and towns to create development districts to segregate the taxes levied against new property developed in such districts since they were created (“Tax Increments”) and to use and pledge such tax increments to finance project costs within the district. A development district may be as small as one parcel or may comprise up to 25% of a town or city’s land. A district can be in effect for a maximum of 30 years. Each district must have a unique development program. The development program spells out the goals of the district and the means to achieve them. Once a district and program have been certified, the city or town has the ability to use various tools to implement the program. These include acquiring land, constructing or reconstructing improvements (such as buildings, roads, schools and parks), incurring indebtedness and pledging tax increments and other project revenues for repayment of these debts. The City is using DIF as a financing tool for infrastructure development at Assembly Rowand Union Square.

State and Federal Grants – The City uses dedicated state aid and grant funding to finance capital investment when these funds are available. The most notable sources of this financing are Chapter 90 State Highway Funds and the Community Development Block Grant.

Sale of Surplus Property – Proceeds from the sale of surplus municipal real estate may be appropriated on the motion of the Mayor by the City Council for financing capital projects. Generally, these proceeds are appropriated to a Stabilization Fund.

Public/Private Partnerships – A Public/Private Partnership is a contractual agreement between a public agency and a private sector entity whereby the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.

Other Available Funds – Other sources include Parking Meter Receipts, Insurance Recoveries, and closeouts

to Undesignated Fund Balance.

CAPITAL INVESTMENT PLAN FINANCING POLICIES

The City of Somerville has adopted several Capital Investment Financing Policies as a guide for decisionmaking.

A. General Fund Debt Service Benchmark

Except for projects or improvements authorized by a Proposition 2 ½ Debt Exclusion vote of the electorate, long-term debt for general financing for general municipal purposes shall be not exceed six percent (6%) of total General Fund expenditures. This benchmark measures the City’s ability to finance debt within its current budget, similar to the measurement of household income dedicated to mortgage payments. This is the most immediate measure of ability to pay.

B. Water & Sewer Enterprise Funds Benchmark

Water and Sewer Debt Service should not exceed twenty percent (20%) of water and sewer operating revenues. This benchmark recognizes the capital intensive nature of the Water & Sewer Enterprise Funds while ensuring that investment in the City’s water and sewer systems does not place dramatic increases on the ratepayer.

C. Use of “Free Cash”

Free Cash in excess of that needed to fund the Operating Budget should be used for non-recurring or emergency expenditures or appropriated to a Stabilization Fund for future capital projects and equipment purchases. The City will endeavor to apportion a minimum of 30% of its yearly free cash certification to the Capital Investment Plan.

D. Use of Debt

All current operating expenditures will be paid for with current operating revenues. The City will not use long-term debt for current operations.

E. Sale of Assets

Proceeds from the sale of surplus municipal property shall be dedicated to capital improvement financing.

F. Stabilization Fund Balances

A minimum balance of $4.8 million shall be maintained as reserves as of June 30th of each fiscal year. Of the $4.8 million in reserves, a minimum balance of $2 million shall be maintained in the Capital Stabilization Fund. This benchmark is established to assure the bond rating agencies of adequate reserves.

INCLUSION OF CAPITAL PROJECTS IN OPERATING BUDGET FORECAST

Following any significant changes in the capital plan, revised debt service estimates are generated by the City’s financial advisors. These debt service figures are then rolled into the long-range forecast (presented in this document as Appendix H) to assess the capital plan’s impact on the City’s financial health. Significant changes in this case may refer to adjustments to project priorities, schedules, or spending timelines. It is paramount that the capital plan is realistic, comprehensive, and updated on an ongoing basis. For more information on projected debt service costs for existing debt plus critical, recurring, and underway projects, refer to Debt Service under non-Departmental Budgets. The most recent version of the City’s Capital Investment Plan was presented to the City Council in January of 2020 and is presented at this link.