Capital Improvement Plans 101

May 10, 2016 – Charlie Francis

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I’ve created many Capital Improvement Plans over the years. As I sat down to write this week’s blog, I initially thought of providing narrative and insight coalesced into five tips for capital budgeting. However, I quickly realized that there are at least four or five best practices for each of the following phases of capital budgeting:

  • Identification of capital and maintenance expenditures
  • Capital planning
  • Capital budgeting development and execution
  • Capital financing
  • Asset management

So, with my OpenGov team’s help, we decided to develop a Capital Improvement Planning (CIP) series, highlighting the best practices in each stage of the CIP process.

This inaugural post will focus on answering the following questions:

  • What is a Capital Improvement Plan?
  • What are the benefits of developing a Capital Improvement Plan?
  • What are the features of a Capital Improvement Plan?
  • What is the process of developing a Capital Improvement Plan?

You may already know this information, but sharing this post with others in your organization can spread awareness about capital project budgeting.

What is a Capital Improvement Plan?

A Capital Improvement Plan (CIP) contains all the individual capital projects, equipment purchases, and major studies for a local government; in conjunction with construction and completion schedules, and in consort with financing plans. The plan provides a working blueprint for sustaining and improving the community’s infrastructures. It coordinates strategic planning, financial capacity, and physical development. A CIP stands at the epicenter of a government’s Planning, Public Works, and Finance departments.

A CIP has two parts – a capital budget and a capital program. The capital budget is the upcoming year’s spending plan for capital items. The capital program is a plan for capital expenditures that extends typically five to ten years beyond the capital budget.

What are the benefits of developing a Capital Improvement Plan?

A complete, properly developed CIP delivers the following benefits:

  • Synchronizes capital and operating budgets
  • Systematically evaluates competing demands for resources based on a prioritization matrix reflecting the entity’s long-term goals and objectives
  • Identifies, prioritizes, and optimizes the financing of capital projects
    • Pay-Go
    • Federal and State grants
    • Debt financing
  • Links strategic and comprehensive plans with fiscal capacity
  • Informs the public about the government’s investment in infrastructure

What are the features of a Capital Improvement Plan?

The CIP typically includes the following information:

  • A listing of the capital projects, equipment, and major studies
  • A ranking of projects
  • A financing plan
  • A timetable for the construction or completion of the project
  • A project justification
  • A classification, itemization and explanation for the project expenditures

How are Capital Improvement Plans Developed?

Governments typically follow these steps when developing a CIP:

Step 1. Organizing the Capital Improvement Plan

CIP Governance

The process begins with deciding to prepare a CIP and Capital budget, and designating a lead department. Although the budget or finance office typically begins the process, sometimes the public works department takes the lead because they have excellent multi-year programs that strategically examine capital projects. As a minimum, the committee usually includes the major departments with capital facilities – e.g., public works for capital facilities, and police and fire for rolling stock.

Develop Process, Forms, Criteria, and a Schedule

The next step in preparing the CIP is to develop:

  • A CIP budget calendar detailing milestones and dates for the CIP process
  • Specific forms detailing project proposals
  • A prioritization and decision-making matrix for evaluating and selecting capital projects

Citizen and Stakeholder Involvement

The CIP budget calendar typically includes the process to involve citizens and important stakeholders (other capital facilities providers in the area).

Step 2. Identify Projects and Funding Options

We often identify projects from the individual infrastructure systems’ “capital needs studies.” However, in many jurisdictions, neither capital needs studies nor comprehensive infrastructure inventories and condition assessments exist. Nevertheless, it is still possible to put together an effective CIP without them through effective development of the project request forms. The project request forms should designate the funding source(s) available for the project.

Selecting the Projects After the project proposals have been submitted, the CIP committee evaluates and prioritizes each project, without regard to the funds available.

Then, finance staff forecast the amount of un-earmarked money available. Projects competing for general funds, that is, un-earmarked money, are re-prioritized based upon the available funds.

The projects are next divided into priority groups — i.e., those which are urgent and for which efforts should be made to find funding; those which should be completed as funds become available, and so on. Projects with existing funding, from enterprise funds, should also be evaluated. The next step is to actually decide on what will be funded.

Step 3. Prepare and Recommend a Capital Plan and Budget

The selected projects, plans, timelines, and financing summaries are then compiled and presented for approval to the elected officials. Modern visualization technology helps when presenting this complex, three dimensional capital improvement plan, with all of its individual capital projects, studies and equipment purchases, in an understandable and user-friendly manner. The governing body conducts hearings, workshops, and other outreach efforts to insure all stakeholders and interested parties can provide feedback.

Performance indicators and project development milestones should be developed for the recommended capital plan for subsequent reporting purposes. Project management and performance indicator systems are important capital budget implementation tools.

Step 4. Adoption of the Capital Budget

The CIP’s first year becomes the Capital Budget. There are three ways that the projects in the capital budget can be approved:

  • Adopt an annual capital budget: This method funds projects only a year at a time with the funds needed for the project for that year.
  • Adopt the capital budget with the entire amount for every project approved in that fiscal year, regardless of whether it will be spent that year: In addition, carryover funds for capital projects from one year are usually put into the next year’s budget and approved again by the elected officials.
  • Approve a bond financing and authorizing the project(s).

Conclusion

A capital improvement plan (CIP) is a dynamic community planning and fiscal management tool used to coordinate the location, timing, and financing of capital improvements over a multi-year period. It is critically important and one of the major responsibilities for a government entity. The CIP is a working document and should be reviewed and updated annually to reflect changing community needs, priorities, and funding opportunities to ensure that the infrastructure exists to advance the community’s strategic and long-term goals and objectives.