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Capital Improvements Planning

Introduction


Advanced planning for significant capital expenditures can be one of the most important financial management efforts that local governments undertake. Local governments are almost always attempting to balance limited financial resources with needs that exceed available funding. Planning ahead for large capital asset acquisitions is not only prudent financial management but also makes for better and more transparent policy decisions.

While operating budgets focus on current-year costs and revenues, effective capital planning requires governments to take longer-term views, forecasting needs and revenue sources well into in the future. Long-range capital asset planning can be challenging and time consuming—particularly to governments unfamiliar with it—but the benefits are many and worthwhile. 
 

What is a Capital Asset?

 
A capital expenditure is simply the acquisition of a capital asset. A capital asset can be defined as significant property that has a useful life beyond one year and reaches a minimum dollar value, also referred to as the capitalization threshold. Capital assets may include, but are not limited to, items such as land and property, buildings, renovations, vehicles, roads, technology, infrastructure, and other similar things. An important tool that helps provide structure and guidance in the delivery of these projects is a community’s multi-year Capital Improvements Plan (CIP), sometimes called a Capital Improvements Program. 
 

What is a Capital Improvements Plan?


A CIP is an adopted financial plan that identifies and describes recommended future projects, their anticipated costs, how they are proposed to be funded, and schedules when they are to be undertaken. Usually, it is updated and adopted annually. It is important to understand that it is a tool that assists with decision-making. CIPs typically have a three-to six-year time horizon, although it is appropriate in some circumstances to extend a CIP’s time projection years beyond, particularly for large infrastructure efforts like water and sewer expansions.

To appreciate the purpose, value, and limitations of a Capital Improvements Plan, it is important to be aware of the differences between an operating budget, capital budget, and a CIP. An operating budget is a formally established budget for ongoing operating expenses such as salaries and fuel. Usually, they are adopted annually and cover a single fiscal year. A capital budget is a formally established budget for a specific capital asset acquisition such as a new road or library.  In a capital budget, funding is appropriated for a particular purpose, and expenditures are made against it. Capital budgets are separate from annual operating budgets, thereby allowing projects to be implemented across multiple fiscal years without annual re-appropriations. With capital budgets, allocated money stays within the project’s budget after a fiscal year ends, allowing for more flexibility of implementation. Furthermore, this separation allows for the operating budget to cover only actual operating costs. Without this separation, expensive one-time acquisitions would inaccurately and unnecessarily inflate a particular year’s operating budget.
 
A CIP, on the other hand, is not a budget. Rather it is a multi-year financial planning tool designed to assist with capital budgeting. It typically recommends and describes what, how, and when future capital improvements or purchases will be made. It describes which community projects have been identified as likely capital projects and the projected cost for completing each project. The CIP is essentially a statement of intent that a community desires to undertake a capital project at some point in the future. It assists a community with planning for anticipated future expenses and allocating appropriate revenues.
 
In short, a CIP identifies potential projects with estimated cost projections, whereas a capital budget actually allocates specific funds for a defined project during its year(s) of implementation. 
 

Benefits of a CIP

 
The benefits of a well-implemented CIP are numerous and varied. There are significant financial, administrative, and policy benefits that a community can realize. Benefits include, but are not limited to, a) reducing ad-hoc decision-making, b) improving allocation of resources, c) coordinating decision making, d) assisting with project delivery, e) connecting to long-range planning, and f) increasing transparency.

A. Reduces Ad-hoc Decision-Making
Without an adequate plan, decisions tend to be made in an uncoordinated and haphazard manner.  Important but sometimes unexciting projects tend to get overlooked during budget evaluation and development. A CIP helps keep these projects on everyone’s radar. Additionally, new citizens, staff members, elected officials, and others are continually bringing new ideas to the table. Having an adopted multi-year plan improves continuity to project selection and implementation. A CIP allows decision-makers to point to a coordinated plan that has projects in place and a process to get new projects considered. It can reduce the “shiny object syndrome” by focusing on long-established projects instead of the newest idea that comes along. 

Capital projects are usually large and expensive and therefore often very visible to the community. Undertaking a thoughtful, collaborative planning process ensures these projects are appropriately vetted, designed well, and effectively implemented so the money invested in them is well spent.

B. Improves Allocation of Finite Resources
A CIP improves financial predictability and stability. It helps identify major acquisitions, allowing a jurisdiction to plan in advance. This is particularly important for replacement or repair of significant capital assets. Projects can be identified and scheduled to be undertaken as funding permits. Adequate advanced planning allows time to identify potential funding sources and/or make financial decisions based on both needs and revenues. A CIP also assists jurisdictions in saving money and implementing “pay-as-you-go” financing. Additionally, it allows for future operating expenses from potential projects to be identified early and incorporated into long-range financial plans.

Capital projects that call for the use of debt, such as bonds, require special consideration.  Repayment terms should not extend longer than the useful life of the financed project. The commitment of future revenues for debt service obligations impacts the government’s ability to fund future projects—or may require a voter referendum. A well-executed capital budgeting process helps to ensure the government is evaluating long-term decisions about funding and projects.

C. Coordinates Decision-Making
In a well-designed CIP, multiple projects are analyzed and compared against one another. This coordination allows for more effective cross-departmental comparisons and evaluations. In a well-planned CIP, criteria are used to evaluate and rank the need and value of projects. This leads to more informed and effective decision-making by staff and elected officials.

D. Assists with Project Delivery
A CIP also helps with managing and allocating staff resources. Every project to be implemented requires a certain amount of staff resources. A well-designed CIP helps to ensure that projects are spaced appropriately and undertaken in a coordinated logical manner.

E. Connects to Long-Range Plans
Capital projects should be based on overall community goals and needs. Many capital projects are the results of long-range strategic planning efforts completed by the community, such as Comprehensive Plans, Strategic Plans, and other Master Plans. Connecting long-range fiscal planning with these plans increases the likelihood that the goals and visions contained within the plans will actually be implemented.

F. Increases Transparency
Good plans include public involvement efforts to allow for comment and input on potential projects at various times in the process. Citizens should be encouraged to weigh in and influence the plans, thereby increasing program acceptance. Furthermore, well-executed plans also include enough information to adequately describe projects for the average reader after plan adoption. This provides the community with information about the jurisdiction’s goals, plans, and direction.
 

Challenges and Drawbacks


While a CIP provides important benefits, there are some things to consider when drafting and implementing your plan. Challenges include a) staff time and resources, b) worthy projects can get stymied, and c) communities’ expectations can become entrenched.

A. Staff Time and Resources
From project generation to development of cost estimates to economic forecasting, good CIPs require time, expertise, and sometimes money to create. While it is not necessary to have an expansive and detailed CIP, certain minimum efforts must be undertaken to ensure the value of the plan. Adequate staff and/or consultant time is necessary to generate ideas and data to actually produce the document.

B. Worthy Projects Can Be Stymied
While CIPs can help support continuity, unwavering devotion to any adopted plan can at times lead to inflexibility. This can also be true for inflexible CIPs that can unintentionally penalize worthy new projects. Facts and circumstances change and when worthy projects arise, they can and should be evaluated for inclusion in a community’s plan. At times, worthy projects can and should jump ahead of other projects for various reasons. Each year, projects should be analyzed, refined, reprioritized, and sometimes simply eliminated. A CIP should be viewed as a tool for decision-making and not as a substitute for it.

C. Entrenched Community Expectations
CIPs are plans; they should not be static, and adjustments need to be made over time as appropriate. Project estimates made several years in advance may sometimes be inaccurate as the project gets closer to reality due to changes in project scope, unknown facts, general economic conditions, and other factors. This can make future cost estimation tricky. Care should be taken when making estimates, particularly for projects that are expected to be completed multiple years in the future.

Additionally, some projects that appeared worthy at one time may not be desired any longer for whatever reason. Citizens and other interest groups may rely on the CIP too heavily and expect it to be implemented exactly as written. It is appropriate and necessary to review projects and revenues regularly and decide whether projects should be abandoned based on the newest information available. 
 

CIP Process


CIP development often occurs in parallel with, but separate from, the annual budget process. Each community should tailor its process to reflect its own systems and culture. Public involvement can and should occur along the way at any point in time the community or the jurisdiction wishes. In its most basic outline, the following are steps to CIP development and adoption: a) develop CIP policies to guide the process, b) create a list of potential capital projects, and c) adopt the plan.

A. Develop CIP Policies
The first step to developing a CIP for the first time is to create local policies that will guide the plan. After the first year of plan development, policies will need to be reviewed and adjusted accordingly.

1) Define Capital Projects. Perhaps the most fundamental policy question relates to what capital projects should and should not be included in the CIP. Not all capital acquisitions must be included in the CIP. Generally, the more costly the asset, the more likely it is to be included in the CIP. Lower value equipment, even if it has a useful life beyond one year, generally does not warrant special attention and financial planning. As such, the financial value of a capital asset becomes an important criterion and should be established by each community. There is no one right answer; the appropriate financial level depends entirely on the individual community. Smaller communities may find that $5,000 is a suitable amount for inclusion, whereas larger jurisdictions may establish financial thresholds of $25,000 or even more.



2) Length of the CIP. Another important item for consideration is the actual length of time the CIP will project into the future. CIPs typically look between three and six years ahead. If it extends far beyond a six-year period, cost estimating will be increasingly difficult and less reliable. It should be noted that for some specialized CIPs, longer timeframes are entirely appropriate. However, in general, a common CIP length is five years into the future.

3) Create Evaluation Criteria. It is likely that many more projects will be proposed, eligible, and considered than funding will allow. Another challenge is evaluating widely different projects from multiple departments. While this is a useful part of the CIP, it can add complexity. It is important to establish criteria in order to evaluate potential projects, help simplify the process, and improve decision-making. The criteria are sometimes weighted by importance to the community. Eventually each project will be scored against the criteria and ranked.

The following are some potential criteria. However, each community should develop its own as appropriate:
  • It is a mandatory project.
  • It is a maintenance project based on approved replacement schedules.
  • It will improve efficiency.
  • It is mandated by policy.
  • It has a broad extent of usage.
  • It lengthens the expected useful life of a current asset.
  • It has a positive effect on operation and maintenance costs.
  • There are grant funds available.
  • It will eliminate hazards and improve public safety.
  • There are prior commitments.
  • It replaces an asset lost to disaster or damage.
  • Project implementation is feasible.
  • It is not harmful to the environment.
  • It conforms to and/or advances the community’s goals and plans.
  • It assists with the implementation of departmental goals and policies.
  • It provides cultural, aesthetic, and/or recreational value.
4) Establish Review Team(s). In most cases, a larger list of potential projects will be developed than can likely be funded.  Establish review teams to evaluate the projects and develop a single unified list for ultimate consideration by elected officials. There is no one right make-up of review teams. However, they should have access to information and data to make informed recommendations. In some communities, review teams are comprised only of staff members who make recommendations to elected officials. In other cases, citizen committees are created for this specific purpose. In others still, elected officials themselves participate in all stages of the process, including serving as the review team(s). Finally, there can also be a combination of any of the above as desired. Whatever the team makeup, it is important to identify early on who will be tasked with identifying and reviewing the projects. In some larger organizations, multiple review teams are established to look at projects on a department-by-department basis. 

5) Develop a Schedule. After establishing policies to guide the plan, the next step is to develop an overall schedule for project identification, evaluation, and adoption. It generally takes several months to go through the entire process—depending on size and complexity of the eventual CIP. Also, it is important to incorporate public input sessions into the process. This may occur through public hearings, written comment periods, stakeholder meetings and/or other processes. A clearly established and published schedule increases transparency and public acceptance. Additionally, it establishes important deadlines to keep the plan on track.
 
B.  Develop Capital Project List
After policies and a schedule are established, the task of project identification and selection begins. Ultimately, the CIP is simply an adopted list of recommended capital projects and a timeframe for their implementation. However, that list is usually created only after a longer list of potential projects is developed, analyzed, and culled.

1) Identify Potential Projects. Long-range plans, studies, community input, staff and elected officials, and others serve as good sources for potential projects.

Many communities rely heavily on adopted strategic and long-range plans, such as Comprehensive Plans, to begin populating a list of potential projects. Even if a community is fortunate to have detailed long-range plans with many potential projects, actual project descriptions (including scope and cost estimates) must be created. For each potential project, a brief project description should be developed with enough detail explaining it and including a cost estimate.



Some communities also solicit potential projects from citizens. This may be done formally or informally and can provide a good opportunity for additional community input and buy-in.

Often important capital projects, such as large equipment purchases, fall outside of larger strategic planning efforts and should be included. Staff department heads often are asked to identify such projects; include them as well for evaluation by the review team(s) and incorporation into the plan. In such cases, senior staff should evaluate the proposed list and decide what eventually should be submitted to the CIP review team for consideration.
 
It is important to recognize that not every project imaginable should be submitted and analyzed in great detail by the review team. It is a balancing act between thoughtfully analyzing projects and spending time on projects that are unlikely to ever be undertaken.

2) Review and Prioritize Projects. Once a list of potential projects is developed, the submitted projects should be evaluated against an adopted scoring matrix. The review team should meet and go through the potential program. Typically, points are assigned and the projects are ranked accordingly. Be sure to maintain enough flexibility with scoring to allow for unexpected benefits or drawbacks to be taken into consideration when ranking projects. It is impossible to plan for every potential factor and circumstance.


 
3) Develop a Draft Implementation Plan. Project ranking is important, but it does not necessarily determine if and when an actual project will be undertaken. Important real-world factors must be considered in determining an actual plan.

After the review team ranks projects, difficult decisions are often required in order to develop a draft CIP. At this point, there is typically a list of potential projects with cost estimates, but no logical order. The review team must analyze future anticipated revenues, staff workload, potential funding sources, and other important factors to create a multi-year implementation plan. It is important to note that a project’s rank at a particular position does not necessarily mean that it will be completed sooner than other projects. The actual cost of the project, funding sources, and other important intangible factors must be taken into consideration. However, at the end of the day, a single list of prioritized recommended projects broken down by year must be created for consideration.

C.  Adopt a Plan
The CIP should be formally adopted by the local jurisdiction. If elected officials do not participate along the entire way, they will need adequate time to review the information prior to making a decision and adopting the plan.

Work sessions are useful in allowing the review team to present the recommended list to the elected body prior to adoption of the plan. At such meetings, discussions about the process, projects, and other factors can occur. Assumptions and estimates can be discussed. Projects that did or did not make the list can be explained. There can be as few as one, or there can be many work sessions. However, they should be incorporated into the process and scheduled. Ultimately, the governing authority should have a formal vote to consider and approve the plan by formal vote following local procedures and requirements. 


 

A Few Tips


A. Remain Flexible
Over time, not all capital purchases must be specifically listed in the CIP. The CIP should be treated as a tool to assist with decision-making. There will invariably be times when large acquisitions must be made outside of normal budget cycles. This is understandable and acceptable. While it is prudent to review the CIP prior to large acquisitions, not every purchase has to be included in the CIP before it is acquired.

B. Include Disclaimers
Include information for the reader that the CIP is a “plan” to assist with decision making and can change. Individual projects are subject to change, and there is no guarantee that one will be completed either within the recommended timeframe or at all. Furthermore, be sure to include language that indicates that cost estimates are just that: “estimates.” The capital budget for a project is typically adopted outside the CIP process, much further in the future when designs may have been completed, bids have been received, and/or other refined costs are actually known.

C. Use Round Financial Figures
As much as practical and appropriate, use round figures when projecting future costs. This helps convey that the numbers are estimates and subject to change. For example, use an anticipated cost as $100,000 and not $98,436. The more specific the figure, generally the more difficult it is to change in the future. Additionally, where appropriate consider using inflationary figures to help manage cost increases. Over a five-year time period costs can escalate by 25% or more simply due to inflation.

D. Understand that the CIP Will Improve Over Time
Developing a CIP that works for your community takes some trial and error. Start simple. Over time, communities will include more relevant information and delete other information. Taking too big of a leap early on is common, but it can create issues over time, such as including too many projects or projects with incomplete information. 
 

Conclusion


Any community that chooses to utilize a CIP should be commended. The process can appear daunting and cumbersome. However, the benefits are many and worthwhile. Each jurisdiction should expect some setbacks and be prepared to learn from mistakes along the way. There is no single way to develop and implement a CIP as each community must account for local culture, staffing, policies, and procedures. 
CONTACT
If you have questions or comments regarding the publication or if you find any technical problems (i.e. broken links, inaccessible pages, etc.) with the resource, please contact Holger Loewendorf at (678) 686-6246.