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Capital Improvement Planning: The Wonder Years
Brad Larson, Assistant City Administrator, Savage, MN
My family never talked about the CIP growing up, so when I first got into local government, the capital improvement plan was a mystery to me. Sure, I’d heard about it in school, but I didn’t really know what it was. So, when I began my career in local government, I thought the CIP was the part of the budget where you put projects to get funded. Back then, I worked in a planning department and we always had new ideas for a market study or financial assistance program. Our Director would look at us, and ask where is this money going to come from? The CIP of course! Every other department is using it for their projects, why not us? Well, there were two issues with this notion.
- Our projects did not qualify as capital expenses.
- The CIP is not a fund…or a funding source.
Hopefully, by sharing some of my growing pains with ELGL, you will better understand the CIP or come away with ideas to better manage their CIPs.
Let’s quickly address my first error in comprehending the CIP, by addressing what is and is not a capital expenditure. You can refer to the GASB website for a more in depth analysis, but in general, a capital expense is money spent on acquiring or maintaining fixed assets such as land, buildings, or equipment. In my example above, we were not coming up with projects that met those criteria. A financial assistance program is not a fixed asset. It does not have a useful life or depreciate over time. I think it bears mentioning here that my undergraduate degree did not require any accounting classes.
Now let’s address my second error, how the CIP is used. Just by placing a project in the CIP doesn’t get it funded. You need to identify how it will be funded. When I first started my career, I vastly underestimated the complexity of municipal finances. Even small communities can have dozens of different fund types, and each of those funds have different policies. The CIP helps organize and identify those as they are tied to funding capital expenditures.
Now that I’ve worked with different CIPs and public budget documents there are some definite do’s and don’ts for an effective CIP. What makes up a good CIP? A good CIP has a ranking system that explains the need of a project with the ability to finance a project. The CIP should contain a schedule and the funding sources of projects. Lastly, there should be descriptions and justifications of each of the projects. If you are able to organize your CIP in this fashion, the public will better community priorities, how they are going to be financed, and when a project will be built or purchased.
The CIP often gets overlooked as a tool for the public because everyone talks about the budget. But, the budget gives a 5,000 foot picture of your organization. The CIP tells you what projects will be happening in a given year, why they are happening, and how they will be funded. That is what the public really wants to know. If you are looking to bolster your community’s CIP the Government Finance Officers Association (GFOA) has lots of good tips. Here are some of the key points:
- Update your numbers and project descriptions each year. This sounds like a no brainer, but it happens and it can be a project killer. If you’ve had a project sitting in the CIP for 10 years and the original cost estimate has increased by 2-3% each year or the project scope has changed, it’s quite difficult to find additional financing at the last minute. Take the time to review each project scope and adjust numbers accordingly each year.
- Do not use the CIP as a parking lot. Communities usually have more needs than they have the ability to finance. Sometimes it can be hard to resist putting that ball park in year 10 and keeping it there until time runs out. While this may be politically expedient, it may not be wise. If your community is performing debt studies (as they should), a perpetually parked project could be inflating debt numbers and may increase tax rates, utility rates, or other fees.
- Tie your CIP projects to previous planning initiatives. If you spent $x on a feasibility study, or a certain project was identified as a priority through the comprehensive plan, mentioning this in the project justification is a good idea. Not only does this show forethought, but it gives a project more validity. By tying the CIP to earlier planning it also allows a community to better plan for increases in demand and growth.
- Show the operational impacts of the CIP. Operational expenditures belong in the community’s budget, but explaining them here shows that you have thought through the project and it allows elected officials to better make decisions. If you are adding more soccer fields, how does that affect your ability to mow and maintain all the other parks? Do you need to add more staff? Or, is no staff needed because you put the Lamborghini of all riding mowers in the CIP as well?
To recap, the CIP is simply a tool to organize and plan. It can be confusing at first glance, but once you understand its purpose it’s one of the most useful tools in moving a community’s priorities forward. Please share any of your tips for developing or utilizing the CIP in the comments below.