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Chapter 1. Introduction

A capital improvement program or plan (CIP) is widely considered to be one of the most valuable tools that a local government has to ensure that it invests its limited financial resources in the best possible way to achieve the community’s plans and vision. A CIP is a fiscal planning tool developed through a process called capital improvement programming. The terms capital improvement programming and capital improvement planning are often used interchangeably. The former has been in use the longest and has the most widespread use, and as a result, it is used throughout this document.^{2 3 4}

The CIP contains the scheduling of public physical improvements (including transportation improvements) over a period of several years (generally 5 or 6 years). This schedule of improvements is developed based on an analysis of funding sources and the specific improvements the community chooses to build. A CIP can be very useful in identifying the need for capital investments, their magnitude, and sources of funding.

The requirement to adopt a CIP varies widely from State to State, and even in States that have a requirement, it may not apply to all local government units. Some States require local governments to develop and implement a CIP before they can levy impact fees or some forms of taxes (see Chapter 2 for more details). In practice, many local governments choose to adopt a CIP not only because State law requires it, but also because it provides significant benefits as a planning and financial management tool.

Because most capital improvements involve the disbursement of large amounts of funds that are difficult for local governments to make through single annual appropriations, a number of funding sources and financing techniques have evolved to allow local governments to pay for capital improvements over several years. These include funding sources, such as:

• Current revenue (e.g., general taxation, fees).
• Debt instruments (e.g., general obligation and revenue bonds).
• State and Federal grants.
• Value capture techniques (e.g., tax increment financing, special districts, special assessments).

Table 4 discusses some of the most commonly used funding methods by local governments in a CIP in more detail.

Value capture techniques generate funding for infrastructure by “capturing” some or all of the value produced by public investment within an area in the form of economic development (e.g., increased property values, land development, employment, sales). Local governments have used value capture techniques for many years to fund different types of local infrastructure improvements. However, the use of value capture to generate funds for transportation infrastructure is relatively new.

The audience of this primer includes two groups of practitioners. The first group consists of practitioners from communities that do not currently have a CIP but that are considering whether to adopt one in the near future. The second group comprises practitioners from communities that already have a CIP but are interested in learning how value capture techniques could generate funding for critical transportation projects. Broad capital expenditures of all types are included in a CIP. This primer provides practitioners with an overview of the most important elements of a CIP and the capital improvement process, with an emphasis on the use of value capture techniques for the transportation component of the CIP.

Practitioners familiar with transportation planning will notice the many parallels between the development of a CIP for a local government and the development of a metropolitan transportation improvement program (TIP) for a metropolitan planning organization, and a statewide transportation improvement program (STIP) for a State department of transportation. In fact, the TIP and STIP are critical for the development of the CIP in that the eligibility of a CIP’s transportation projects for State and Federal transportation funding sources is tied to the projects being part of the adopted regional plans.

This chapter introduces capital improvement programming in the context of its role in achieving a community’s vision, and the different value capture techniques that can help generate funds to implement the transportation component of the CIP. The chapter then closes with a summary of the structure of this primer.

1.1 The Comprehensive Plan and the Capital Improvement Program

A comprehensive plan (also known as a community plan, master plan, or general plan) is a long-range blueprint that establishes the guidelines for what a community aims to achieve in the future.⁵ The comprehensive plan is the cornerstone of community planning efforts. It is a document that defines a community’s vision and identifies challenges, solutions, and recommendations to implement this vision.⁶ The comprehensive plan is a living document used by local governments during the planning process. Communities typically update their comprehensive plans periodically (e.g., every 5 to 10 years) to reflect changes in the community’s needs. In most cases, a comprehensive plan provides guidance for a period of 20 years or more.

A comprehensive plan is usually divided into elements, which may vary from community to community. The elements in a comprehensive plan commonly include the following:^{7, 8}

• Population
• Transportation
• Public facilities/infrastructure
• Natural and cultural resources
• Housing
• Economic development
• Intergovernmental coordination
• Capital improvements
• Public health
• Energy
• Community characteristics
• Land use
• Priority investments
• Other elements, such as the revitalization of a certain area of the community (or improving the relationship with neighboring cities)

For each of its elements, a comprehensive plan covers:

• Existing conditions.
• Goals and objectives specific to the element.
• Initiatives or strategies that need to be implemented to achieve the goals and objectives.

The implementation of a comprehensive plan involves capital improvements. Capital improvements refer to the construction, purchase, or major renovation of buildings, utility systems, or other physical structures. The CIP lists capital improvement needs in order of priority, identifies funding sources and financing mechanisms (see Table 4), and provides a schedule for their implementation over multiple years (commonly 3 to 6 years, but sometimes up to 10 years).³ The CIP is a powerful tool to implement a community’s comprehensive plan, and as such, it should be consistent with the plan’s land use policies and infrastructure recommendations. Just as a comprehensive plan has different elements, the CIP has multiple elements or departmental sections (e.g., culture and recreation, public utilities, transportation). This primer focuses on the transportation element section of the CIP.^[i]

Table 4: Common CIP Funding Sources and Financing Mechanisms⁴

Technique	Definition
Current Revenue (pay as you go)	“Pay as you go” refers to the financing of improvements using current revenues, such as general taxation, fees, and service charges.
Reserve Funds	Reserve funds are monies that are accumulated in advance for the purpose of infrastructure construction or equipment purchases. The accumulation may result from excess current revenue, funds in depreciation reserves, or the sale of assets.
General Obligation Funds	This funding technique refers to debt backed by the full taxing power of the local government. Municipalities can use general obligation bonds to pay for permanent improvements, such as schools, municipal buildings, parks, and other public facilities. Issuing general obligation bonds may require voter approval.
Revenue Bonds	These bonds are frequently sold to pay for projects that produce revenues, such as water and sewer systems.
Lease-Purchase	This method involves a local government preparing specifications for an improvement that is constructed by a private company. The facility is then leased to the local government for a period of time at the end of which the facility can be conveyed to the local government.
Special Assessments	This method is often used to pay for public investments that benefit particular properties more than benefiting the public at large. Some examples of improvements financed by special assessments include street paving, curbs, streetlights, sanitary sewers, and water mains.
State and Federal Grants	These grants are from State or Federal governments for specific programs in areas such as economic development, housing, and transportation.
Tax Increment Financing (TIF)	A TIF is typically used to raise funds for upfront public improvements in an area where large-scale development or redevelopment is possible. A TIF district is designated around the proposed improvement with a tax base equal to the value of all real property within the area. The TIF district uses incremental tax revenue on future gains in real estate values over and above the value of the district’s tax base when it was created to pay for the public improvements.
Public-Private Partnerships	These are contractual arrangements between a local government and a single private sector entity in which the private entity is responsible and financially liable for performing all or a significant number of functions in connection with the project. Some of the most popular partnerships include full privatization, where a facility is built, operated, and owned by a private company, and cost sharing (also called joint development), wherein a developer pays for some facilities and the public pays for others.

It is important to update and review the CIP regularly. A common practice is every 1 or 2 years. Certain local governments may decide to review the CIP only when major capital improvements are needed. However, this practice may significantly reduce the benefits of having a CIP. The main benefits of a CIP that is properly developed and regularly updated include the following:⁹

• Facilitates the development of the annual budget by recommending a capital budget and providing an estimated impact of capital improvements on the operational budget.
• Plans financial resources over the next 5 to 10 years, avoiding duplicate expenditures across departments.
• Improves the delivery of capital improvements by identifying comprehensive packages of funding sources, which may be a mix of traditional funding sources and value capture techniques.
• Increases the opportunities for accessing Federal and State funds.
• Prioritizes capital improvements according to the comprehensive plan, thereby facilitating its implementation.
• Coordinates the execution of different capital improvements in terms of schedule and funding.
• Increases transparency by informing the public about how taxpayers’ money will be used to pay
  for capital improvements.
• Monitors the progress and expenditures of capital improvements, reducing the risk of
  costly mistakes.
• Balances community desire for capital improvements with fiscal capacity.

1.2 Role of Value Capture in Facilitating the Implementation of a CIP

Funding sources and financing mechanisms are a critical component of a CIP because they constrain the number and scale of the improvements that a local government can reasonably deliver. The CIP identifies the specific funding sources and financing mechanisms needed to carry out each project, allowing local governments to leverage different funding sources to deliver critical projects for their communities in a timely manner.

As noted earlier, the use of value capture as a funding and/or financing mechanism for transportation is relatively new. Value capture techniques can be classified in six categories, and the names of each technique may change from State to State and from community to community. Table 5 lists the value capture categories and discusses some of the most common techniques used for transportation funding within each category.

Table 5 also notes whether each value capture technique is generally used as a funding mechanism only or as a financing mechanism, or as both. It is important to highlight the difference between funding and financing. Funding refers to available sources to pay for a certain infrastructure investment. On the other hand, financing refers to the set of arrangements that ensure there is enough cash upfront or during appropriate project phases to pay for the capital costs. Financing techniques allow local governments to leverage future revenues from different funding sources to pay for the current investment.

Table 5: Value Capture Techniques¹⁰

Category	Technique	Definition
Developer Contributions	Impact Fees	Fees imposed on developers to help fund additional public services, infrastructure, or transportation facilities required due to the new development.
	Negotiated Exactions	Negotiated charges imposed on developers to mitigate the cost of public services or infrastructure required as a result of the new development.
Transportation Utility Fees	Transportation Utility Fees	Fees paid by property owners or building occupants to a municipality based on estimated use of the transportation system.
Special Taxes and Fees	Special Assessments	Fees charged to property owners within a designated district whose properties are the primary beneficiaries of an infrastructure improvement.
	Business Improvement Districts	Fees or levies charged to businesses within a designated district to fund or finance projects or services within the district’s boundaries.
	Land Value Taxes	Split tax rates, where a higher tax rate is imposed on land than on buildings.
Tax Increment Finance	Sales Tax Districts	Additional sales taxes levied on all transactions or purchases in a designated area that benefits from an infrastructure improvement.
	Tax Increment Finance	Charges that capture incremental property tax value increases from an investment in a designated district to fund or finance the investment.
Joint Development	At-Grade Joint Development	Projects that occur within the existing development rights of a transportation project.
	Above-Grade Joint Development	Projects that involve the transfer of air rights, which are development rights above or below transportation infrastructure.
	Utility Joint Development	Projects that take advantage of the synergies of broadband and other utilities with highway rights-of-way.
Naming Rights	Naming Rights	A transaction that involves an agency selling the rights to name infrastructure to a private company.

1.3 Structure of the Primer

This primer consists of six chapters, including this introduction. The remaining chapters are listed below along with a summary of their contents.^[ii]

• Chapter 2 reviews the basic concepts required to understand the contents and structure of a CIP; describes the purpose, objectives, and uses of a CIP; and provides an overview of the legal framework governing capital improvement programming.
• Chapter 3 describes the implementation process of a CIP, covering the guiding documents and plans that provide direction to the CIP, and the typical process of developing and subsequently administering the CIP.
• Chapter 4 discusses the opportunities and challenges associated with developing a CIP from the standpoint of achieving a community’s vision from different perspectives, including public and political acceptance, equity, cost, and administration.
• Finally, Chapter 5 provides summaries of case examples of CIPs for different community sizes (small, medium, and large), with a focus on their transportation component.

Footnotes

^[i] The department that deals with transportation projects in a community can go by different names (e.g., department of public works, department of transportation, department of streets and maintenance).

^[ii] Tables and figures included throughout this document were developed for this primer, except as otherwise indicated.

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