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CHAPTER 2. Capital Improvement Programming Basics

This chapter reviews basic capital improvement programming concepts required to understand the overall content of a CIP with an emphasis on the transportation component. The chapter consists of five sections. The first section provides a definition of capital improvement programming and capital improvement as those terms are used in this primer. The second section describes the main elements of a CIP. The third section presents the purpose, objectives, and uses of a CIP. The fourth section discusses the legal framework and authority governing the development and adoption of a CIP. Finally, the fifth section defines and describes the common value capture techniques used as funding sources in CIPs.

2.1 Definitions of Terms Used in This Primer

2.1.1 Capital Improvement Programming

Capital improvement programming is the multiyear scheduling of capital improvements based on available fiscal resources and the community’s desire for specific improvements. The CIP is the result of completing the capital improvement programming process. A CIP entails a capital program and a capital budget. A capital program is a planning and fiscal management tool that provides a schedule for cost and funding of all capital projects that are programmed for the next 5 to 10 years. The first year of a CIP becomes the recommended capital budget for the next fiscal year.⁹ However, it is not legally binding in that the local government is under no obligation to abide by the revenues and expenditures projected for years beyond the first-year capital budget. The recommended capital budget will typically be submitted to the local government’s governing body for its review and adoption in conjunction with the operating budget.

2.1.2 Capital Improvement

A capital improvement (also known as a capital project) is an undertaking that involves the construction or purchase of a new permanent physical structure or a utility system to satisfy new community needs. A capital improvement also may involve the renovation of existing physical infrastructures to increase their service life and continue satisfying current community needs.³ Examples of capital improvements are streets, utility systems, bridges, or roadways, among others.

The execution of a capital project may require purchases of land or special equipment. If these purchases are required to execute the project, they are considered to be capital purchases and will be included in the CIP. For example, the construction of a roadway section requires the purchase of land for the right-of-way and special equipment (e.g., traffic lights and traffic control devices). In this example, the purchase of land and special equipment can be considered capital purchases and should be included in the CIP.

Other equipment purchases that are related to a capital project but are not required for its execution are generally considered to be operating expenses. Consequently, they should not be included in the CIP but in the operating budget. However, the definition of a piece of equipment required for the execution of the project may vary across communities. A clear example is the construction of a bus station. For some communities, the purchase of buses should be considered a capital purchase, because without buses, the station cannot operate. However, other communities may consider that the purchase of buses is not required to complete the construction of the station, and consequently they should be included in the operating budget. In general, if a small equipment purchase can be easily absorbed by the operating budget, the equipment is not included in the CIP but rather in the operating budget. In addition, large non-recurring operating expenditures (e.g., equipment over $25,000) that have a minimum useful life span (e.g., 5 years) are normally included in the CIP for better fiscal planning.

2.2 Elements of a CIP

The CIP consists of four elements: narrative, prioritized list of projects and cost estimates, funding sources, and project detail form. This section describes the content of each element.

2.2.1 Narrative

The CIP narrative consists of the overall narrative and the narrative in the sections that contain the capital projects of each department. This document emphasizes the capital projects of the transportation department section.

The contents of the overall narrative may vary across communities. However, the most frequent ones are:

• Purpose and objectives of the CIP.
• Background information of the community and the local government responsible for the CIP.
• Definitions of terms that are used in the document (e.g., capital project, capital equipment, funding source).
• Description of the CIP process and criteria followed to prioritize projects.
• Scoring matrix of submitted projects.
• Definition of available funding sources and the provision of revenues for the next fiscal year and future years.
• Definition of priority areas that need significant capital investments.
• Summary of projected expenditures by department (to be adopted for the next fiscal year and endorsed or estimated for future years).
• Summary of funding sources to pay for the projects (to be adopted for the next fiscal year and endorsed or estimated for future years).
• Impact of the implementation of CIP projects on the operating budget.
• Description of funded projects. This information is normally included in the overall narrative if the CIP does not include a narrative for each department section.

The narrative of the transportation department section may not be present in all CIPs, particularly in the CIPs of small communities. If it exists, the transportation department section normally includes the following contents:

• Department mission, vision, values (e.g., equity, safety, mobility, sustainability, livability, excellence), and priorities.
• Summary of transportation assets.
• Objective of the transportation department.
• Relationship among projects.
• Summary of key areas for improvement, including costs (e.g., street paving and resurfacing, pedestrian master plan investments, bicycle master plan investments, transit projects, freight projects, bridge and structures projects).

List of revenue sources and estimated revenues.

2.2.2 Prioritized List of Projects and Cost Estimates

The prioritization of projects to be included in a CIP is a critical step in the capital improvement programming process. The CIP should be consistent with the comprehensive plan’s land use policies and infrastructure recommendations. In practice, however, with comprehensive plans and local transportation plans becoming more policy-oriented, they rarely identify all the specific projects that may be proposed for a CIP.⁴ In addition, some communities may have comprehensive plans that are out-of-date, or that may still be under preparation or being updated. For this reason, it is becoming common to use prioritization criteria that use a combination of diverse qualitative and quantitative criteria. Some examples of general criteria include public safety, satisfies a critical need, or would be of benefit but not essential. Some examples of criteria used for the transportation component include safety improvements, multimodal benefits, contribution to policy focus areas, connectivity, and stakeholder support. The capital projects with the highest scores are included in the CIP. However, not all CIPs necessarily provide the list of capital projects in order of priority or the score obtained by each project.

The CIP provides costs for all projects for the next 5 to 10 years. The way that project cost information is provided is very similar in all CIPs. Specifically, the CIP provides the costs from life to date (i.e., the costs that have been incurred by each ongoing project in prior years, since the project commencement and through the most recent budget year), costs for the next fiscal year (also called “current year” in some CIPs), and estimated future costs for each capital project. Some of the projects included in the CIPs may have started years ago, some of them will start in the next fiscal year, and others will start in future years. Table 13 in the appendix provides an example of how a project funding summary form is used to present a project’s costs in a CIP.

2.2.3 Funding Sources

The CIP mentions the amount of economic resources provided by different funding sources, for each project, from life to date, for the next fiscal year, and for future years. Only funds for the next fiscal year are secured if the recommended capital budget is adopted. Funds for future years are not secured but they can be already allocated, or not, from different funding sources.

In most cases, the funds for a capital project come from a mix of funding sources and financing mechanisms that may include Federal funds, State funds, and local funds (see Table 14). Table 14 in the appendix provides an example of how a project funding summary form is used to present a project’s funding sources in a CIP.

2.2.4 Project Detail Form

The project detail form provides the most detailed information about each project included in the CIP. Project detail forms are normally located in the transportation department section. The information contained in each project detail form may vary across communities. However, the most frequent fields in this form are the following:

• Project name and identification: Name and unique number identifying the project.
• Project description: Information about the purpose, scope, and history of the project.
• Project justification: Reasons why the project should be executed and the expected impact.
• Project start/end date, current project stage, and timeline.
• Location: Street address, intersection, or general location of the project. Some CIPs also include other location information, such as the neighborhood district or the council district.
• Total expected project cost.
• Expenditures: Information about how expenditures are distributed among project components
  (e.g., design, construction, equipment acquisition) from life to date, for next fiscal year, and for future years.
• Funding sources: Amount of funds provided from each funding source from life to date, for next fiscal year, and for future years.
• Secured funding: Portion of the project cost that has committed funding.
• Unsecured funding: Portion of the project cost for which funding sources need to be determined.
• Operations and maintenance costs: Estimated increases or decreases in costs as a result of the execution of the capital project.

Figure 1 shows an excerpt of a project detail form extracted from the CIP of the City of Shoreline, Washington.¹¹ STIPs and TIPs have different requirements, but the basics are very similar.^[iii]

Figure 1. Project Detail Form Excerpt, City of Shoreline, Washington¹¹

The figure presents an example of a project detail form extracted from the City of Shoreline CIP. The figure consists of text, a table, and a map. The text provides the project description and service impact. The table presents past, present, and expected project expenditures and revenue sources. The table also presents the expected project timeline. Finally, a map located on upper left side of the figure shows the project location.

Project Description: This project will provide mobility and safety improvements to users of the N 175th Street corridor. Planned improvements include reconstruction of the existing street to provide two traffic lanes in each direction, a center lane with two-way left turn areas, medians and turn pockets, bicycle lanes (integrated into the sidewalk), curb, gutter, and sidewalk with planter strip where feasible, illumination, landscaping and retaining walls. Intersections with high accident rates will be improved as part of this as well project. Grant funding of approximately $3.5 million was awarded in 2016. Preliminary design will begin in late 2018. Service Impact: This project will improve the safety and mobility of pedestrians, people with disabilities, transit users and drivers and provide better access to the school, park and ride lot, park and residents located along the corridor.

Changes from the 2018–2023 CIP: Project start delayed until 2018.

Table 6: Project Detail Form Excerpt, City of Shoreline, Washington

N 175TH ST–STONE AVE N to 15 ORGKEY: 2916339 J.L.# ST 269600 PHASE	PRIOR-YRS	2018CB	2018YTD	2018E	2019E	2020E	2021E	2022E	2023E	2024E	6-YEAR Total	TOTAL PROJECT
PROJECT EXPENDITURES:
1. PROJECT ADMINISTRATION		1,640,000	720	50,000	1,200,000	2,400,000	450,000				4,050,000	4,100,000
2. REAL ESTATE ACQUISITION
3. CONSTRUCTION
TOTAL PROJECT EXPENDITURES		1,640,000	720	50,000	1,200,000	2,400,000	450,000				4,050,000	4,100,000
REVENUE SOURCES:
FEDERAL - STP		1,418,600		43,250	1,038,000	2,076,000	389,250				3,503,250	3,546,500
TRANSPORTATION IMPACT FEES		221,400		6,750	162,000	324,000	60,750				546,750	553,500
TOTAL PROJECT REVENUES		1,640,000	720	50,000	1,200,000	2,400,000	450,000				4,050,000	4,100,000
1% FOR PUBLIC ART ELIGIBLE (Y/N)	ELIGIBLE (Y/N)
PROJECT TIME LINE:				2018E	2019E	2020E	2021E	2022E	2023E	2024E
PROJECT ADMINISTRATION				Q1 Q2 Q3 Q4	Q1 Q2 Q3 Q4

2.3 Purpose, Objectives, and Applications of a CIP

2.3.1 Purpose and Objectives

The purpose of a CIP is to connect capital improvement needs with the financial resources available. Capital projects contained in the CIP are selected based on a set of priorities established by the community according to its current and expected financial status. In other words, the purpose of the CIP is to coordinate community planning, financial capacity, and physical development. As a result, the CIP reduces the risk of unnecessary capital expenditures generated by poorly planned approaches.

In general, the main objectives of a CIP are:^{9 1}

1. Implement comprehensive plan goals.
2. Ensure timely construction of new infrastructure, or renovation of existing infrastructure, to provide the level of service standards identified in the comprehensive plan.
3. Identify funding sources for each capital improvement.
4. Provide a baseline (recommended capital budget) for the annual budget.
5. Coordinate capital and operating budgets.
6. Create transparency around the process of selection and funding of capital projects considering public inputs.
7. Inform the public about future needs and capital improvements.

However, for local governments located in metropolitan areas, the pattern of intergovernmental relationships has significant effects on the local CIP process and its objectives. Most metropolitan areas include many separate municipal governments, counties, special districts, and other agencies that build critical facilities and infrastructure, including highways and transit systems. These key facilities can trigger, accelerate, or decelerate the speed and pattern of urban development.⁴ When it comes to metropolitan transportation networks, metropolitan planning organizations have a critical role in coordinating planning and development, and more importantly, the distribution of Federal and State transportation funds for regionally significant projects. As a result, another critical objective of the CIP process is to coordinate its transportation priority projects with those reflected in metropolitan transportation plans and TIPs, to ensure that they are eligible for Federal and State transportation funds and that these funds are available at the time of execution of the project.

2.3.2 Uses – Annual Budgets and Implementation of Medium- and Long-Term Plans

Comprehensive plans establish the guidelines for what a community aims to achieve in the next 20 to 30 years. It is a recommendatory document that defines a community’s vision and identifies challenges, solutions, and guidance to implement this vision. On the other hand, transportation plans identify the location and type of transportation facilities that are needed to meet projected long-term growth within the community over the next 10 to 20 years. Some examples of mode-specific plans are regional transportation plans, multimodal plans, bicycle or pedestrian plans, or streets master plans. All transportation plans should follow the guidelines established by general and comprehensive plans.

Comprehensive plans and local transportation plans do not provide a list of projects to be executed within a certain timeframe and a fiscally constrained budget. Therefore, they rely on other tools for their implementation. In this regard, the CIP is a planning and fiscal management tool available for local governments for the implementation of comprehensive and transportation plans. The CIP should be consistent with the policies and infrastructure recommendations defined by these plans. In fact, major new improvements in the CIP that are not reflected in comprehensive and transportation plans should be preceded by an update of these plans.

As noted earlier, the CIP also is used as a tool to identify capital needs in advance so the projects that are expected to rely on State or Federal transportation funds are also reflected in metropolitan and regional planning documents. Section 3.1 discusses in more detail the relationship between the CIP and metropolitan or regional planning documents.

Finally, the CIP is also used in the development of the annual budget of the local government. The annual budget has two elements—a capital budget and an operating budget. As mentioned earlier in this section, the first year of a CIP becomes the recommended capital budget for the next fiscal year. Moreover, the CIP frequently provides an estimation of the impact that the execution of each capital project will have on the operating budget. This fiscal information will be incorporated in the process of reviewing and adopting the annual budget.

2.4 Legal Framework

State and local laws, rather than Federal laws, govern the adoption and implementation of a CIP. Not all local governments are required by State law to adopt a CIP. Most local governments choose to adopt one because of its significant benefits as a planning and financial management tool. Nevertheless, the State statutory framework for adopting a CIP will be relevant for some communities that may want to consider the use of value capture as a funding source. More specifically, some States do require the adoption of a CIP before local governments are allowed to assess an impact fee, and some statutory frameworks are very specific as to how impact fees are to be estimated in the context of the CIP. The paragraphs that follow summarize the statutory framework for the adoption of CIPs by local governments across several States, and describe some of the common legal requirements for CIPs that some States have with regard to the use of impact fees as a funding source.

2.4.1 State Statutory Authority for Local Governments to Adopt a CIP

The legal framework and authority governing the development and adoption of a CIP by local governments are generally found in State laws dealing with local government planning and budgeting. As a result, the requirement to adopt a CIP varies widely from State to State, ranging from not requiring one from local governments in some States, to explicitly or implicitly requiring local governments to adopt a CIP under certain circumstances.

This is illustrated by the following examples:

• Oklahoma encourages (but does not require) all local government units to adopt a CIP.^[iv]
• In New Hampshire municipalities where the planning board has adopted a master plan, the local governing body may adopt a CIP.^[v]
• Texas and Oregon only require local governments to adopt a CIP when they intend to assess impact fees (Texas) or system development charges (Oregon) to pay for capital improvements or facility expansions.^{[vi], [vii]}
• Washington State requires local governments with a population above certain levels to implement
  a comprehensive land use and development plan, which in turn requires a 6-year capital facilities plan.^[viii]
• Tennessee requires counties that want to levy a tax on residential development to pay for the cost of school facilities to adopt a CIP.^[ix]
• Georgia law does not require a CIP, but it requires that all local governments adopt and operate under a project-length balanced budget for each capital project fund.^[x]

In practice, despite the fact that not all local governments are required by State law to adopt a CIP, many of them do it because of its significant benefits as a planning and financial management tool. The examples listed above also indicate that in States where adopting a CIP is explicitly required (Oregon, Texas, and Washington), the requirement is generally connected to indicators of development, population, or urbanization within the local government jurisdiction. The more developed and urbanized a jurisdiction is, the larger the cost and complexity of the capital projects that it requires to serve its population, and the stronger the need to borrow money and repay it over several years. Having a CIP is a vital tool for local governments that are required to plan and deliver on large, multiyear capital investments, while meeting balanced budget requirements that demand strict fiscal and
budgetary discipline.

2.4.2 What Are the Common Legal Requirements for a CIP?

As noted in the previous section, not all States require local governments to adopt a CIP. In those States that require a CIP from local governments, the statutory requirements that the program must meet vary significantly in the level of detail and the parts of the CIP process or program content they address, as illustrated in Table 6.

For most local governments, the detailed legal requirements for adopting a CIP are laid out in their local ordinances, which provide additional direction to the CIP process and the contents of the program. Although the legal requirements governing the CIP process and the contents of a CIP are community specific, they generally conform to the content elements listed earlier in Section 2.2 of this chapter and to the process described in Chapter 3.

Table 7: Select CIP State Statutory Requirements Highlights (TN, TX, OR, and WA)

State	Select CIP State Statutory Requirements
Tennessee[xi]	The CIP must include a proposed schedule of future capital projects, listed in order of construction priority, together with cost estimates and the anticipated means of financing each project requiring the expenditure of public funds, over and above the annual local government operating expenses, for the purchase, construction, or replacement of physical assets.
Texas[xii]	A local government that chooses to enact an impact fee must adopt a CIP. Must use qualified professionals to prepare the CIP. The CIP must contain specific enumeration of the following: A description of the existing capital improvements within the service area and costs to upgrade, update, improve, expand, or replace them to meet existing needs and usage, and stricter safety, efficiency, environmental, or regulatory standards prepared by a qualified professional engineer licensed in Texas. An analysis of total capacity, the level of current usage, and commitments for usage of capacity of the existing improvements, prepared by a qualified professional engineer licensed in Texas. A description of the capital improvements or facility expansions and their costs necessitated by and attributable to new development based on approved land use assumptions, prepared by a qualified professional engineer licensed in Texas. A table establishing the level or quantity of use, consumption, generation, or discharge of a service unit for each category of capital improvements or facility expansions, and a conversion table establishing the ratio of a service unit to various types of land uses, including residential, commercial, and industrial. The total number of projected service units necessitated by and attributable to new development based on approved land use assumptions and calculated in accordance with generally accepted engineering or planning criteria. The projected demand for capital improvements or facility expansions required by new service units projected over a reasonable period of time, not to exceed 10 years. A plan for awarding credits for future property tax and utility service revenue generated by new service units during the CIP period.
Oregon[xiii]	A local government that chooses to establish a system development charge shall prepare a capital improvement plan, public facilities plan, master plan, or comparable plan that includes a list of capital improvements that the local government intends to fund with improvement fee revenues and the estimated cost, timing, and percentage of costs eligible to be funded by the improvement fee for each improvement. If a system development charge will be increased by a proposed modification of the list to include a capacity-increasing capital improvement, the local government shall provide a 30-day notice of the proposed modification to the persons who have requested written notice. The local government shall hold a public hearing if it receives a written request for a hearing within 7 days of the date the proposed modification is scheduled for adoption. A public hearing is not required if a written request is not received.
Washington[xiv]	The capital facilities element of a comprehensive plan must include the following: 1) An inventory of existing capital facilities, including the location and capacity of each facility. 2) A forecast of future capital facility needs. 3) A 6-year capital plan for financing and a forecast of projected funding capacities based on the revenues available. The local government must update the plan biennially so that financial planning remains sufficiently ahead of the present needs.

2.5 Common Value Capture Techniques Used for Transportation Improvements

The value capture techniques most commonly used as funding sources in CIPs are impact fees, special assessments, transportation utility fees, and tax increment financing. The following paragraphs briefly describe each of these value capture techniques.¹⁰

2.5.1 Impact Fees

Impact fees (also known as system development charges) are a one-time charge to developers to help pay for existing or new transportation infrastructure that will serve new developments. Impact fees are funding sources that allow local governments to obtain funds before the execution of the project starts. Generally, impact fees are a requirement for developers to obtain the obligatory permits to start the development of a new area. In general, impact fees face no public resistance since they do not affect taxpayers directly, although they may face developer resistance. The development and adoption of a CIP is a requirement to use impact fees in some States, such as Texas and Oregon.

2.5.2 Special Assessments

Special assessments are fees and taxes charged to property owners located within a designated area or district to pay for capital improvements that benefit the district. Special assessments have the potential for generating high revenues over the years. However, these revenues are not available immediately, and are instead collected over time. That is why some local governments use special assessments as backing for financing mechanisms to obtain immediate funds to pay for the improvements. Special assessments may face public resistance since they involve new taxes and fees for real property owners in a district. Road districts, public improvement districts, and parking benefit districts are some examples of special assessments used to fund transportation projects.

2.5.3 Transportation Utility Fees

Transportation utility fees (TUFs) are primarily used by local governments to fund roadway operation and maintenance activities that extend the service life of the infrastructure, saving the taxpayers’ money. TUFs are also called street maintenance fees, roadway maintenance fees, transportation maintenance fees, transportation user fees, or street utility fees. In general, the revenue potential of TUFs is low. However, it is often enough to fund roadway operation and maintenance activities. TUFs may face certain public resistance since they involve new fees for residents or property owners.

2.5.4 Tax Increment Financing

Tax increment financing (TIF) is a value capture technique that captures some or all of the incremental property value increase attributed to a capital improvement implemented in a certain area to fund the cost of this improvement. TIF has the potential for generating high revenues over the years. However, just like special assessments, these revenues are not available immediately, and are instead collected over time. That is why some local governments use TIFs as backing for financing mechanisms to obtain immediate funds to pay for the improvements, while others use the funds on a pay-as-you-go basis. In general, TIF faces little public resistance since it does not involve additional taxes.

Footnotes

^[iii] Table 16 and Table 17 in the appendix provide complete examples of project detail forms extracted from the CIPs of the City of St. Paul, Minnesota, and the City of Shoreline, Washington, respectively^{38 11}

^[iv] 62 OK Stat § 62-912 (2019).

^[v] NH Rev Stat § 674:5 (2019).

^[vi] Texas law uses the term Capital Improvements Plan instead of Capital Improvement Program. TX Local Govt Code Ch. 395 (2019).

^[vii] OR Rev Stat § 223.309 (2019).

^[viii] The population levels of local governments for which a comprehensive plan is required include counties that have both a population of 50,000 or more and whose population has increased by more than 17percent in the previous 10 years, and the cities located within such a county; and any other county regardless of its population that has had its population increased by more than 20 percent in the previous 10 years, and the cities located within such a county. WA Rev Code § 36.70A.040 – 36.70A.070 (2019), and WA Admin Code 365-196-415.

^[ix] TN Code § 67-4-2901 – 67-4-2913 (2019).

^[x] GA Code § 36-81-3 (2019).

^[xi] TN Code § 67-4-2901 – 67-4-2913 (2019).

^[xii] Texas law uses the term Capital Improvements Plan instead of Capital Improvement Program. TX Local Govt Code Ch. 395 (2019).

^[xiii] TN Code § 67-4-2901 – 67-4-2913 (2019).

^[xiv] Texas law uses the term Capital Improvements Plan instead of Capital Improvement Program. TX Local Govt Code Ch. 395 (2019).

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