MUNICIPAL CAPITAL
IMPROVEMENT PROGRAM (CIP)
1
A BUDGETING WORKBOOK FOR MUNICIPAL OFFICIALS
“PAY ME NOW OR PAY ME LATER”
Developed by
Kenneth L. Weaver, Ph.D.
Presented by the
Local Government Center
Montana Sate University Extension
PO Box 170535, Bozeman, MT 59717
www.msulocalgov.org
OVERVIEW
I. What is a C.I.P.
● Management Definition
● Legal Definition
II. Steps to Develop a Municipal C.I.P.
1. Majority Decision by Council to Implement C.I.P.
2. Develop Council’s Priority List of Capital Needs
3. Public Participation in Defining Capital Needs
4. Finding the Costs of Capital Equipment
5. Adopt a Funding Strategy
III. Where to Get Help
WHAT IS A C.I.P.?
A Management Definition
A CIP is a Council approved plan to acquire and pay for needed capital equipment
and facilities in a timely and efficient fashion.
You need a CIP simply because your equipment and facilities wear out and must
be replaced. Which is why competent managers of a city or town`s assets should
plan for how best to acquire and pay for replacement equipment and facilities.
As the old cliché goes:
“You can pay me now, or you can pay me later!”
For example, the patrol cruiser that you bought new four years ago now has
250,000 miles on it and needs a transmission that will cost $3,000. Without
the cruiser your cops will be on foot.
Should you fix the transmission and hope that the engine will hold up for a
few more years?
OR
Should you trade it in on a new cruiser, even if that means that you
will not be able to afford the front end loader needed by the street
department and that you promised two years ago?
A Legal Definition
Montana law (7-6-616 MCA) enables a municipal government to create a Capital
Improvement Fund to pay for:
``. . .the replacement, improvement, and acquisition of property, facilities, or
equipment that costs in excess of $5,000 and that has a life expectancy of 5
years or more.
● The law requires the governing body to formalize its intent to create a multi-year
capital plan by adopting a resolution to that effect. A model resolution is provided
below and can be found at page 40 of the Montana Municipal Officials Handbook.
● Importantly, the law provides that the C.I.P. fund may receive money from any
source, including the transfer of any unencumbered fund balances remaining at the
end of the fiscal year.
STEPS TO DEVELOP
A MUNICIPAL C.I.P.
• Step 1 Council Decides to Implement a Multi –Year Capital Plan (C.I.P.)
• Step 2. Develops Council’s Priority List of Capital Needs
• Step 3. Seeks Public Participation
• Step 4. Determines Capital Costs
• Step 5. Adopts a Funding Strategy
STEP 1. COUNCIL DECISION TO IMPLEMENT CAPITAL
IMPROVEMENT PLAN
● Formal adoption of a council resolution to create a Capital
Improvement Fund, as required by 7-6-616, MCA, is probably sufficient
to initiate a multi-year capital plan. The resolution should include
language requiring the executive to develop a listing or roster of needed
capital projects for council consideration.
● If the council cannot agree to adopt such a resolution, there is little
possibility that a multi-year capital plan (C.I.P.) can be developed.
STEP 2. DEVELOP COUNCIL’S PRIORITY LIST OF
CAPITAL NEEDS
● The council must place its stamp of approval and budgetary blessing
on the city/town’s capital priorities.
● BUT, it is the department heads who will have the keenest
appreciation of the adverse impacts caused by deficient capital
equipment or facilities
● AND the mayor will have his or her own sense of the priorities for
funding capital needs.
● BUT in the final analysis, only the council can appropriate the
necessary resources.
STEP 2. PRIORITY LIST OF CAPITAL NEEDS (continued)
● Once the council shows its commitment to the C.I.P. by adopting the
implementing resolution the mayor should require department heads to identify
the capital needs of their departments (police, fire, public works, etc..)
● Using the $5,000 and five year life expectancy as minimum legal criteria for
inclusion on the list of capital needs, the mayor should encourage the department
heads to think beyond the next budget cycle. What are the department’s capital
needs in the next 3-5 years?
● Each item to be listed requires that the department head complete a standard
Capital Requirement Form. This form will be the source document for future
reference by the department heads, the mayor and by the council. It will serve as
the basis for factual comparison of one capital item proposal to all other capital
item proposals in the process of creating a master roster of the city/town’s priority
ranked capital needs.
● The roster of recommend capital needs is then provided to the council for
reference during formal presentations by the mayor and department heads to
explain the need for each capital item.
Capital Requirement Form
•
Department: ______________________________
•
1. Identify the needed capital item:
•
2. Explain why the item is needed:
•
3. Indicate when it will be needed:
•
4. Describe the operational impact on department performance if the item is not
acquired:
•
5. Provide an authoritative estimate of the cost of the capital item:
•
Department Head Signature:______________________ Date: ______________
•
Reviewed by Mayor:_________________
RANK ORDER DECISION MATRIX
● A useful tool for the council in ranking the recommended capital items
is a Rank Order Decision Matrix that systematically and graphically
compares each recommended item to all other capital proposals.
TOWN COUNCIL
CAPITAL FUNDING PRIORITIES
(Individual Council Members)
X
Police
Cruiser
Loader
Computer
System
Park
Benches
Pool Cover
Paint City
Hall
Ranking
Totals
Police
Cruiser
X
1
1
1
1
1
5
Loader
0
X
1
1
1
1
4
Computer
System
0
0
X
1
1
1
3
Park
Benches
0
0
0
X
0
0
0
Pool Cover
0
0
0
1
X
0
1
Paint City
Hall
0
0
0
1
0
X
1
Instructions: If the item in the left hand column is a higher priority than the item in the upper row, enter
a “1”. If it is a lower priority, enter a “0.”
TOWN COUNCIL
CAPITAL FUNDING PRIORITIES
(Tabulation of All Four Council Members Voting)
X
Police
Cruiser
Loader
Computer
System
Park
Benches
Pool Cover
Paint City
Hall
Ranking
Totals
Police
Cruiser
X
4
3
4
4
4
19
1
X
3
4
4
4
16
Computer
System
0
3
X
4
4
4
15
Park
Benches
0
0
0
X
0
0
0
0
0
0
4
X
0
4
0
0
0
4
2
X
6
Loader
Pool Cover
Paint City
Hall
Instructions: If the item in the left hand column is a higher priority than the item in the upper row, enter
a “1.” If it is a lower priority, enter a “0.”
CAPITAL FUNDING PRIORITIES (continued)
● Upon achieving agreement on capital priorities, the council should
adopt a resolution establishing the Roster of Capital Improvement
priorities for funding during the annual budgeting cycle. A model
resolution is shown below.
● Prior to final adoption of the resolution, the Roster should be the
subject of a formal council hearing to enable public participation and
receive public input prior to final council approval of the Roster of
Capital Improvement projects.
RESOLUTION NUMBER 2015-_____
BIG SKY CITY COUNCIL
WHEREAS, effective management of the City’s capital resources requires timely replacement of worn capital
equipment, facilities and materials; and
WHEREAS, Montana law enables the governing body of a unity of local government to
adopt a resolution creating a Capital Improvement Fund for the replacement, improvement
and acquisition of property, facilities or equipment that costs in excess of $5,000 and that
has a life expectancy of 5 years or more; and
WHERE the Big Sky City Council is the governing body of the City of Big Sky,
NOW THEREFORE BE IT RESOLVED BY THE BIG SKY CITY COUNCIL THAT:
1. There is Big Sky Capital Improvement Fund which may receive funds form any lawful source and which may
be disbursed funds for the acquisition by the City of capital equipment, facilities and materials.
2. There is a Roster of Capital Improvement Priorities approved by the City Council incident to the annual
budgeting cycle.
Resolved by the Big Sky City Council meeting in regular session this _____day of
___________ , 2015.
___________________ , Mayor
ATTEST:_____________________
, City Clerk
STEP 3. PUBLIC PARTICIPATION IN DEFINING
CAPITAL NEEDS
• Montana law (2-3-111, MCA) requires that your public be encouraged
and enabled to participate in your significant decisions prior to making a
final decision (in this case adopting the resolution. ) Additionally, public
input into the capital improvement priority rankings may actually be
helpful.
• In short, citizen input concerning your capital priorities is not the only
virtue of a public hearing. Citizen education is valuable in its own right.
• See Chapter 7 of the Montana Municipal Officials Handbook on public
participation by Dr. Paul Lachapelle for tips on how to make the public
hearing a useful learning experience for your citizens and for the council.
STEP 4. FIND THE COSTS OF CAPITAL EQUIPMENT
AND FACILITIES
● The Roster of Capital Priorities must include the authoritatively
determined cost of each item. The department head’s or mayor’s cost
estimate (guess) is just not sufficient to do effective long range capital
replacement planning.
● A commercial supplier of the capital item or service should be asked to
provide the city/town government with a firm estimate of the cost.
Additionally, competitive cost estimates from several suppliers should be
solicited to establish a reasonably reliable and lowest cost estimate.
● It is important to remember that the creation of a CIP does not relieve
your city/town of the legal requirement to advertise for bids for the
purchase of any equipment, vehicles, machinery or materials that cost
more than $80,000 (7-5-4302, MCA). Moreover, the purchase contract
must be let to the lowest responsible bidder after advertisement.
STEP 5. STRATEGIES TO FUND CAPITAL ACQUISITIONS
● Relying on the Year End Fund Balance
This might be called the “rat-hole” strategy since whatever is left over
each year seems to mysteriously disappear into next year’s budget. It
is not a capital plan at all even if needed equipment is funded
occasionally on a catch-as-catch-can basis; e.g. “We’re saving up for a
front end loader.”
● It’s not good budgeting either because it overstates the cash
position of the government and understates the depreciated and
declining value of its capital assets.
STEP 5. STRATEGIES TO FUND CAPITAL ACQUISITIONS
(continued)
Before describing a few alternative capital funding strategies, we need
first to emphasize that funding capital equipment and small facilities is
a different kind of capital replacement problem than upgrading and
expanding basic infrastructure; e.g. the waste water processing plant
and plumbing system or the 100 year old water cistern and its piping.
For most communities, these big ticket infrastructure capital items
generally require grant funding from the state or federal government such
as the Treasure State Endowment Program (TSEP) and Community
Development Block Grant Program (CDBG) combined with local bonded
indebtedness. These large scale (often multi-million dollar) capital projects
deserve their own CIP and dedicated replacement funds associated with
the appropriate enterprise fund such as the water or wastewater funds.
STEP 5. STRATEGIES TO FUND CAPITAL ACQUISITIONS
(continued)
There are several feasible strategies to fund non-infrastructure capital
replacement. Most rely upon debt financing, but one (number 3
below) strategy employs increased revenues dedicated to capital
replacement.
INTERCAP LOAN
The easiest and least costly debt funding strategy available to municipal
governments is a short or long term loan from the INTERCAP Loan
Program administered by the State of Montana Board of Investments. A
loan application format is available on the Board’s web site:
(www.investmentmt.com/content/BondPrograms/Docs/IntercapApp.pdf)
which includes loan requirements, eligible applicants and purposes as
follows:
The loan applications may be used for all INTERCAP loans including short
term loans, General Fund indebtedness, Enterprise debt, General
Obligation debt, Rural Fire District or Service Area loans, and Special or
Rural Improvement District loans. Requirements and terms of the loan
will vary according to the type of loan and repayment funding source.
General Rules for INTERCAP Loans
♦ The INTERCAP program only loans funds to eligible government units (including
city and town governments) as defined under 17-5-1604, MCA
♦ The INTERCAP program is a variable rate loan program.
♦ Interest rates are adjusted on February 16th of each year.
♦ 100% financing is available with no up-front cost, equity, or matching funds
required.
♦ Interest and principal payments are due semi-annually on February 15th and
August 15th.
♦ Current interest rate through February 15, 2015 is 1.00%.
♦ Maximum loan limit is established by eligible government unit’s legal debt limit.
♦ Maximum term of the loan is 15 years or useful life of the project, whichever is
less.
For additional forms and assistance call or E-mail:
Louise Welsh, Senior Bond Program Officer
(406) 444-0891
Lwelsh@mt.gov
Julie Flynn, Bond Program Officer
(406) 444-0257
JFlynn2@mt.gov
BONDED INDEBTEDNESS
Bonded indebtedness combined with state or federal grants is the usual method for
financing large scale infrastructure projects such as the community water or wastewater
systems. However, even relatively small capital projects of less than $1 million are
sometimes funded by either General Obligation (G.O.) Bonds or Revenue Bonds.
● General Obligation Bonds.
General obligation (G.O.) bonds are guaranteed by the full faith and
credit of the local government issuing the bonds.
By pledging the jurisdiction’s full faith and credit the government makes a
legally binding pledge to repay the principal and the interest by relying upon
its taxing authority.
This obligation must therefore be ratified by an affirmative vote of the
citizens before the bonds may be issued.
● Revenue Bonds.
Revenue bonds are not guaranteed by the taxing authority of the local
government issuing the bonds and they are, therefore, somewhat less secure
than G.O. bonds and require somewhat higher interest.
Revenue bonds are backed only by the revenues from fees paid by the users of
the capital facility and therefore do not require voter approval prior to issue.
VOTED MILL LEVY INCREASE
• Montana law (15-10-420, MCA) imposes strict limits upon the taxing
authority of local governments, which may not be exceeded except with
the voter approval.
• Apparently, there are two keys to a favorable electoral outcome on a
voted mill levy:
(1) Community understanding of the government’s purpose in raising
property taxes. An aggressive community education program informing
the electorate exactly what their taxes will be spent for and what results
can reasonably be expected is essential. For example,
“A new front end loader that will cost $50,000 and will enable the
town to fill twice as many potholes in city streets each spring.”
(2) Community trust that the government will adhere to that purpose for a
specified period of time. In short, “sun setting” the tax levy increase after a
period of 5 or 10 years will probably be an important consideration in the
voters’ decision.
VOTED MILL LEVY BALLOT PROCEDURES
● The procedure to place the question of a voted mill levy increase to fund
capital replacement on the ballot is set forth at 7-6-4431, MCA which
provides that:
(1) The governing body of a municipality may raise money by taxation for the
support of municipal government services, facilities, or other capital projects in
excess of the levy allowed by 15-10-420 under the following conditions:
(2) The governing body shall pass a resolution indicating its intent to exceed the
current statutory mill levy limit on the approval of a majority of the qualified
electors. The resolution must include:
- specific purpose for which the additional money will be used;
- specific dollar amount to be raised; and
- approximate number of property tax mills required.
INSTALLMENT PURCHASE CONTRACT
• If the cost of a capital item exceeds $4,000, Montana law (7-5-4306,
MCA) provides that the council may provide for the payment of the
purchase amount in installments extending over a period of not
more than 10 years.
• The lease-purchase procedure is usually set forth as a contract
approved by the council and executed by the mayor between the
city or town and the vender of the capital item.
• When entering into an installment purchase contract, care must be
taken to insure that future installment payments will not place too
much stress on the government`s ability to meet its existing
obligations or to fund its on-going operations.
5. CO-OPERATIVE PURCHASE OF CAPITAL EQUIPMENT
● Several Montana cities and towns have entered into an interlocal
agreement to share the cost of purchasing capital equipment whose
use can be scheduled to meet the needs of the cooperating
governments, (e.g. a street sweeper).
● The authority to enter into an interlocal agreement is set forth at
7-11-104 and 105, MCA, which provides very specific guidance as to
the contents of the interlocal agreement including its purpose,
duration and the method to be employed in terminating the
agreement and the agreed upon disposition of any real or personal
property acquired under the agreement.
● The MSU Local Government Center can provide the names of those
municipal governments employing this strategy as well the names and
addresses of contact person.
CONCLUSION
The purpose of this lesson has been to help newly elected mayors, council
members and other municipal officials to understand that the total cost of
delivering services to your community includes the depreciated cost of the
equipment used in delivering those services.
Sooner or later these seemingly invisible costs must be paid to replace
essential capital equipment. A preplanned and funded method of doing so is
called a
Capital Improvement Program
III. WHERE TO GET HELP
• MSU Local Government Center
• Local Government Services Bureau,
Department of Administration
• Private Consultants: Miral Gamradt