In this installation of his ongoing series of articles to assist instructors using his book A Budgeting Guide for Local Government, 2nd Edition, Bob Bland provides this summary from Chapter 7, "Planning and Budgeting for Capital Improvements." Click here to download FREE discussion questions for classroom use.

For capital acquisitions, careful planning is essential in order to avoid costly and embarrassing mistakes.

The cornerstone for the capital budget is the capital improvement plan (CIP), which identifies the capital improvements that the local government wishes to undertake, typically over the next five years. The first year of the CIP becomes the capital budget, the financing plan for the projects that the government will undertake in the forthcoming year.

Each year, the CIP is updated, revenue and expenditure estimates are revised for the remaining years in the planning period, and a new fifth year of projects is added. The repeated evaluation of projects forces leaders to evaluate the projects more than once and to judge the merits and urgency of new proposals against the merits and urgency of those projects already in the CIP.

Initially, the priorities for capital allocation must come from elected leaders. They articulate the capital needs of the government through the campaign process and through their role as representatives of the electorate. Who participates in the capital planning process greatly influences the selection of projects that are included in the CIP and that eventually receive funding in the capital budget. It is recommended that an interdepartmental capital allocation committee be appointed to review requests for capital spending, rank each proposal according to agreed-upon criteria, and prepare the proposed CIP for review by the manager and mayor.An inventory and condition assessment of existing physical assets should precede the preparation of the CIP.

The CIP provides not only a year-by-year inventory of proposed projects, but also a plan for lawmakers for financing those projects. Local governments rely on shared taxes, grants, municipal bonds, special assessments, and local own-source revenue to fund capital acquisitions. Municipal bonds provide state and local governments with a flexible means of financing capital improvements while promoting intergenerational equity. The use of debt shifts the cost to successive users who benefit from a public improvement but were not present when it was constructed or acquired.

To successfully market their bonds, governments must reassure investors of the security of their investment. Along with the prompt payment of debt obligations, such reassurance is achieved by using a debt service fund in which to account for revenues and expenditures on principal and interest; using long-term debt only for assets with a life greater than one year; and adopting a policy statement that clearly states the government’s procedures for issuing debt, the purposes for which debt may be used, the role of citizens in approving the use of debt, and the maximum amount of debt that can be incurred.

Preparation of the capital budget requires budget staff to determine the exact cost of each project through an engineering study and to make a detailed estimate of revenues including bond sale proceeds. Budget staff must identify the amount of bonds to be sold in order to provide financing for the projects. The local government must hold a public hearing to get citizen input on the proposed capital spending plan. Finally, the governing body must appropriate budget authority for capital projects.

During the actual construction of capital projects, the budget office must carefully coordinate spending with available revenues. It also should review contracts before they are signed to make certain that they are consistent with the spending intentions of the governing body.

Robert L. Bland, professor and chair of the department of public administration at University of North Texas, and author of A Budgeting Guide for Local Government, 2^nd Edition, has prepared a set of exercises, discussion questions, and multiple choice exercises for each chapter in the Budgeting book. These are available for download FREE.

Next month: Bob discusses ways to integrate Excel spreadsheet exercises into the MPA/MPP curriculum.