i.1.4.2 Capital Improvement Planning and Capital Improvement Budgeting

CIPs include projects needed to maintain, replace, refurbish, enhance, and expand a public agency’s capital facilities. Capital improvement budgets (CIBs) are systematic assessments of the improvements in a CIP that should be funded in light of the resources available to the public agency. A CIP should contain the projects necessary to achieve the agency’s strategic vision and to maintain and improve the agency’s existing facilities. Decisions regarding what appears in the CIP should include assessments of useful life, life cycle costs,5 and estimated replacement costs (both in nominal dollars and inflated dollars). This decision making is decidedly different from simply estimating replacement costs of the public agency’s fixed assets in isolation.6 For example, in 2010, the Government Finance Officers Association (GFOA) adopted a “Best Practice” that recommends public agencies adopt “a policy to require a complete inventory and periodic measurement of the physical condition of all existing capital assets. The assessment should document the established methods of condition assessment, including any that are used to evaluate below ground infrastructure. This physical condition inventory and measures used should be kept current, with facility condition ratings updated every one to two years.”7

CIPs are based on policy decisions: which components or systems of infrastructure the public agency needs over the short, medium, and long term planning period and which of those components or systems have priorities over others. A public agency should be able to review its CIP and get a clear sense about the condition of its capital assets, how long that condition should last, and what the public agency needs to do, both in terms of capital projects and cost, to maintain or improve the condition of its facilities.

The term “life cycle costs” can be thought of as a methodical approach to assessing the total cost of ownership of the capital asset. It takes into account all costs of acquiring, owning, and disposing of the asset over the planned life of that asset. This approach is especially useful when alternative projects are being considered and the alternatives will meet the public agency’s objectives equally well, but with a different configuration or specific asset. The alternatives may have different initial or operating costs. In order to establish the “best” alternative, the analysts will measure whether higher initial costs will produce comparable results, but at lower operating or maintenance costs. Life cycle costs analyses are often the most straightforward and easy-to-interpret measure of economic evaluation, as opposed to “internal rate of return” or “cost/benefit” analysis.

The CIP process is incomplete, however, if it does not address what can be the most challenging question in assessing the funding needs of the public agency: what can the public agency afford and what, therefore, should it fund? A public agency rarely has the resources to do all that a CIP contemplates. That means that there is likely to be a gap between what the agency can fund and what it will have to finance. This introduces the distinction between funding and financing.