Capital planning and public finance

Learning objectives

• Explain what a capital improvements program is, how it relates to the capital budget, and why it must align with the comprehensive plan.
• Compare pay-as-you-go and debt financing, and general obligation and revenue bonds.
• Explain how tax increment financing, special assessments, and business improvement districts work.
• Apply the legal requirements for impact fees.
• Account for life-cycle and operating costs and a community's debt capacity when ranking projects.
• Respond sensibly when a funding source changes, and read a CIP table.

Key concepts

The capital improvements program

A capital improvements program (CIP) is a multi-year schedule (typically five or six years) of public capital projects: long-lived, high-cost physical investments such as roads, water and sewer lines, parks, fire stations, and libraries. For each project it lists the cost, timing, and funding sources.

• The first year of the CIP becomes the capital budget, adopted annually alongside the operating budget.
• The CIP is updated every year: completed projects drop off, a new final year is added, and priorities are revisited.
• In many jurisdictions the planning commission reviews the CIP for consistency with the comprehensive plan.

Capital versus operating spending: capital spending buys or builds assets that last many years; operating spending pays for ongoing services (salaries, maintenance, supplies). A new fire station is capital; the firefighters' salaries are operating costs, and every new facility creates ongoing operating costs the CIP should acknowledge.

8 more sections follow in the full lesson.

Key terms

• Capital improvements program (CIP): A multi-year schedule of capital projects with costs, timing, and funding.
• Capital budget: The first year of the CIP, adopted with the annual budget.
• Pay-as-you-go: Financing capital projects from current revenues.
• General obligation bond: A bond backed by the issuer's full faith, credit, and taxing power.
• Revenue bond: A bond repaid from the revenues of the financed facility or system.
• Bond rating: An assessment of the issuer's creditworthiness.
• Tax increment financing (TIF): Financing improvements with the growth in property tax revenue above a frozen base.
• Special assessment: A charge on properties that receive a special benefit from an improvement.
• Business improvement district (BID): A district funded by self-imposed assessments for supplemental services.
• Impact fee: A one-time charge on new development for capital facilities needed to serve it.
• Rational nexus: The required link between a fee, the need a development creates, and the benefit it receives.
• Value capture: Recovering part of the land value increase created by public investment.
• Life-cycle cost: The total cost of an asset over its useful life, including operation, maintenance, and replacement.
• Debt service: The annual payment of principal and interest on outstanding debt.
• Operating budget impact: The ongoing yearly cost a capital project adds once it's built.