What is a capital improvements plan (CIP)? Why implement a capital improvements plan? Initially, local governments are required by the state or federal government or pressured by citizens to provide a service which entails purchasing or constructing what is known as a capital asset or improvement. These capital improvements are generally buildings, equipment, and land which have high costs and long lives. Capital improvements are often used to provide new services or as a replacement for existing services. Due to the large expenses and long expected asset life, the local government should develop a plan for additions and replacement of the capital assets. Investments in capital improvements are generally expensive and in most cases the local government will issue debt to pay for capital improvements. The related debt will be paid for over a number of years in a debt service operating budget. Capital improvements generally are accounted for in a capital improvements budget as opposed to the annual operating budgets.
The operating budget is an annual budget developed and approved by local government for receipt and expenditures of funds that generally have a life expectancy timeframe of less than one year. These funds are revenues, received from federal, state, and local sources and expenditures for the various services provided by the government. The expenditures would include salaries, supplies and materials, interest and principal on outstanding debt, and other current period (fiscal year) operating expenses. This budget would account for revenues and expenditures for a 12 month period referred to as a fiscal year.
Capital Improvements Budget
The capital improvements budget is a finance plan and program to purchase or contract for capital improvements—land, buildings, and other capital improvements that are considered large expenses and have a long life expectancy. Generally the funding for these capital improvements comes from the issuance of debt by bonds or notes and in some cases other revenues such as property tax and operating transfers. Generally a capital improvement budget exceeds 12 months and always extends to the completion of a specific project.