1. “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 MUNICIPAL CAPITAL IMPROVEMENT PROGRAM (CIP) 1 A BUDGETING WORKBOOK FOR MUNICIPAL OFFICIALS

2. 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

3. WHAT IS A C.I.P.?

4. 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?

5. 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.

6. 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

7. 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.

8. ● The council must place its stamp of approval and budgetary blessing on the city/town’s capital priorities. STEP 2. DEVELOP COUNCIL’S PRIORITY LIST OF CAPITAL NEEDS ● 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.

9. ● 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..) STEP 2. PRIORITY LIST OF CAPITAL NEEDS (continued) ● 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.

10. 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:_________________

11. 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.

12. 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 X111115 Loader0X11114 Computer System 00X1113 Park Benches 000X000 Pool Cover0001X01 Paint City Hall 00010X1 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.”

13. 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 X4344419 Loader 1X344416 Computer System 03X44415 Park Benches 000X000 Pool Cover 0004X04 Paint City Hall 00042X6 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.”

14. 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.

15. 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 RESOLUTION NUMBER 2015-_____ BIG SKY CITY COUNCIL

16. 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. STEP 3. PUBLIC PARTICIPATION IN DEFINING CAPITAL NEEDS 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.

17. ● 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. STEP 4. FIND THE COSTS OF CAPITAL EQUIPMENT AND FACILITIES ● 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.

18. ● 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.” STEP 5. STRATEGIES TO FUND CAPITAL ACQUISITIONS ● 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.

19. 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.

20. 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.

21. 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:www.investmentmt.com/content/BondPrograms/Docs/IntercapApp.pdf 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.

22. 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 ♦ 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. ♦ Maximum loan limit is established by eligible government unit’s legal debt limit. ♦ Current interest rate through February 15, 2015 is 1.00%. ♦ The INTERCAP program is a variable rate loan program. ♦ 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

23. 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.

24. 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.

25. 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.

26. 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.

27. 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.

28. 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

29. III. WHERE TO GET HELP MSU Local Government Center Local Government Services Bureau, Department of Administration Private Consultants: Miral Gamradt