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Tangible Capital Assets Beyond PSAB

3150

Nancy Gomerich, BBA, CAwww.ngconsulting.ca

604-463-9845

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SESSION 1

Source: David Watt, Senior Asset Management SpecialistAssociated Engineering

Tangible Capital Assets Beyond PSAB

3150

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Agenda Session 1 Course Logistics & Overview Asset Management & The Finance Officer’s Role Financial Issues and Concerns The Canadian Infrastructure Deficit Long-Term Capital Planning

Limitations of the HC Model Capital Budgeting Framework Funding for Asset Replacement/Renewal – Lifecycle Funding

Impact of interest and inflation Current Cost vs. Proportion of Replacement Cost Funding Models

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AgendaSession 2 Long-Term Capital Planning

Funding for Asset Replacement/Renewal – Lifecycle Funding Example: Calculating LG Infrastructure Deficit and related annual

funding targets (4 different models) Annual Funding Targets Presentation Model

Overall Conclusions Policy Considerations SORP-4 Q&A and General Discussion – Where do we go From Here?

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Asset Management & The Finance Officer’s Role

Tangible Capital Assets Beyond PSAB

3150

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Asset ManagementWhat is Asset Management?“ The application of sound technical, social and economic

principles that considers present and future needs of users, and the service from the asset”

The Local Gov’t Asset Management Working Group of BC

“Operational Perspective Effectively tracking your assets; taking into account the variables

that impact the asset’s lifecycle costs to ensure services are provided in the most efficient and effective manner.

Financial Planning Perspective Projecting the anticipated lifecycle costs of assets and ensuring

there is a funding strategy and plan in place to provide for these costs over the long-term.”

Watson & Associates Economists Ltd.

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Asset ManagementWhat is Asset Management? Lifecycle Costs

Refers to all costs incurred throughout the life of an asset

Includes: Purchase/Build Cost Operations and Maintenance

Annual O&M Periodic O&M and Renewal

Disposal Costs

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Source:FCM - National Guide to Sustainable Municipal InfrastructureSelecting a Professional Consultant – June 2006

Asset ManagementWhat is Asset Management?Lifecycle Costs

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Asset ManagementWhat is Asset Management?

Basic Asset Management Using PS3150 data and variables (useful life, remaining service

life etc.) along with replacement cost estimates to project future capital needs

More Advanced Asset Management Using asset condition and planned maintenance information

along with replacement cost estimates to project future capital needs

Useful life and remaining useful life based on the actual condition of each asset

Factor in the impact of planned maintenance on useful life and remaining service life

Watson & Associates Economists Ltd.

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Asset ManagementFinance Officer’s Role Responsible for financial planning…

Develop long-term financial plans to identify funding needs and develop related funding plans and strategies

Develop and recommend related financial policy Develop & maintain a Financial Planning System that:

Promotes consideration of all Lifecycle Costs Promotes selection of capital and operating options that are the most

efficient (lowest cost) and effective (meets goals and desired service levels).

Promotes appropriate prioritization b/w alternative services and works

Team Player and Team Leader as required

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Financial Issues and Concerns

Tangible Capital Assets Beyond PSAB

3150

13Financial Issues and Concerns

To provide sustainable local government services (sanitation, water, development, transportation, recreation etc.) that meet the needs of our citizens, in a cost efficient manner.

Typical Local Gov’t Mission Statement

14Financial Issues and Concerns Are LG going to remain sustainable in the Future?

Most infrastructure in Canada put in 1950-1970s, so end of useful life is looming...

Economic Climate

Infrastructure Nearing End Useful Lifes

Demand Funding Higher Debt

Costs

Limited Grants

= =

15Financial Issues and Concerns Are LG going to remain Sustainable in the Future?

If LG financial position remains unchanged, most LG will have minimal reserves/surplus balances in relation to asset replacement needs…

Local Gov’t Funding Options

No/Little Savings

Demand Funding

Taxation & Other Fee

Increases Affordable or Fair?

Legislated Debt Limit not Sufficient or Affordable? = =

16Financial Issues and Concerns Are community needs being met in the most cost efficient

manner now? What about in the future?

Insufficient Capital

Funding

Asset Condition

Risk of Critical Failure

Shortened Useful Life and

pre-mature replacement

= =Increased Asset O&M

Damage to other Assets

+ lack of debt management and planning = higher debt costs

17Financial Issues and Concerns

Federation of Canadian Municipalities (FCM) 2007 Report: “The Coming Collapse of Canada’s Municipal Infrastructure”

Estimated the Canadian Infrastructure Deficit in ‘07 at $123B Equates to $3,753 per person (2007 population)

3,000 population = $11.3M Deficit 15,000 population = $56.3M Deficit 50,000 population = $187.7M Deficit

Status Quo is NOT sustainable Evidence of deferral of O&M/Renewal works that are shortening asset

useful lifes and increasing other costs

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The Canadian Infrastructure Deficit(FCM 2007 Report)

Tangible Capital Assets Beyond PSAB

3150

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The Canadian Infrastructure DeficitFCM 2007 Report

FCM Infrastructure Deficit $123B

Components FCM Infrastructure Deficit

The unfunded investments required to maintain and upgrade existing, municipally owned infrastructure assets

The funding needed over and above current and projected levels to bring existing facilities to a minimum acceptable level for operation over their service life, through maintenance, rehabilitation, repairs and replacement

Same study identified Cdn New Infrastructure needs of $115B

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The Canadian Infrastructure DeficitFCM 2007 Report

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The Canadian Infrastructure DeficitFCM 2007 Report

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The Canadian Infrastructure DeficitFCM 2007 ReportHow did this Happen?

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The Canadian Infrastructure DeficitFCM 2007 Report

Municipal Share Capital Stock

1961 – 30.9% 2002 – 52.4%

Reason One…

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LG get less than 10% of all Tax Revenues!

The Canadian Infrastructure DeficitFCM 2007 Report Reason Two…

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The Canadian Infrastructure DeficitFCM 2007 Report Reason Three…

Lack of infrastructure inventory and information

Limited Asset Management Limited short and medium term planning and no

lifecycle planning

=

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Long Term Capital PlanningLimitations of the HC Model

Tangible Capital Assets Beyond PSAB

3150

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Long Term Capital PlanningHC Model Limitations - HC Amortization

PSA HC Amortization

Method to allocate asset HC over estimated useful life

Is “backword” looking

Problems with when used as a funding target: Historical Cost typically much less than Replacement Cost Older the Assets = Lower the HC Amortization Values the same assets differently (HC based on year of

acquisition) Does not account for “ketchup” funding required to fund any

accumulated TCA deficit/shortfall (ie Infrastructure Deficit)

28Long Term Capital PlanningHC Model Limitations-A/C for Deferred Mtnce.

PSA Accounting for Deferred Maintenance

Deferred Maintenance is planned work/maintenance that was to be done on an Asset at some point in the past, but was not done due to resource constraints

Deferred Maintenance can be divided into 2 types, that necessary to:

Maintain the assets established service level Maintain the asset in a manner such that it would reach the

end of its intended useful life

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PSA Accounting for Deferred Maintenance

Only deferred maintenance that results in a reduction in an assets useful life is accounted for in PSA

Accounted for at the point the useful life is impaired which may be a number of years after the optimal date for performing the related maintenance

Is accounted for as an increase in the related annual HC amortization only

Not identified as a separate component of amortization No note disclosure Likely will go unnoticed since such work would usually occur

well into an asset’s useful life when HC NBV of asset is relatively low

HC Model Limitations HC Model Limitations-A/C for Deferred Mtnce.

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SourceFCM 2007 Report “The Coming Collapse of Canada’s Municipal Infrastructure”

Long Term Capital PlanningHC Model Limitations-A/C for Deferred Mtnce.

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SourceFCM 2007 Report “The Coming Collapse of Canada’s Municipal Infrastructure”

Long Term Capital PlanningHC Model Limitations-A/C for Deferred Mtnce.

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The New PSAB (2009) Financial Statements

Long Term Capital PlanningCapital Budgeting

Framework

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Capital Funding Envelopes Current Year “Own Source” Funding for Capital Expenditures

(refer to as “general revenue funding”)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

YEARS

DO

LL

AR

S

Capital Envelope Capital Spending

* Note: Due to inflation, in reality, the graph and line angles upwards

Long Term Financial PlanningCapital Budgeting Framework

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Desired CFE = R + G + N – 0, where: R = annualized amount required to renew/replace* existing

capital assets, same service level Can be broken into two components

Annual Lifecycle Investment (RL) Annual Ketchup Investment (RK)

G = annualized amount required to fund LG’s share of new capital works required due to growth (DCC & other), same service level

N = annualized amount required to fund new capital works, new service level OR to increase the service level of R or G works

O = annualized amount of R, G and N that will be funded from external sources (grants, donations, debt)

Long Term Financial PlanningCapital Budgeting Framework

*Equals Replacement Cost less Salvage Value

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Setting CFE Targets Calculate desired CFE (RL, RK, G, N) and Id Other Funding Sources (O) Identify actual CFE amount Calculate the Funding GAP (difference) Develop alternative funding strategies and asset capital plans

Long Term Financial PlanningCapital Budgeting Framework

Annual Capital Funding Envelope SummaryR

epla

cem

ent

(RL

)R

epla

cem

ent

(RK

)G

row

th (

G)

New

(N)

Oth

er F

und

ing

(O)

Total Cu

rren

t Fu

nd

ing

GAPBuildingsEquipmentVehiclesPark ImprovementsInfrastructure -Water 100 25 20 0 0 145 75 70 -Seweretc…

100 25 20 0 0 145 75 70

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Long Term Capital PlanningFunding for Asset Replacement/Renewal

(Funding “R”)

Tangible Capital Assets Beyond PSAB

3150

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Lifecycle Funding – Funding RImpacts of Time, Inflation, Interest

Scenario 1 Scenario 2Historical Cost 1,000,000 1,000,000Cost Inflation 5.00% 3.00%Interest Rate 3.00% 5.00%

Years To Replacement

Future Replacement

Cost

Annual Lifecycle

Reserve Fund Contribution

Future Replacement

Cost

Annual Lifecycle

Reserve Fund Contribution

1 11,467,400 11,467,400 4,383,906 4,383,9062 11,467,400 5,648,965 4,383,906 2,138,4913 11,467,400 3,710,052 4,383,906 1,390,6134 11,467,400 2,741,019 4,383,906 1,017,1185 11,467,400 2,159,937 4,383,906 793,377

10 11,467,400 1,000,307 4,383,906 348,54115 11,467,400 616,563 4,383,906 203,16020 11,467,400 426,767 4,383,906 132,58125 11,467,400 314,526 4,383,906 91,85430 11,467,400 241,036 4,383,906 65,98435 11,467,400 189,663 4,383,906 48,53740 11,467,400 152,085 4,383,906 36,29145 11,467,400 123,678 4,383,906 27,45150 11,467,400 101,664 4,383,906 20,941

If the LG had funded Historical Cost Amortization from Year 1 (20,000/yr) then: /w Interest @ 3% = 2,255,937 /w Interest @ 5% = 4,186,960

Note: Annual Contribution =

Annualized contribution required to raise the Replacement Cost Value at the end of the assets useful life (same $ value each year)

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Scenario 2Historical Cost 1,000,000Cost Inflation 3.00%Interest Rate 5.00%

Reserve Contribution in Year

YearCurrent Cost

ModelReplacement Cost Model

1 12,378 20,9412 12,749 20,9413 13,132 20,9414 13,526 20,9415 13,931 20,94110 16,150 20,94115 18,723 20,94120 21,705 20,94125 25,162 20,94130 29,169 20,94135 33,815 20,94140 39,201 20,94145 45,445 20,94150 52,683 20,941

Proportion of Replacement Cost Model The annual reserve contribution is the

same amount every year Annual Contribution = Annualized

contribution required to raise the Replacement Cost Value at the end of the assets useful life

Current Cost Model The annual reserve contribution

increases each year by the cost inflation. 1st Yr Annual Contribution = First year

contribution required to raise the Replacement Cost Value at the end of the assets useful life, assuming the contribution will be increased by the cost inflation each year.

If the inflation rate is equal to the interest rate for the life of the asset, then

Annual Contribution = Current Year Replacement Cost / Useful life

Easier to phase-in funding; Fairer?

Lifecycle Funding – Funding RProp. Replacement vs. Current Cost Model

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End of Presentation