1. 1 Tangible Capital Assets Beyond PSAB 3150 Nancy Gomerich, BBA, CA www.ngconsulting.ca 604-463-9845

2. 2 SESSION 1 Source: David Watt, Senior Asset Management Specialist Associated Engineering Tangible Capital Assets Beyond PSAB 3150

3. 3 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

4. 4 Agenda Session 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?

5. 5 Course Logistics & Overview  Class Registration List is shared (/w contact info.)  Sessions are recorded When available, for how long, how to access…  “Best” Webinar Experience Headphones and location will not be disturbed Full Screen mode Problems during the session  Questions/Comments During the Sessions Questions are encouraged and welcome anytime! Dealing with background noise  If you need to mute your line for any reason just press *6 on your phone to mute it. To unmute your line press *7.  If I have to mute the lines and you have a question, hit the “Raise Hand” button (won’t see this in full-screen)

6. 6 Asset Management & The Finance Officer’s Role Tangible Capital Assets Beyond PSAB 3150

7. 7 Asset Management What 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.

8. 8 Asset Management What 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

9. 9 Source: FCM - National Guide to Sustainable Municipal Infrastructure Selecting a Professional Consultant – June 2006 Asset Management What is Asset Management? Lifecycle Costs

10. 10 Asset Management What 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.

11. 11 Asset Management Finance 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

12. 12 Financial Issues and Concerns Tangible Capital Assets Beyond PSAB 3150

13. 13 Financial 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

14. 14 Financial 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 ==

15. 15 Financial 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? = =

16. 16 Financial 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

17. 17 Financial 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

18. 18 The Canadian Infrastructure Deficit (FCM 2007 Report) Tangible Capital Assets Beyond PSAB 3150

19. 19 The Canadian Infrastructure Deficit FCM 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

20. 20 The Canadian Infrastructure Deficit FCM 2007 Report

21. 21 The Canadian Infrastructure Deficit FCM 2007 Report

22. 22 The Canadian Infrastructure Deficit FCM 2007 Report  How did this Happen?

23. 23 The Canadian Infrastructure Deficit FCM 2007 Report Municipal Share Capital Stock 1961 – 30.9% 2002 – 52.4%  Reason One…

24. 24 LG get less than 10% of all Tax Revenues! The Canadian Infrastructure Deficit FCM 2007 Report  Reason Two…

25. 25 The Canadian Infrastructure Deficit FCM 2007 Report  Reason Three…  Lack of infrastructure inventory and information  Limited Asset Management  Limited short and medium term planning and no lifecycle planning =

26. 26 Long Term Capital Planning Limitations of the HC Model Tangible Capital Assets Beyond PSAB 3150

27. 27 Long Term Capital Planning HC 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)

28. 28 Long Term Capital Planning HC 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

29. 29  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.

30. 30 Source FCM 2007 Report “The Coming Collapse of Canada’s Municipal Infrastructure” Long Term Capital Planning HC Model Limitations-A/C for Deferred Mtnce.

31. 31 Source FCM 2007 Report “The Coming Collapse of Canada’s Municipal Infrastructure” Long Term Capital Planning HC Model Limitations-A/C for Deferred Mtnce.

32. 32 The New PSAB (2009) Financial Statements Long Term Capital Planning Capital Budgeting Framework

33. 33  Capital Funding Envelopes Current Year “Own Source” Funding for Capital Expenditures (refer to as “general revenue funding”) * Note: Due to inflation, in reality, the graph and line angles upwards Long Term Financial Planning Capital Budgeting Framework

34. 34  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 Planning Capital Budgeting Framework *Equals Replacement Cost less Salvage Value

35. 35  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 Planning Capital Budgeting Framework

36. 36 Long Term Capital Planning Funding for Asset Replacement/Renewal (Funding “R”) Tangible Capital Assets Beyond PSAB 3150

37. 37 Lifecycle Funding – Funding R Impacts of Time, Inflation, Interest Note: Annual Contribution = Annualized contribution required to raise the Replacement Cost Value at the end of the assets useful life (same $ value each year)

38. 38  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. 1 st 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 R Prop. Replacement vs. Current Cost Model

39. 39 End of Presentation