Financial Sustainability and Asset Management. Presentation to LAS / MFOA Bill Hughes March 25, 2015

Transcription

1 Financial Sustainability and Asset Management Presentation to LAS / MFOA Bill Hughes March 25, 2015

2 Financial Sustainability and Asset Management 2 Outline q q q q q q Financial Sustainability Municipal Context Capital Reserves Debt Intergenerational Equity

3 Financial Sustainability and Asset Management 3 Financial Sustainability

4 Financial Sustainability and Asset Management 4 Research project on financial sustainability q York is conducting a research project on behalf of AMO to examine the inter-relationships among capital, reserves and debt in Ontario municipalities q The project will look at how these relationships affect long-term financial sustainability and asset management q The research is at a very early stage, but we hope that it will show how different characteristics and patterns among municipalities influence approaches to financial sustainability

5 Financial Sustainability and Asset Management Roman aqueducts still in use today 5

6 Financial Sustainability and Asset Management 6 Financial sustainability is about the stewardship of the long-term q Financial sustainability requires long-term planning; it does not just happen q The key to financial sustainability is taking the necessary steps in the near-term to manage long-term risks q The two biggest challenges to financial sustainability are: q The future cost of infrastructure investments (asset management) q Potential mismatch between level of service decisions and fiscal capacity

7 Financial Sustainability and Asset Management 7 Financial sustainability and asset management go together Financial Sustainability Asset Management Level of service Lifecycle management Financial management Asset management is a big part of financial sustainability

8 Financial Sustainability and Asset Management 8 Key factors linking asset management to financial sustainability q Degree of responsibility for infrastructure q What kinds of infrastructure are you responsible for? q Infrastructure intensity q How much infrastructure do you have? q Investment needs q How much do you need to invest and when? q Fiscal capacity q What is your ability to generate revenue to meet your infrastructure needs? q Intergenerational equity q What are our obligations to future generations? Municipalities will exhibit both variation and commonality along these dimensions

9 Financial Sustainability and Asset Management 9 Fiscal capacity and infrastructure intensity affect a municipality s financial circumstances Fiscal Capacity Growing municipality / high capacity Stable / declining municipality; moderate to weak fiscal capacity The fortunate few Fiscal strategy is critical Fiscal strategy is critical The unfortunate asset deterioration zone Low to moderate infrastructure per capita High infrastructure per capita Infrastructure Intensity

10 Financial Sustainability and Asset Management 10 so does the absolute level of investment needs and Many mature municipalities their urgency High Potentially unmanageable (unless previously well planned) Longterm fiscal strategy needed Growth municipalities Investment Needs Low to Moderate Near to medium -term fiscal strategy needed Manage with normal budgeting 0 10 years years or more Urgency (timing)

11 Financial Sustainability and Asset Management 11 The elements of fiscal strategy q For the purposes of today s discussion, fiscal strategy refers to the interaction between the capital plan, debt management, reserve management and the budget (tax levy and rate supported) q A municipality s ability to deliver on its asset management plan commonly depends on the quality of its fiscal strategy

12 Financial Sustainability and Asset Management 12 Municipal Context

13 Financial Sustainability and Asset Management 13 Many different kinds of municipalities Ontario (444 municipalities) Single- tier (173) Upper- tier (30) Lower- tier (241) City (15) County (4) Town (24) Township (83) Municipality (23) * Village (5) Separated City/Township/Town (19) Regional Municipality (7) County (23) City (19) Town (62) Township (115) Municipality (39) * Village (6) Source: AMO Note: Some municipalities have opted to use the generic term municipality in their official name. These municipalities were commonly incorporated by amalgamating former towns, townships and villages.

14 Financial Sustainability and Asset Management 14 with significantly different responsibilities for infrastructure Infrastructure Responsibilities Single- tier Upper- tier Lower- tier County Regional Within Counties Within Regions Arterial roads Local roads Transit Water & Wastewater Fire protection Waste disposal Parks and Forestry Differences in infrastructure responsibilities will have fiscal implications Source: MMAH Note: There are currently ten District Social Services Administration Boards (DSSABs) in northern Ontario that provide consolidated municipal services.

15 Financial Sustainability and Asset Management 15 Dramatic shift in responsibility for infrastructure The municipal share of asset ownership in Ontario has significantly increased since the 1960 s Share (%) Federal 31% 10% Provincial 31% 22% Local 38% 67% Source: StatsCan, From Roads to Rinks, Table A, Feb. 2008

16 Financial Sustainability and Asset Management 16 Distribution of population will affect infrastructure intensity Geographical Distribution of Population Municipalities by Population Range Almost 70 per cent of the population is concentrated in the GTA and Central Ontario, but almost two thirds of municipalities have population of 10,000 or less Data source: Statistics Canada (Census 2011)

17 Financial Sustainability and Asset Management 17 Population growth ( ) Source: Statistics Canada Growth affects fiscal capacity, infrastructure intensity and investment needs

18 Financial Sustainability and Asset Management 18 Population growth in Southern Ontario ( ) Source: Statistics Canada

19 Financial Sustainability and Asset Management Population growth in the GTA ( ) York 97% Peel 70% Halton 55% Source: Statistics Canada Durham 43% Toronto 11% 19

20 Financial Sustainability and Asset Management Forecast population growth ( ) Source: Ministry of Finance 20

21 Financial Sustainability and Asset Management 21 Forecast population growth in Southern Ontario ( ) Source: Ministry of Finance

22 Financial Sustainability and Asset Management 22 Forecast population growth in the GTA ( ) Peel 50% York Durham 38% 24% Toronto 33% Halton 33% Source: Ministry of Finance

23 Financial Sustainability and Asset Management 23 Share of forecast population growth The Ministry of Finance projects a greater share of growth in Toronto and Peel than Growth Plan Amendment 2

24 Financial Sustainability and Asset Management 24 Capital

25 Financial Sustainability and Asset Management 25 Asset management plans are linked to master plans and capital plans Master Plans Establish desired service levels and identify infrastructure needed to get there Asset Management Plans Track existing assets, assess their condition, and plan life cycle rehabilitation & replacement needs Capital Plans Allocate budgetary resources to deliver on plans To be effective, planning and policy documents must align with budgetary policy and fiscal goals

26 Financial Sustainability and Asset Management 26 An asset management framework Level of Service Current/Future Demand Performance Expectations Risk Tolerance Lifecycle Management Asset Portfolio Lifecycle Investment Analysis Financial Management Funding and Financing Source Analysis Saving and Investment Timing Asset Management Plans Asset management is simply managing an asset so that it provides the desired level of service over its life span at the lowest possible cost

27 Financial Sustainability and Asset Management 27 Effective asset management lowers costs over time Condition $50m $50m Poor Asset Management Smart Asset Management Year Source: Based on a chart in the Ontario Ministry of Infrastructure s Guide for Municipal Asset Management Plans Timely life cycle investments can provide higher service levels and lower the total cost of managing an asset

28 Financial Sustainability and Asset Management 28 Budgeting for asset management The National Research Council recommends that about 2 per cent of the value of assets should be spent on repairs and normal rehabilitation and 2 per cent contributed to reserves each year Asset Management Pay-as-you-go Capital Reserves (non-dc) DC Reserves Repairs and normal rehabilitation Portfolio-based lifecycle investments Major life-cycle rehabilitation Asset replacement Growth capital not covered by DCs New capital needs for growth

29 Financial Sustainability and Asset Management 29 Infrastructure intensity is highly variable Many small municipalities have high levels of infrastructure intensity Data source: FIR (2013) Infrastructure intensity = Tangible capital assets per capita Fiscal capacity = Weighted average assessment per capita

30 Financial Sustainability and Asset Management 30 Most municipalities appear to have time Some small municipalities have high intensity and near-term investment needs Data source: FIR (2013)

31 Financial Sustainability and Asset Management 31 Reserves

32 Financial Sustainability and Asset Management 32 Reserve management strategy is key to achieving financial sustainability q Long-term financial sustainability will require: q Saving for future capital asset life cycle and replacement investments q Using reserves judiciously to manage debt q Benefits of reserves are: q Adequate reserves reduce the need to issue debt q Credit rating agencies consider reserves when evaluating liquidity q Contributions to and draws from reserves can be smoothed to provide a predictable impact on the tax levy and water and wastewater rates q Reserves also protect municipalities against non-capital long-term liabilities and external shocks

33 Financial Sustainability and Asset Management 33 Reserve levels vary among municipalities Capital reserves per capita do not appear well correlated with infrastructure intensity Data source: FIR (2013)

34 Financial Sustainability and Asset Management 34 Reserve adequacy how much to save? q The answer depends on: q q q The investment needs and timing identified in asset management plans, including embedded service levels and levels of risk Preferences with respect to pay-as-you-go capital versus funding from reserves The municipality s preferred trade-off between reserve funding and debt financing

35 Financial Sustainability and Asset Management 35 Growth-related investment impinges on asset management investment q Development charge revenues do not cover the full cost of growth q The remainder must be covered through tax levy, water rates or subsidies q The need to divert funding to pay for growth-related infrastructure compromises funding for asset management

36 Financial Sustainability and Asset Management 36 Debt

37 Financial Sustainability and Asset Management 37 Debt Management q Debt will remain a financing source for many municipalities q Proponents of debt financing argue that it spreads the cost of assets over a longer portion of their useful lives q Opponents argue that debt servicing payments reduce fiscal room and crowd out other spending q Debt room should be preserved to maintain flexibility in financing long-term capital asset needs q Debt should not be the primary source for repair and replacement projects

38 Financial Sustainability and Asset Management 38 Many municipalities have little or no debt Approximately 60 per cent of municipalities have little or no debt servicing costs, meaning they have little or no debt Data source: FIR (2013)

39 Financial Sustainability and Asset Management 39 and the amount of debt varies by infrastructure responsibility Lower-tiers tend to hold little or no debt, whereas the large debt holders tend to be upper- and single-tiers Data source: FIR (2013)

40 Financial Sustainability and Asset Management 40 Purpose of debt (type of infrastructure) Long- term Debt By Infrastructure Type Environmental services 38.5% 25.6% Transportation services 25.5% Social housing, 13.3% 38.0% Recreation and cultural services, 9.0% Environmental services Social housing General government Social and family services Other long term liabilities Transportation services Recreation and cultural services Protection services Planning and development Health services Data source: FIR (2013) Close to two thirds of all debt is for water, wastewater and transportation

41 Financial Sustainability and Asset Management 41 Debt varies with infrastructure intensity Long Term Debt per Capita vs. Infrastructure Intensity Long Term Debt per Capita Low Infrastructure Intensity (TCA per capita) High Muncipalities with Population> 5,000 Municipalities with Population < 5,000 Small municipalities are less willing or able to take on debt regardless of the level of infrastructure intensity Data source: FIR (2013)

42 Financial Sustainability and Asset Management 42 Intergenerational Equity

43 Financial Sustainability and Asset Management 43 Intergenerational equity q Good planning means that the people who benefit from an asset are also the ones who pay for it q However, several sources suggest that the children of baby boomers will be the first to have lower life-time income than their parents q This may suggest a need to save more today for future asset management needs

44 Financial Sustainability and Asset Management 44 Income gains are going to the older generations $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $- Canada: Total Income - Average per person Average Annual % Change ( ) 0.6% 0.1% 1.2% -0.3% UNDER and over Real incomes of under-25 and cohorts appear to have stagnated or even declined as compared to the and 65+ cohorts Source: CalculaAons based on StaAsAcs Canada s Survey of Labour Income Dynamics (SLID) Cansim Table # Constant Dollar Values (2011 = 100)

45 Financial Sustainability and Asset Management 45 Family formation is being delayed Age Specific Fer7lity Rates in Ontario (Sta7s7cs Canada) Number of Live Births per 1000 Women to 34 years 25 to 29 years 35 to 39 years 20 to 24 years to 24 years 25 to 29 years 30 to 34 years 35 to 39 years

46 Financial Sustainability and Asset Management 46 Revival of the Toronto core Source: Statistics Canada

47 Financial Sustainability and Asset Management to 44-year olds are less keen to leave the core Source: Statistics Canada

48 Financial Sustainability and Asset Management 48 Is water and wastewater an example of intergenerational equity? Water and Wastewater Cost Recovery Data source: FIR (2013) Recovery rate = Revenue / Operating Expenses

49 Financial Sustainability and Asset Management 49 Conclusion ü Asset management is simultaneously one of the greatest challenges to financial sustainability and essential to achieving it ü The time to consciously plan for financial sustainability in relation to asset management is now ü Currently the majority of municipalities rely heavily on reserves as a source of financing ü A comprehensive fiscal strategy will be needed in most cases, consisting of an interplay between the long-term capital plan, debt management, reserve management and the budget ü The nature of the fiscal strategy that a municipality should pursue is contingent on its own situation, although general principles can be developed

50 Financial Sustainability and Asset Management 50 Questions?