Municipal Asset Management & Financial Planning

Transcription

1 JULY 2012 Municipal Asset Management & Financial Planning IN SMALLER MUNICIPALITIES A Comprehensive Research Paper & Case Study - Showcasing the Corporation of the Township of Scugog Includes: A framework that facilitates successful, manageable and flexible asset management & financial planning in smaller municipalities By: David A. Stewart

2 Overview of Document OVERVIEW OF DOCUMENT Purpose & Abstract. Locating the Township of Scugog. About the Author.. iii iv v Executive Summary Research Paper & Literature Review... 5 The Infrastructure Investment Gap. 6 Overview of Asset Management. 6 Objectives of Asset Management... 9 Challenges of Asset Management.. 9 An Asset Management & Financial Planning Framework for Smaller Municipalities 11 Pillar # 1 Record & Report on Tangible Capital Assets Public Sector Accounting Board Asset Inventory Itemize & Record Tangible Capital Assets Utilize Tangible Capital Asset Information to Add Value Pillar # 2 Preliminary Plan Establish Sound Corporate Management Structure Support Capacity Building Asset Management Plan Integrated into Corporate Plan Financial Condition Assessment 17 Pillar # 3 Construct the Plan Identify & Implement Asset Management Process Protocols Answer Critical Infrastructure Questions Time of Need Schedule(s) Estimate Treatment Costs of Tangible Capital Assets Asset Assessment Bar Asset Condition Assessment.. 24 By: David A. Stewart i

3 Overview of Document 3.6 Establish Priority Optimization for Treatment of Tangible Capital Assets Prepare Financial Forecasts 25 Pillar # 4 Execute and Monitor the Plan Asset Management Plan linked to Capital Budget (Investment Strategies) Maintain Council & Staff Commitment Optimize Investment Measure Results.. 32 Concluding Statement.. 33 The Corporation of the Township of Scugog Profile.. 34 The Corporation of the Township of Scugog Case Study Prelude The Corporation of the Township of Scugog Case Study. 37 Case Study Reflection & Analysis 80 Staff Responsibility. 85 Acknowledgements. 86 Appendices 87 Appendix A An Asset Management & Financial Planning Framework for Smaller Municipalities Appendix B A Sample Asset Condition Assessment Bar 88 Appendix C A Sample Infrastructure Report Card Works Cited.. 90 By: David A. Stewart ii

4 Purpose & Abstract PURPOSE The purpose of this comprehensive research paper and case study is to provide smaller municipalities with an asset management and financial planning framework; including a tool kit of activities that will challenge the status quo and encourage municipal Councils and staff to initiate asset management and financial planning activities in their municipality. The Corporation of the Township of Scugog case study will showcase how the created framework and tool kit of activities can be implemented in small municipal government. This document is a deliverable for the Municipal Finance Officers Association of Ontario Finance Internship Program. The program is in partnership with the Ontario Ministry of Municipal Affairs and Housing. ABSTRACT Municipal decision makers in smaller municipalities have discussed the need for information on how to plan, manage and implement asset management plans and financial plans. More importantly, there seems to be a demand for information and case studies on how smaller municipalities can identify their infrastructure investment gap and devise a plan of action to better manage and address their individual infrastructure needs. The research paper is intended to educate readers on the topics of asset management and financial planning in municipal government. The paper will dive into the challenges municipal decision makers are presently facing as they relate to the topics of asset management and financial planning. Based on municipal sector research, a theoretical framework that facilitates successful, manageable and flexible asset management and financial planning has been created to help smaller municipalities implement asset management and financial plans with staff and elected officials. After reviewing cases and speaking to municipal decision makers from leading municipalities who have successfully implemented asset management plans, common trends were identified and are discussed in detail within the framework. The case study includes a detailed description of the Township of Scugog s journey towards manageable asset management, a financial condition assessment of the corporation as well as financial models that capture the municipality s present long term infrastructure needs based on the most accurate, up to date information collected and compiled during the given 12 month time period. It will also provide a reflection and analysis into the challenges and learning experiences the municipality faced as a result of the project. This timely and meaningful study is intended to serve as a valuable reference tool for decision makers in municipal finance. By: David A. Stewart iii

5 Locating the Township of Scugog LOCATING THE TOWNSHIP OF SCUGOG The Corporation of the Township of Scugog Lower-tier municipality Land Area: 475 Square Km Population: 21,569 (2011 Statistics Canada) 1% tax levy increase is approximately $98,000 By: David A. Stewart iv

6 About the Author ABOUT THE AUTHOR David A. Stewart David Stewart is a municipal project implementation specialist who has a proven track record of making impactful contributions in the municipal government sector. He has played a leadership role in many projects throughout his career and has progressive experience managing and improving operations for multi-million dollar corporations. The majority of his career has been spent in the municipal government sector. His areas of specialization include finance, marketing and economic development. David has experience delivering presentations to Municipal Councils, the Ontario Public Service and to Municipal Associations across Ontario related to emerging topics in municipal finance and economic development. He holds an Honours Bachelor of Commerce Degree and is presently pursuing his Certified Management Accountant designation. David continues to be active in the community. Presently, he is serving on the Board of Directors for a non-profit agency in the Greater Toronto Area. Outside of working and volunteering in the community, he enjoys spending time with family, preparing for long distance runs and playing golf. By: David A. Stewart v

7 Executive Summary EXECUTIVE SUMMARY Introduction In an effort to transform the way capital assets are managed, capital investment is planned and the way infrastructure needs are communicated, the Township of Scugog Council made it a priority to develop, implement and manage a long term asset management and financial plan for the corporation. Staff was given a timeline of 12 months to make an impact with this project. To this point legislation provides little direction with respect to long term asset management and financial planning for municipalities in Ontario, even though these topics are critical to the health, welfare and economic vitality to the nation overall. Smaller municipalities similar to the Township of Scugog are facing increased financial uncertainty and more needs to be done to keep infrastructure in good condition. Long term asset management and financial plans will be an important and timely turning point for smaller municipalities in Ontario as they look towards a sustainable future. Over the years, Ontario municipalities have invested billions of dollars in tangible capital assets. These assets play an essential role in a community s ability to improve the quality of life, diversify and cope with population growth and improve environmental conditions. Municipalities have traditionally focused on meeting infrastructure needs through investment in infrastructure creation, without planning for the long term lifecycle costs associated with the ongoing operation, maintenance and renewal of their networks. This type of inefficient management of municipal infrastructure has placed a major burden on public finances that is continuing to grow. In the past few years, there has been growing anecdotal evidence that the backlogs of maintenance, renewal and replacement of aging infrastructure is causing financial stress on local government and is jeopardizing the sustainability and affordability of services. This may be an indicator that municipal decision makers have not received sufficient information to understand the condition of existing capital assets and the cost of using them in service provision. As the existing capital asset stock ages and population grows, increased demand for new capital assets will place pressure on the ability of municipalities to sustain service levels. Information about the existing stock, the cost of its use and the needs for its replacement must be at the forefront of decision making. Comprehensive Research Paper The purpose of the research paper is to educate readers on the topics of asset management and financial planning. The paper will dive into the challenges municipal decision makers are presently facing, as well as discuss emerging trends as they relate to the topics of asset management and financial planning. By: David A. Stewart 1

8 Executive Summary Asset management is an important and timely turning point as municipalities aim to create future ready sustainable communities. Many smaller municipalities have not adequately planned for the recommended levels of investment required for infrastructure maintenance. The majority of smaller municipalities presently have no tools or techniques in place to optimize and prioritize asset maintenance and capital investment programs, which is why the Township of Scugog elected to be a catalyst for change and created a framework that facilitates successful, manageable and flexible asset management and financial planning in smaller municipalities. An Asset Management & Financial Planning Framework for Smaller Municipalities Refer to Appendix A - Page 87 During the information research process, many municipal decision makers working for smaller municipalities discussed the increasing demand for information on how to plan, manage and successfully implement an asset management and financial plan. The end goal is for smaller municipalities to have the ability to better identify, manage and address their present and future infrastructure needs. The framework has been created to help municipal decision makers develop meaningful asset management and financial plans to meet real business needs. It was developed based on the Township of Scugog s experiences as well as through extensive research and through collaboration and consultation with practitioners in the municipal sector. Much of the framework is focused on targeting smaller municipalities with a population of 25,000 or less. It is premised on multi-objective decision making and recognizes that each municipality is unique and will proceed at different speeds. The objectives taken into consideration were maximizing performance, minimizing life cycle costs and minimizing risk. The planning pillars of the framework include: Pillar #1 Record & Report on Tangible Capital Assets Pillar #2 Preliminary Plan Pillar #3 Construct the Plan Pillar #4 Execute & Monitor the Plan The Corporation of the Township of Scugog Case Study The Township of Scugog case study on asset management and financial planning was prepared to provide municipalities with a real example of how the framework can be implemented in a smaller municipality. The case study includes a detailed description of the Township of Scugog s journey towards manageable asset management, a financial condition assessment of the corporation as well as financial models that capture the municipality s long term infrastructure needs based on the most accurate, up to date information collected and compiled during the given 12 month time period. Based on Councils direction, a forty (40) year corporate needs model and fifty (50) year road network needs model has been selected for use in the study. The corporate needs By: David A. Stewart 2

9 Executive Summary model represents 89 percent of the Township of Scugog s tangible capital assets; land was excluded. The road network needs model represents 54 percent of the Township of Scugog s tangible capital assets. Multiple spending scenarios are presented for each of the two models and are explained in detail in the case study, accompanied by detailed graphs. In an attempt to better serve professionals in the municipal sector, the case study has been created in a Microsoft PowerPoint presentation format - Refer to Page 36. The case study aims to accommodate different learning styles, while delivering value to all readers. Key Findings The Township of Scugog s journey revealed that municipal asset management plans and financial plans must be built on principles that include; (i) (ii) (iii) (iv) (v) (vi) respect for the taxpayers money clear and well defined objectives ability and willingness to take on intellectual challenges evidence based decisions relentless reviews and conformity mechanisms to measure productivity Based on Scugog s experience planning, managing and implementing an asset management and financial planning framework, three factors emerged that were critical to this initiatives success. They include: 1. Corporate culture and working: A municipality with a culture that supports effective corporate working and a willingness to embrace and implement change will see fewer challenges when implementing and managing an asset management plan and financial plan. 2. Buy-in at a senior officer and elected member level: The commitment, enthusiasm and skills of officers in all municipal service areas are important. However, unless there is a buy-in to the implementation of a more corporate and strategic approach to asset management and financial planning amongst both senior officers and elected officials progress is likely to be limited. Any future direction on asset management and financial planning needs to target these senior players. 3. Leadership: Effective leadership at all levels in the municipality must be present in order to implement the required changes. In particular, strong leadership from Council, the Chief Administrative Officer along with other members of senior management is vital if the required momentum of change in relation to asset management and financial planning is to be achieved and maintained. By: David A. Stewart 3

10 Executive Summary Conclusion Ontario s fiscal problems mean that it will become increasingly challenging to finance new infrastructure investment, leaving smaller municipalities in a position where they must search for more creative, innovative and ingenious solutions to address their infrastructure needs. Ontario s long term infrastructure plan (LTIP) commits to requiring municipalities receiving significant capital funding to publish a detailed asset management plan to increase transparency and accountability. This is a real business opportunity as municipal leaders need the tools to create more resilient, more future ready cities or towns by building tomorrow s requirements into today s infrastructure projects. The Corporation of the Township of Scugog has taken great strides to initiate the asset management and financial planning process by including these important projects in their Corporate Plan. Staff has been working hard to document and communicate the corporation s journey to successful, manageable and flexible asset management and financial planning in order to share their results and learning experiences with the sector. Based on the results presented in the case study presentation, it can be concluded that this project has been meaningful and valuable for the Township of Scugog. By: David A. Stewart 4

11 Research Paper & Literature Review RESEARCH PAPER & LITERATURE REVIEW PRELUDE Recent research from various associations in Canada shows that there is a growing infrastructure investment deficit occurring in many sectors. This results in deteriorating infrastructure and escalating costs since the longer roads and buildings remain in a state of disrepair, the higher the cost to refurbish or replace 1. There has been a significant shift in the ownership and management of public infrastructure since 1961 towards the municipal sector. More specifically in 1961, during the initial phase of heavy investment in Canada s infrastructure, federal, provincial/territorial and municipal governments each controlled 23.9, 45.2 and 30.9 percent of the national capital stock, respectively. By 2002, the federal governments share has decreased from 23.9 percent to 6.8 percent and the municipal share had grown from 30.9 to 52.4 percent of all infrastructure 2. It is estimated that municipal governments now own 67% of public infrastructure in Ontario 3. Public infrastructure is one of the areas in which the three orders of government in Canada together serve the public interest by promoting economic growth, protecting individuals, acting as stewards and providing other social goods. With three orders of government involved, tension is inevitable. Municipal interests mainly focus on the municipality s residents, while provincial and federal governments have much broader populations to consider 4. A study by the Conference Board of Canada suggests that every dollar invested recently in Ontario s public infrastructure generated $1.11 in economic output 5. Leveraged properly, infrastructure investment is a key enabler of economic growth. Leading Canadian municipalities are presently taking great strides to invest in sustainable infrastructure by retrofitting the past, regenerating the present, planning for the future and preparing for the unexpected. However, infrastructure is also costly, especially for smaller municipalities with limited growth opportunities, which is why proper plans must be in place to finance investments to achieve optimal results for these communities. Municipal asset management plans are vitally important to identifying and addressing the municipal infrastructure investment gap and accounting for life cycle costs. Municipalities recognize the need to increase their investment in municipal infrastructure, in partnership with the provincial and federal governments and agree that they need to develop and share best practices with respect to asset management. The costs of designing and 1 Retrieved December 9, Danger Ahead The Coming Collapse of Canada s Municipal Infrastructure, Saheed Mirza, A Report for FCM, November 2007, P.6. 3 Municipal Finance Officers Association. Capital Program on Steroids Presentation. April, Ontario Ministry of Infrastructure. Provincial-Municipal Fiscal and Service Delivery Review. June P. Antunes, K. Beckman and J. Johnston, The Economic Impact of Public Infrastructure in Ontario, 2010, Conference Board of Canada. By: David A. Stewart 5

12 Research Paper & Literature Review developing asset management plans are repaid by the savings realized through timely decision-making. THE INFRASTRUCTURE INVESTMENT GAP Public infrastructure is critical to economic competitiveness and the quality of life every person enjoys. Well functioning infrastructure boosts productivity and supports economic growth through lowering business costs. However, since the 1980s, Ontario s infrastructure has been under stress. Since the significant shift in ownership and management of public infrastructure to the municipal sector, municipalities still find themselves searching for the proper tools to manage their infrastructure; such as debt, reserves, property taxes, user fees and development charges. Municipalities have underinvested and are seeing their infrastructure nearing the end of its useful service life, which has contributed to the growing infrastructure needs. The present infrastructure challenge is in part the result of the aging of the massive stock of infrastructure built through the 1950s and 1960s. Infrastructure built must not only meet the needs of today, but also the needs of tomorrow. According to Engineers Canada Regular infrastructure maintenance enhances Canada s productivity, growth and competitiveness and decreases the costs of repair over the longer term. Better management techniques not only increase the lifespan of infrastructure, but also support the commercial value and export potential of Canadian innovation. Municipalities will need to commit to smart, strategic, systematic stewardship of infrastructure in order to provide satisfactory levels of service to the public in a sustainable and environmentally responsible manner. It is evident that a valued approach to addressing the infrastructure investment gap will focus on asset management and financial planning for municipalities. OVERVIEW OF ASSET MANAGEMENT Asset management is a strategic, proactive, long term comprehensive plan for managing existing and new infrastructure on a life cycle basis that includes: objectives within time lines; an inventory/registry of current assets; asset condition data collected on a regular basis; a maintenance program (adequate treatment options); a risk management analysis; and a financial plan/investment strategy Asset management seeks to determine the optimum mix of treatment options and timing for minimizing costs while maximizing the life of the asset. By: David A. Stewart 6

13 Research Paper & Literature Review Municipalities have a wide range of physical assets to manage, all of which age at different rates, have differing impacts on the organization and the community and have varied levels of visibility to the public, Council and staff. The list below provides examples of the diversity of assets owned and operated that will eventually require proper treatment by the municipality 6 : surface assets: roads, trails, parking lots and storm water management ponds, above ground assets: building structures and major components, park improvements, outdoor lighting, outdoor furniture and fixtures, bridges overpasses and other crossing structures, below ground assets: water and sewer mains, lift stations, road beds, foundations, parking structures, tunnels and subways, library resources: books and other materials, specialized equipment, technology assets: servers, networks and hubs, cabling, power supplies, back-up generators, workstations, software, peripherals and smart phones, fleet and equipment: licensed and unlicensed cars, trucks, trailers, specialized equipment vehicles, mowers and maintenance equipment, mechanical tools, emergency services: gear, equipment, weapons, special apparatus and vehicles, marine items: wharves, docks, piers, pilings, vessels, navigations aids and indoor office furniture and fixtures Many municipalities have not adequately planned for the recommended levels of investment required for infrastructure maintenance. In a 2004 study conducted by Vanier and Rahman, respondents (Canadian municipalities), had no tools or techniques to determine asset condition, predict remaining useful life, prioritize maintenance or determine capital renewal schedules. Smaller municipalities seem unaware of where the responsibility lies when it comes to managing and implementing an asset management plan. According to recent discussions with industry professionals, responsibility lies with the engineers or works department and the financing responsibility lies with Council. Municipal asset management is not an event but rather an evolution towards a different way of addressing the emerging issues that municipalities face. Municipalities find it difficult to specify what they want over the long term as Councils are typically concerned about their term rather than the long term needs of a municipality. Adding to their difficulties is the fact that long term public sector plans are susceptible to changes in policy. For example, many municipalities in Ontario are investing in waste water management programs and facilities for treating household waste; however, a change in government policy with respect to something like biodegradable packaging has the potential to change the overall demand for individual types of treatment facilities overnight 7. 6 Enhancing Strategic Influence in the Treasurer s Office, MFOA. 2009, P Retrieved July 19, 2011 By: David A. Stewart 7

14 Research Paper & Literature Review Municipal asset management plans must be flexible enough to adapt to change in order to achieve desired results. Often the trick for municipalities comes in ensuring that each discrete section of the asset management plan is a tightly integrated piece of the whole, so that changes in one area are simultaneously reflected in all other areas. In other words, when one planning assumption changes, all the rest of the assumptions must take into account the consequences of that change. A business intelligence consultant for Deloitte Consulting was quoted as saying Largescale capital asset planning should not only be viewed as a partnership between the finance function and the business; it should also involve as many stakeholders as possible to validate the underlying assumptions 8. What is the right approach to asset management? Unfortunately, there is not one right answer as this question depends on many factors. The first factor looks at a municipality s current situation. Smaller municipalities are still in the development process as they take aim at consolidating and integrating asset data. The second factor looks at the funding scenario; now vs. the future. Presently, the forecasts tell us that Ontario s current fiscal position will mean alternative solutions must be sought to finance infrastructure needs. The third factor takes into account political considerations. Often individual municipal Councils are considered to be the deciding factor in terms of their visions and objectives as it pertains to the construction and implementation of asset management and financial plans. Research has classified asset management plans into two types; a basic asset management plan and an advanced asset management plan. A basic asset management plan is a plan that is undertaken to meet organizational requirements for planning and reporting. It provides basic outputs such as; forward replacement programs and associated cash flow projections. The first version of a basic asset management plan may be brief and simple, addressing each component of the plan only to the extent possible, given the data, systems and processes immediately available to the municipality. For those municipalities that are unsure whether or not to initiate the process, research has proven that there is merit in quickly developing a basic asset management plan. Although the level of confidence in the outputs (valuations, quantification, long term budgets) may be restricted, an immediate focus for cost effectiveness and asset management will be created. Once the initial basic asset management plan has evolved and proper organizational and commitment established, the sophistication of the plan should improve incrementally to an optimum level, appropriate enough to meet the needs of a particular municipality. An advanced asset management plan employs asset deterioration (predictive) modeling, risk management and optimized decision making techniques in order to evaluate options and identify the optimum long term asset management and financial projections to deliver a particular level of service. 8 Retrieved July 19, 2011 By: David A. Stewart 8

15 Research Paper & Literature Review OBJECTIVES OF ASSET MANAGEMENT Main objectives of municipal asset management plans include, but are not limited to the following: to provide better long term planning of capital investment; to provide a fair, open and transparent management of capital assets; to encourage fiscal responsibility which is supported by appropriate due diligence; and to ensure risks are managed effectively and economically with public interest being protected CHALLENGES OF ASSET MANAGEMENT Smaller municipalities in Ontario are beginning to identify that a high proportion of assets are reaching a stage where they will need to be reviewed, replaced or rehabilitated. Municipal decision makers are finding it challenging to move forward with the planning and implementation of asset management plans. Based on discussions conducted with practitioners in the sector, the following list of challenges was identified: 1. Non-specialized municipal staff on the topic of asset management 2. Minimal resources and guidance available on the topic 3. Inability to identify and collect key internal data required to develop and implement asset management plans (poor document management systems in smaller municipalities is questioning the integrity of data) 4. Inadequate financial software systems in place to support integration of asset information 5. Councils that are uninformed with respect to the planning process and implementation timelines 6. A lack of political will directly related to Councils being uniformed on the topic 7. The short term political cycle 8. Disconnects between departments 9. Managing amalgamation, revenue shortfalls, budget demands, public expectations and limited growth 10. The need for increased capital spending More specific challenges for smaller municipalities have been identified through secondary research, they consist of: 11. Manual Controls and Spreadsheets Asset management is a complicated process involving cross-disciplinary terms and a high degree of risk and uncertainty. Current asset planning and forecasting practices in smaller municipalities rely heavily on manual controls and spreadsheets. However, spreadsheets can present a serious risk of human error. Unnoticed flaws in logic and inadvertently over written formulae are just two of many conditions that can give rise to serious adverse By: David A. Stewart 9

16 Research Paper & Literature Review consequences. An even more important limitation of spreadsheets specifically is their limited support for asset planning and approval cycles. With different aspects of asset planning carried out in functional silos (so that, for example, technical and engineering costs and assumptions are performed separately from the financial plan and projected balance sheet), changes in one area are not automatically reflected in the other. The result is a lack of visibility and collaboration that jeopardizes the integrity of the plans and introduces unwelcome delays into the planning process. Implementing proper technologies and programs to assist smaller municipalities with the asset management planning process can be a way to avoid errors or communication errors associated with manual controls and spreadsheets. 12. Maintaining Integrity of Data Maintaining integrity in the data contained within an asset management plan can be a challenge. For example, the useful remaining service life of current capital assets is an engineering empirical and statistical estimation. 13. Change Management Change management is also a common challenge faced by smaller municipalities. This refers to getting municipal staff on board and demonstrating the benefits of an asset management plan. Newly developed processes threaten the way that municipal employees traditionally managed their business and assets 9, which is creating a stronger resistance to change. Organizations today are faced with the challenge of capitalizing on a multi-generational workforce in order to create high-performing, results driven teams. However, with four distinct generations in the workplace Traditionalists, Baby Boomers, Gen X and Gen Y there are four different approaches to work, which impact business performance. Each generation possesses unique attitudes, values, characteristics and skills based on their experiences of life-defining events 10. Understanding and managing the generational divide is important to maintaining project creativity, innovation and teamwork on projects such as municipal asset management plans. The decision whether to use internal or external resources will depend on the skills of internal staff and the internal resources available. The full value of asset management planning is usually realized if asset management plans are prepared in-house. This is especially the case where the objective is to produce a basic, first version plan on current knowledge of assets and customer service requirements. In-house preparation of plans will result in a high level of staff buy in to the plans and associated processes are much more likely to be integrated successfully into the day-to-day management of assets Retrieved July 26, The Road to Performance Success: Understanding and Managing the Generational Divide, n-gen People Performance Inc. 2003, P International Infrastructure Manual, Australia/New Zealand Edition, 2002, P By: David A. Stewart 10

17 An Asset Management & Financial Planning Framework for Smaller Municipalities AN ASSET MANAGEMENT & FINANCIAL PLANNING FRAMEWORK FOR SMALLER MUNICIPALITIES For an Overview of the Framework Refer to Appendix A - Page 87 The framework is designed to help municipal decision makers develop meaningful asset management and financial plans to meet real business needs. Included amongst the four planning pillars of the framework is a tool kit of approaches that can be used to undertake asset management and financial planning activities. It was developed through extensive research and through collaboration and consultation with practitioners in the municipal sector. Much of the framework is focused on targeting smaller municipalities with a population of 25,000 or less. During the research process, many municipal decision makers in smaller municipalities discussed the need for information on how to plan, manage and implement an asset management plan. More importantly, there seems to be a demand for information on how municipalities can identify their infrastructure investment gap and devise a plan of action to manage and address their infrastructure needs. Much of the existing information is not targeted to smaller municipalities who typically have smaller budgets, limited resources and limited capacity. This framework describes in detail the components of how to plan, manage and implement successful, manageable and flexible asset management plans in smaller municipalities. The framework is premised on multi-objective decision making. That is, a number of objectives come into play when deciding upon which alternatives are the best in the short term and/or long term for the municipality. The objectives taken into consideration include; maximizing performance, minimizing life cycle costs and minimizing risk. The framework takes into consideration the unique factor. This factor recognizes that each municipality is unique and will proceed at different speeds and with various levels of complexity and detail depending upon its population and population projections, land area, density, geographic location, service portfolio, age of infrastructure, demographics and socio-economic profile. Therefore, it can be concluded that municipalities are neither created equally nor have they evolved uniformly, which is why there is no common road map or template for municipalities to follow when it comes to asset management and financial planning. Based on sector research, there are rarely municipalities that align in all of the above noted factors 12. Research conducted on municipalities show that the main focus of an asset management plan is to: 12 Association of Municipal Clerks and Treasurers of Ontario. Sustainable Financial Planning Presentation. BMA Management Consulting May, 2012 By: David A. Stewart 11

18 An Asset Management & Financial Planning Framework for Smaller Municipalities (i) (ii) (iii) (iv) Address critical infrastructure requirements; Identify asset management priorities; Summarize current and planned infrastructure investments; and Build a strategy to move the municipality towards a sustainable level of infrastructure investment Instead of doing business as usual, municipalities are encouraged to explore a full range of options for meeting service delivery needs. Municipalities must always consider the following 13 : is there another way to meet our service delivery needs that could avoid new capital spending? is there a way to better manage or use existing assets that could reduce the need for additional expenditures? and is there a way to share the cost and risk of capital acquisition with, for example, a private sector partner or another public sector agency? Implementing the Framework The goal is for smaller municipalities to work through the four planning pillars of the framework. The amount of time it takes to work through the framework will be unique for every municipality. Some municipalities may argue that they require additional process components to satisfy their own internal and external requirements. The relationship between the process components within each process pillar can be sequential, or not. The implementation schedule really depends on the size of the municipality and how many staff resources are involved. The implementation of this framework can vary with respect to the extent of data available and collected, quality of the data and its degree of accuracy. For example, some process components and even an entire process can be completed by the same individual in some select municipalities, while other municipalities may have the components and process being implemented by teams and individuals. PILLAR #1 Record & Report on Tangible Capital Assets Public Sector Accounting Board 3150 The Public Sector Accounting Board (PSAB) comprises senior government executives and experts in government financial reporting. PSAB serves the public interest by setting standards and providing guidance for financial and other performance information reported by the public sector Retrieved July 26, 2011 By: David A. Stewart 12

19 An Asset Management & Financial Planning Framework for Smaller Municipalities In 2002, a Canadian Institute of Chartered Accountants (CICA) research report titled Accounting for Infrastructure in the Public Sector concluded that a major factor in determining a local government s financial ability to maintain its existing service levels is access to financial information about the stock and use of its capital assets. However, the majority of municipalities did not have available financial information about the complete stock, use and condition of their tangible capital assets. In 2006, that situation changed by PSAB approving section 3150, which required all municipalities across Canada to report tangible capital assets on their statement of financial position effective January 1, Tangible capital assets, by definition are non-financial assets having physical substance that 14 : are held for use in the production or supply of goods and services, for rental to others, for administrative purposes or for the development, construction, maintenance or repair of other capital assets; have useful economic lives extending beyond an accounting period; are to be used on a continuing basis; and are not for sale in the ordinary course of operations The accounting for all tangible capital assets, including infrastructure and general assets facilitates better management of assets, development of appropriate maintenance and replacement policies, identification and disposal of surplus assets, and better management of risk 15. Decision makers are able to better understand the impact of using capital assets when the assets themselves have been identified and amortized. Prior to the advent of the Public Sector Accounting Board s requirements for municipalities to value and record their tangible capital assets, these assets simply passed through the budgets and financial records in the same manner as common expense items. The practices used and disciplines applied to managing assets were widely varied, from nonexistent to highly detailed and complex. The requirement to account for tangible capital assets is moving municipalities into a new landscape of managing, documenting and reporting upon their capital assets. Municipalities have completed this task, which means they have a new source of information pertaining to their infrastructure that can be utilized for future planning Asset Inventory - Itemize and Record Tangible Capital Assets An asset inventory is a complete and accurate list of the assets a municipality owns that should be regularly updated and validated. This component physically enumerates the items in the asset class inventories according to the protocols identified in the corporation s asset management process and/or methodology. The process protocols selected will depend on the size of the municipality and the types of assets in the portfolio. Once collected, the data should be further reviewed and categorized. Many municipalities may 14 Retrieved July 28, Retrieved July 21, 2011 By: David A. Stewart 13

20 An Asset Management & Financial Planning Framework for Smaller Municipalities want to further classify assets and make them conform to the corporate structure of the organization. Recommendation(s): Create an Asset Inventory Database An asset inventory is not a temporary requirement of PSAB; rather it is an ongoing discipline of maintaining the data and using it to produce forecasts. This is considered to be the foundation of asset management for municipalities. Municipal decision makers have referred to their asset inventory as an information vault that can be used to extract and massage to meet corporate initiatives. By implementing an asset inventory, municipalities will have access to a comprehensive inventory of their general and infrastructure assets, including asset name, asset class, the department to which the asset belongs, a description of the asset, assets in service year, asset acquisition/historic cost as well as the assets estimated useful life. This type of information is critical to developing and sustaining a basic plan for asset management. Utilize Technology Advancements to Integrate Data Technology advancements are important to the future and evolution of manageable and sustainable municipal asset management plans. After conducting several hours of primary research with industry professionals, it was easy to conclude that technology and its advancements will form the future backbone of asset management in municipalities. The future of asset management lies within an independent municipality s willingness and ability to integrate and consolidate asset information. For example, CityWide Tangible Assets is an industry leading tangible capital asset compliance and asset management module. This application provides municipalities with a complete asset registry for all asset types. Key asset management features include: asset-level amortization with roll-up, replacement cost and lifecycle planning, condition assessment and age based condition calculator, geographic information system integration, and customizable reports 16. Microsoft Excel is another common cost effective solution for smaller municipalities to consolidate and manage asset information. Municipalities who have utilized technology advancements to further develop their asset management plans have shown exceptional signs of planning progress. Utilizing technology advancements to ingrate data allows for flexibility and adaptability and ensures that each discrete section of the capital asset plan is a tightly integrated piece of the whole. If changes are made in one area they are in turn reflected in all other areas Retrieved December 14, 2011 By: David A. Stewart 14

21 An Asset Management & Financial Planning Framework for Smaller Municipalities Product Sharing As a result of municipalities continuing to manage revenue shortfalls and budget demands, alternative ingenious solutions are being sought out to manage budgets. For example, lower tier municipalities that are unable to afford goods or services are utilizing the upper tier municipalities resources at a nominal fee. This is a common practice used within the sector. Therefore, lower tier municipalities may be able to benefit from upper tier programs and services to assist with asset management practices Utilize Tangible Capital Asset Information to Add Value Tangible capital asset accounting is an important building block for the development of an asset management plan and long term financial plan. It allows a municipality to better understand: what assets they have what the assets are worth (at a historical cost level) what is their estimated useful life approximately when assets will need to be replaced Three indicators have emerged for smaller municipalities since the implementation of tangible capital asset accounting to help understand: 1. Whether a municipality setting aside sufficient funds annually for the replacement of assets? Operating Surplus/Deficit Ratio 2. The age of the assets Asset Consumption Ratio 3. Whether a municipality has been setting aside sufficient funds in the past to support the timely replacement of assets Capital Reserves as a Percentage of Accumulated Amortization The operating surplus ratio is the operating surplus (deficit) expressed as a percentage of own source revenues. An operating surplus (deficit) arises when operating revenue exceeds (is less than) operating expenses including (historical) amortization. When an operating surplus is achieved, the amount is available for capital expenditure over and above historical amortization expenses. The asset consumption ratio shows the written down value of a municipality s depreciable assets relative to the historic cost (Asset Consumption Ratio = Accumulated Amortization/Historical Cost of Assets). This ratio seeks to highlight the aged condition of a municipality s stock in fixed assets. As the ratio increases over time, there is particular need to ensure that strategies are in place to address future replacement of existing assets and infrastructure. The capital reserves as a percentage of accumulated amortization ratio compares the reserve balances available as a percentage of accumulative amortization. This provides the relative position of the reserves against the amount of the asset that has been depreciated By: David A. Stewart 15

22 An Asset Management & Financial Planning Framework for Smaller Municipalities (historic costing). It is important to note that accumulated amortization is based on historical costing, therefore municipalities will require more than the historical depreciated amount in reserves to replace the assets as they become due 17. If tangible capital asset accounting is simply viewed as an accounting exercise, a huge opportunity is lost, which attempts to improve transparency, openness and accountability of municipal operations. PILLAR #2 Preliminary Plan For a municipal decision maker, identifying usable best practices that align with the existing corporate culture can be problematic. The following best practice processes are recommended based on research and through discussions with municipal decision makers: Establish Sound Corporate Management Structure It is important for any municipality to operate under a sound corporate management structure, that is having a strong focus on strategic planning, utilizing any and all resources to deliver value and capitalizing on core competencies to maintain competitive advantage. A corporate management structure that provides sounds strategic leadership involves all key stakeholders, provides a culture of change and facilitates cooperation amongst management is what municipalities must possess in order to be a catalyst of change in the topics of asset management and financial planning Support Capacity Building Capacity building is a conceptual approach to development that focuses on understanding the obstacles that inhibit municipalities from realizing their developmental goals while enhancing the abilities that will allow them to achieve measurable and sustainable results. In terms of asset management and financial planning, municipalities should establish a corporate approach for supporting larger and more complex capital expenditures based on available project management tools. A municipality must be committed to realizing their development goals as they relate to asset management and seek assistance from other municipalities that have faced similar challenges. This will help achieve capacity building success Asset Management Plan Integrated into Corporate Plan Corporate planning is a systematic approach to clarifying corporate objectives, strategic decision making and checking progress towards objectives, taking into consideration the 17 Association of Municipal Clerks and Treasurers of Ontario. Sustainable Financial Planning Presentation. BMA Management Consulting May, 2012 By: David A. Stewart 16

23 An Asset Management & Financial Planning Framework for Smaller Municipalities resources of the organization and the environment within which it operates. A corporate plan is a set of instructions to managers of an organization describing what role each department is expected to fulfill in the enhancement of organizations objectives 18. A key challenge facing those initiating asset management plans is establishing their linkage to the municipality s overall strategic direction. Obtaining Council and staff commitment is critical because a task such as this is unlikely to succeed unless there is organizational commitment. Organizational commitment can be achieved by: raising the awareness of elected officials and the senior management team on the benefits of asset management and the associated financial implications imparting an ownership of the process by involving key players such as the Mayor, Members of Council, senior management and staff clearly and consistently communicating asset management objectives to staff complimented with concrete examples where short term results can be achieved Integrating asset management plans into municipal corporate plans is imperative to its success in smaller municipalities. In order to achieve this integration, municipal decision makers may find it necessary to educate Councils on this topic. This will help achieve political support, generate an advanced awareness and establish a long term commitment. It is important to note that this organizational commitment should be initiated at the beginning of a Council term, if possible Financial Condition Assessment The financial condition assessment is a powerful component of the framework that helps municipalities understand their financial health. It also delivers the appropriate messaging to municipal Councils so they can better understand where the municipality has been and where it is going. The Canadian Institute of Chartered Accountants 2007 research report defines the financial condition of a government as its financial health, looked at in the context of the overall economic and financial environment, as measured by 19 : sustainability the degree to which a municipality can maintain its existing financial obligations without increasing the debt or tax burden flexibility the degree to which a municipality can change its debt or tax burden to meet its existing financial obligations vulnerability the degree to which a municipality is dependent on sources of funding outside its control or influence or is exposed to risks that could impair its ability to meet its existing financial obligations and financial commitments 18 Retrieved January 24, Public Sector Accounting Board. Indicators of Government Financial Condition. December 2007 By: David A. Stewart 17