I am totally opposed to the Town borrowing for this purpose.
Below is a brief that I made to council during the recent strategic planning session, which explains amongst other things, why increasing debt load for this purpose is not sustainable. This brief was prepared by myself and George Ross, (CA-retired). Mr Ross was the Chief Financial Officer for a major corporation prior to retirement.
Fiscal responsibility
What does it mean to be fiscally responsible? Does council have appropriate fiscal policies
in place? Does council have a clear set of financial goals and priorities that
are fiscally responsible? Does the present 5-year plan reflect fiscally
responsible policies? As with many concepts, fiscal responsibility means different
things to different people. It must also be recognised that because of its
nature as a service provider with revenue based on property taxes, responsible
fiscal policies for municipal governments are different from the policies of
senior levels of government. If council were to agree on a definition of fiscal
responsibility, then councillors could measure all its policy decisions against
that definition.
Fiscal
Responsibility: for municipalities
means developing financial policies that are consistent with the long term
provision of the services required and expected to sustain the community and
its assets.
In an attempt to put financial constraints on municipalities
and to enforce a level of fiscal responsibility, the Community Charter
stipulates that a municipality must adopt a financial plan in which “The total
of the proposed expenditures and transfer to other funds for a year must not
exceed the total of the proposed funding sources and transfers from other funds
for the year”. A balanced budget!
Municipalities must conform to Generally Accepted Accounting
Principles (GAAP) and the PSAB prescriptions. Under GAAP the statement of
operations must include as an expense an allowance for depletion, depreciation
and amortization (DD&A). This should apply to both reporting in the
financial statements and budgeting in the 5-year plan.
In 2012 the town reported a deficit of $500,517. In 2013 the
budget shows an operating surplus of $1.3 million; however this was calculated
without allowance for DD&A. When the financial statements are prepared at
the end of the year an allowance for DD&A must be included. After applying
an estimated DD&A of $2.4, a deficit of $1.1 million will be reported.
The most powerful
number generated by PSAB 3150 practices is the 2012 depreciation of all Tangible Capital Assets (TCA)
owned by the town: $2,399,631. This financial term represents the collective
asset value lost in a single year of in-service life. For the purposes of
Council’s strategic planning, this is the ‘minimum’ annual investment target
that should be met to ensure future delivery of services dependent upon these
TCA.
If fiscal responsibility for municipalities means developing
financial policies that are consistent with the long term provision of the
services required and expected to sustain the community and its assets, then in
future when constructing the 5-year financial plan, DD&A should be included as an
expense and that budget should not have a deficit. Balancing the budget must be
achieved by adjusting either revenues or expenses or both. This will provide
the cash flow to ensure future delivery of the services dependent upon these
TCA.
Asset Management Plan
Depreciation is only an estimate of the capital investment
required to maintain the assets and is rarely sufficient because of inflation.
The working life of the asset is only an estimate and/or the asset may not need to
be replaced. Senior government grants can also contribute to the capital
required for renewal through grants. For these reasons it is important to have a sound and up-to-
date asset management plan.
Reserve Funds
The timing of expenditures on replacements and asset renewal
will not match the timing of the charges for depreciation. Hence the need for
reserve funds!
Balancing the budget
cannot be achieved by borrowing.
Philosophically; while it is true that capital expenditures
on an individual asset should extend its life for the enjoyment of future
generations of tax payers, it is also true that today’s taxpayers are enjoying
assets that are depreciating and will have to be paid for by next generation
taxpayers.
DD&A (Depletion, Depreciation and Amortization) represents the collective asset value lost in a single year and as a matter of equity the taxpayers
should pay for that use in the year it was enjoyed.
Practically; using debt to fund DD&A is unsustainable.
Assuming that the town has a borrowing capacity of $10 million and that the
DD&A is $2.5 million annually; then after 4 years the town would have
reached its debt limit and would no longer have the option to borrow. The
assets on the other hand continue to depreciate.
To achieve financial stability, the town must adjust
revenues and expenses to create a balanced budget after an allowance for
DD&A. In an ideal plan, cash flow from DD&A plus grants would take care
of all the town’s capital expenditures.
New Building Canada
Fund
The town should be in a position to take advantage of the
New Building Canada Fund (NBCF) without resorting to borrowing and has already
identified capital projects that were discussed during last year’s budget
deliberations. Staff should determine which projects qualify for the NBCF.
I can identify 3 sources of town funds for matching the NBCF.
·
Capital already allocated in the 2014 budget;
$1,809,184
·
Water and sewer reserve funds; $600,000
·
Budgeted expenditure savings; $400,000
Every $1 saved is worth $3 in NBCF projects.
Keith W Hern
2013-08-26
The opinions expressed in this blog are my personal
opinions and may not represent the opinions of other councillors nor the
opinions of council.
