AMCTO AM Financing Strategy - Infrastructure Deficit - You ...

AMCTOAM Financing Strategy -

Infrastructure Deficit -You’re Not Alone

Donna HerridgeManager, Accounting & Corporate Services

June 12, 2018

1

Agenda

• AM overview• How Ontario municipalities finance

Infrastructure• Managing your infrastructure deficit by

managing risk• Decision making models• MFOA Tools• Key Success Factor

2

What is the population of your Municipality?

A. 0 ‐ 4,999B. 5,000 ‐ 19,999C. 20,000 ‐ 49,999D. 50,000 ‐ 99,999E. > 100,000

0 ‐ 4,

999

5,000

‐ 19,9

9920

,000 ‐

49,99

950

,000 ‐

99,99

9

> 100

,000

0% 0% 0%0%0%

Asset Management Planning Definition“Asset management planning is the process of making the best possible decisions regarding the building, operating, maintaining, renewing, replacing and disposing of infrastructure assets. The objective is to maximize benefits, manage risk, and provide satisfactory levels of service to the public in a sustainable manner. Asset management requires a thorough understanding of the characteristics and condition of infrastructure assets, as well as the service levels expected from them. It also involves setting strategic priorities to optimize decision-making about when and how to proceed with investments. Finally, it requires the development of a Financial Plan, which is the most critical step in putting the Plan into action.”

- Building Together Guide

4

Plan vs Planning

5

What statement best describes AM in your municipality?

A. We don’t have an AM Plan

B. It’s a document that sits on the shelf

C. AM is part of our culture but don’t documented

D. Strong AM plan AND Planning

We d

on’t h

ave a

n AM

Plan

It’s a

docu

ment

that s

its ..

AM is

part

of ou

r cult

ure...

Stron

g AM

plan A

ND Pl

a...

0% 0%0%0%

AM Planning

Complex Integration

7

Components of AM Plan – MFOA Self Assessment Tool (SAT)

8

1. Introduction2. Asset Management Policies and Strategies3. State of Local Infrastructure4. Levels of Service Analysis5. Lifecycle Management Strategy6. Financing Strategy7. Asset Management Integration8. Continuous Updates and Improvements9. Asset Management Tools10. Internal Governance and Ownership11. Council Approval and Support12. Public Engagement and Consultation

Implementation of Tangible Capital Asset vs AM

A B C D E F

9

F B D E C A

A B D E C F

TCA ‐ Sequential Order

AM ‐ Random Steps…. Each asset may differ

Self Assessment Tool (SAT) and Guide

10

Self Assessment Tool (SAT) and Guide

11

Regulation Overview

Strategic Asset Management Policy(by July 1, 2019)

Requires municipalities to outline commitments to best practices and continuous improvement

Asset Management Plan: Phase 1(by July 1, 2021)

For core assets:• Inventory of assets• Current levels of service measured

by standard metrics• Costs to maintain levels of service

Asset Management Plan: Phase 2(by July 1, 2023)

Builds out the Phase 1 plan to include all assets Asset Management Plan: Phase 3

(by July 1, 2024)

Builds on Phase 1 and 2 by adding:• Proposed levels of service• Lifecycle management and

Financial strategy

Additional Information

• Municipalities under 25,000 not required to discuss detailed risk analysis or growth.

• Plans would be updated every 5 years; annual progress update given to council.

Financial strategy –O. Reg 588/17Asset management plans must include:6.(1)4. A lifecycle management and financial strategy that sets out the following information with respect to the assets in each asset category for the 10-year period:

iii. An identification of the annual funding projected to be available to undertake lifecycle activities and an explanation of the options examined by the municipality to maximize the funding projected to be available.

13

Capital financing strategies

14

Capital Financing Strategies Continuum

“Pay As You Go”

100% Debt FinancingSome

combination thereof

3rd Party Contributions

Drawing Down Reserves

15

“Pay as you Go”

• “Saving” all funds in advance of building or acquiring the asset

• Great discipline and patience• Forgoing many needs in the meantime• May be more costly in the long run

• Implications of forgone service• Inflationary impacts on project costs

16

100% Debt Financing

• “Intergenerational equity”• Spreads costs among taxpayers consuming it

• Involves paying for asset with interest• Debt is more expensive when interest rates are increasing• e.g., Debt at 5% over 15 years is approximately 45% more

expensive• Provincial limits on the total amount of debt

• Annual Repayment Limit (ARL)• Annual debt servicing payments (principle and interest)

cannot exceed 25% of “own source revenue”

17

Drawing Down Reserve Funds

• Established via rate supported or tax based funding

• Lifecycle contributions each year to fund replacements

• Not very adaptable – may tie decision makers to past priorities

18

How do we finance and fund infrastructure in Ontario?

19

How do we finance infrastructure?

15.8%

20.3%

63.9%

0% 10% 20% 30% 40% 50% 60% 70%

Long Term Liabilities Incurred

Government Transfers

Financing from Dedicated Revenue

Financing Sources of Capital Asset Acquisitions(Source: FIR 2016)

20

How do we finance infrastructure? (continued)

21

0.01%

1.28%

3.20%

4.30%

13.34%

41.80%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Investment Income

User Fees and Service Charges

Other

Property Taxes

Development Charges

Reserves and Reserve Funds

Financing Asset Acquisition from Dedicated Revenue by SourceSource: FIR 2016

Compound Interest

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“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it. Compound interest is the most powerful force in the universe.”

Borrowers & Savers

23

All One Investment Program investments are fully liquid but each portfolio is designed for a specific

investment time horizon

Investment Income

Turning Risk into Volatility…Long Term Equity Returns

For illustration purposes only. This study looks at Index data only and as such ignores fees and trading costs. Actual result will vary.

Source: Bloomberg

Equity Investment: Long Term History (Jan 1956 to Feb 2018)Total Return (Includes Dividends) Based on S&P/TSX Composite History

Rolling Rolling Rolling Rolling Rolling Rolling Rolling Rolling Rolling

Length of Investment (in Yrs) 1 Yr 2 Yrs 3 Yrs 4 Yrs 5 Yrs 6 Yrs 7 Yrs 10 Yrs 25 Yrs

Total # of Periods 734.00 722.00 710.00 698.00 686.00 674.00 662.00 626.00 446.00

# of Negative Periods 197.00 126.00 78.00 30.00 15.00 1.00 0.00 0.00 0.00

% Of Negative Periods 26.84% 17.45% 10.99% 4.30% 2.19% 0.15% 0.00% 0.00% 0.00%

Highest Period Returns 86.93 54.58 39.27 33.24 27.76 24.68 21.04 19.50 13.76

Lowest Period Return -39.16 -22.15 -11.10 -5.50 -1.91 -0.38 1.94 2.84 6.95

Average Period Return 10.42 9.63 9.47 9.45 9.48 9.43 9.46 9.48 10.07

24

Portfolio Objectives and Structure

* These asset classes (Canadian equities and Canadian Corporate Bonds with maturities longer than five

years) are available for investment for municipalities only through One Program as per the Municipal Act Eligible

Investment regulation

25

PortfolioIntended

Investment Duration

Investment Approach Holdings

Money Market 1 month to 18+ months

Preserve capital and maintain liquidity while maximizing short-term income

‐ Canadian treasury bills ‐ High quality commercial paper‐ Banker’s acceptances‐ Floating rate notes

Bond 18 months to 3+ years

Provide a higher return over longer investment horizonsthrough diversified investments

‐ Federal, provincial and municipal bonds

‐ High quality bank paper‐ Bank guaranteed debt

Universe Corporate Bond*

4+ years

Investment in highly rated corporate bonds maturing over a wide timeframe

‐ Canadian corporate bonds‐ Federal, provincial and

municipal bonds

Canadian Equity* 5+ years

A diversified, conservatively managed portfolio of equity securities issued by Canadian corporations

‐ Canadian equity securities

+High Interest Savings Account (HISA)

26

Other options

1. Shared services2. Reduce Costs

• Project bundling

3. Other Options:• Alternative Finance and Procurement (AFP)• Public Private Partnerships

27

Other Sources of Revenue –Thinking Outside the Box• Stormwater Chargehttps://www.youtube.com/watch?v=xVW‐‐pNEOEM

28

The link between financing and funding (revenues)

Financing Source Revenue Source

Reserves and Reserve Funds Yesterday’s Taxes and User Fees

Property Taxes and User Fees Today’s Taxes and User Fees

Long-term Liabilities (Debt) Tomorrow’s Taxes and User Fees

29

Affordability – O. Reg 588/17

Asset management plans must include:6.(1)2. An explanation of why the proposed levels of service are appropriate for the municipality, based on an assessment of the following:

iv. The municipality’s ability to afford the proposed levels of service.

30

Affordability of Level of Service

31

Does your municipality have an infrastructure deficit?

A. YesB. NoC. I don’t know

Yes

No

I don

’t kno

w

0% 0%0%

Have you fully funded the deficit?

A. NoNo

0%

AM is about managing your infrastructure deficit

34

Affordability – O. Reg 588/17

6.(1)4. iv If, based on the funding available, the municipality identifies a funding shortfall for the lifecycle…

A. an identification of the lifecycle activities, … that the municipality will undertake, andB. if applicable, an explanation of how the municipality will manage the risk associated with not undertaking any of the lifecycle identified….

35

Tools to Assist in Decision‐Making

1. Detailed Risk Model2. Criteria Approach3. Category Approach

36

Evidence Based Decision‐Making

1. Detailed Risk Approach

Technical:• Probability of Failure (PoF)• Consequence of Failure (Cof)

Process:• Assign numerical values to rating• Each project is rated

37

1. Detailed Risk Approach Cont’d

38

Probabilityof Failure

Consequence of FailureInsignificant Minor Moderate Major Catastrophic

Rare L L M M H

Unlikely L M M M H

Possible L M M H E

Likely M M H H E

Almost Certain M H H E E

1. Detailed Risk Approach Cont’d

Comments• Compares diverse projects (Roads vs buildings)• Administered through a central group• Very detailed • Resource intense• Complex

39

2. Criteria Approach – Points

Sample Criteria:• Health & Safety• Legislative• State of Good Repair• Implementation of Strategic Plan• Implementation of Master Plan• Efficiency• Self‐funding• Maintain existing service level• Improve service levelAssign points to each criteria

40

2. Criteria Approach Cont’d

Project $$$ Points• Project 1 $10,000 97• Project 2 $50,000 90• Project 3 $10,000 87• Project 4 $15,000 87• Project 5 $15,000 85• Project 6 $10,000 83• Project 7 $5,000 83• Project 8 $10,000 83

41

Funding of $105K

Totals $110

2. Criteria Approach Cont’d

• Compares different projects (Roads vs Buildings)• Careful consideration to criteria

• Align with municipal priorities

• Many projects have the same score• Time consuming• Inconsistent interpretation of criteria

42

3. Category Approach

Mandatory

Critical

Efficiency or Cost Savings

State of Good Repair

Improve

43

Projects are assigned to one category

Funding Based on entire category…. until funding runs out….

3. Category Approach

Mandatory● Locked in commitments or vital components

associated with cash flowed projects approved by Council in prior years

● Projects have prior legally binding commitments where contracts are signed, or have minimum legal, safety, regulatory, or other mandated minimum requirements

● Not achieving these requirements will lead to legal action, fines, penalties, or the high risk of liability against the city

● Cannot be deferred or stopped

Critical



Improve

44

Mandatory

● Funding of projects to maintain critical components at current service levels and in a state of good repair

● Not mandatory, but funding may go towards projects that will otherwise become mandatory in future years

● If not undertaken, there is a high risk of breakdown or service disruption

Critical



Improve

3. Category Approach Cont’d

45

Mandatory

● Have a break even over the life of the capital due to operational cost savings or cost avoidance

● Will provide financial benefits in the future

Critical



Improve


46

Mandatory

● Not mandatory, but funding may achieve up to 100% of current service levels

Critical



Improve


47

Mandatory

● Funds are used for service enhancements that increase current levels of service

● Will include new capital initiatives in budget requests and the 10% of tax funding for development charge projects

Critical



Improve


48


• Simpler approach• Reflects municipal priorities

• Interpretation of categories• Run out of $$ for Improvement..

• Set aside some minimal funds for each category

49

50

You Make Decisions.. You Assess Risk.

Assistance from MFOA

51

What is a Strategic AM Policy?

The Strategic AM Policy compliments and supports a municipality’s Strategic Plan and other core documents to:

– Set and communicate organizational commitment to AM principles and philosophies

– Support formation of a culture that values asset management and makes it a priority

– Align and integrate asset management in to an organization’s Strategic Planning process, as well as other key goals, policies and plans

52

What is a Strategic AM Policy? Cont’d

The Strategic AM Policy compliments and supports a municipality’s Strategic Plan and other core documents to:

– Define asset management responsibilities and accountabilities for council, management and staff

– Confirm how stakeholders will be engaged and their input included in the AM planning process

– Guide the asset management planning process, and embed AM thinking in to ongoing capital, operations and maintenance activities

53

Strategic AM Policy (SAMP) Toolkit

The MFOA worked with KPMG to develop a Strategic AM Policy Toolkit to support municipalities in developing this foundational documentand implementing it within their organizations.

– Scalable policy templates meeting the requirements of the regulation

– Easy to understand guidance covering policy planning, preparation and implementation, from needs assessment and information gathering, to policy development and socialization, to roll-out and implementation

– Structured Case Studies highlighting the experience and lessons learned by a dozen Pilot Municipalities who have worked with and informed the toolkit development process

54

SAMP Overview

55

*

*

SAMP – Perspectives ‐ SAMPLE

56

SAMP – Case Study –Medium/Small Municipalities

57

SAMP – Case Study Cont’d –Medium/Small Municipalities

58

AMP It Up 2.0

59

• Will send AM experts (finance and engineering) to a municipality to:

• Assess your existing AMP• Determine your level of involvement/knowledge/comfort with the plan

• Identify next steps that can have the biggest impact in advancing your plan

• Devise a near and medium term work plan• Coaching NOT doing

What is Your biggest challenge related to AM Planning?

A. ProcessesB. PoliciesC. PeopleD. Systems

Proce

sses

Polic

ies

Peop

le

Syste

ms

0% 0%0%0%

Doing Things Differently Through IntegrationOUTCOME: To provide services to residents and businesses in an efficient, sustainable and affordable manner over the long term

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What Elements was a KeyContributor of Successful AM?

63

1. Introduction2. Asset Management Policies and Strategies3. State of Local Infrastructure4. Levels of Service Analysis5. Lifecycle Management Strategy6. Financing Strategy7. Asset Management Integration8. Continuous Updates and Improvements9. Asset Management Tools10. Internal Governance and Ownership11. Council Approval and Support12. Public Engagement and Consultation

Integration – People

64

AM Planning

Planning Department

Council

Public

FinanceSenior Staff

Planning Staff

Operational Staff

Building Blocks…

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Tangible Capital Assets

Asset Management Planning

Long Term Financial Planning

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AM… A Stop Along the Way to Financial Sustainability

Key Messages

• AM is complex

• Its not all about closing the Infrastructure Deficit gap BUT MANAGING IT….and the associated risk

• Integration is key with people being a area of focus

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