Promoting Financial Sustainability and Financial Benchmarking. By: Jim Bruzzese, President of BMA Management Consulting Inc.

Transcription

1 Promoting Financial Sustainability and Financial Benchmarking By: Jim Bruzzese, President of BMA Management Consulting Inc.

2 Presentation Outline Introduction to Long Range Financial Planning Presentation (LRFP) Outline Financial Condition Assessment Environmental Factors Financial Performance Indicators Financial Forecasting Lessons Learned

3 Municipal Challenges are Complex. Financial environment has fundamentally changed: Operating expenditures increasing faster than inflation Changes in economic/business cycles Shifting demographics aging population Tax resistance desire to limit property tax and rate increases Revenue Pressures - Grant and subsidy rules are subject to change New regulatory requirements Infrastructure gaps

4 Challenges in Typical Planning Processes 1-year Operating Budget Decisions tend to be reactive rather than strategic Does not effectively communicate organizational direction Generally does not effectively link Capital & Operating plans Short-term thinking fails to address the long-term nature of programs and infrastructure The complexities of the new municipal reality cannot be addressed in a year

5 It is Not New or Unique to the Municipal Sector A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be. Wayne Gretzky

6 Outcomes of LRFP Stability and predictability of taxes and rates Quantifies any gaps between available funds and anticipated expenses Helps fair sharing in the distribution of resources between current and future tax/ratepayers = Financial Sustainability

7 Key Elements of a LRFP

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9 Financial Condition Assessment Understand where you ve been and where you re headed Assesses the socio economic environment Assesses the financial environment Helps identify the key financial challenges and emerging trends and where decisions will need to be made Present objective picture of strengths/weaknesses before developing policies

10 Financial Condition Assessment Environmental Factors Factors Affecting Financial Condition Financial Factors -Sources of Revenues -Population Change -Population Density -Demographics -Income & Affordability -Assessment -Construction -Inflation Community Profile Financial Condition Assessment Operating Revenues & Expenditures Debt/ Reserves/ Financial Position -Expenditures -Levy -Operating Surplus/Deficit -Stabilization, Capital, Corporate Reserves -Debt Outstanding, Interest, Principal -Financial Position -Municipal Index -Employment -Unemployment -Interest Rates -Uncollected taxes Economic Conditions Asset Management & Capital Plan -Asset Consumption -Growth -Replacement -New Initiatives -Infrastructure Gap Affordability -Taxes as a % of Income -Water/WW as a % of Income -Total burden

11 Environmental Factors

12 Why are Environmental Factors Important? Describe and quantify a community s wealth and economic condition Provide insight into the community s collective ability to generate revenue Provide insight into the age demographics and trends to help plan for the future delivery of service Help understand whether the municipality is in a growth, decline or constant state Helps understand the challenges/ strengths which will need to be considered in developing a sustainable and affordable plan

13 Environmental Indicators Income Assessment Demographics Population Growth Construction Activity Density Continuous Cycle of Cause and Effect

14 Environmental Indicators Location Population Growth 85+ Ontario municipalities surveyed * North includes Thunder Bay, Timmins, Sudbury, SSM and North Bay Significant differences across Ontario represent different challenges and opportunities North observations: Population decline Lower average household income Low assessment base Large area relative to population 2012 BMA Municipal Study % Dwellings Constructed Before Avg. Household Income 2012 Assessment per Capita Density per Capita GTA 13.6% 51% $ 120,700 $ 153,000 1,060 Southwest 2.9% 68% $ 83,000 $ 127, Eastern 1.9% 73% $ 73,700 $ 106, Niagara/Hamilton 1.6% 70% $ 80,600 $ 113, North * 0.7% 81% $ 71,700 $ 73,

15 Environmental Indicators Location 2012 Levy per Capita 2012 Levy per $100,000 Weighted Assessment 2012 Unweighted Assessment per Capita 2012 Residential Tax Rate 2012 Average Household Income 2012 Property Taxes as % Household Income Oakville $ 1,570 $ 720 $ 198, % $ 152, % Timmins $ 1,350 $ 1,830 $ 61, % $ 77, % Analysis of environmental indicators can provide decision makers with an understanding of community affordability 2012 BMA Municipal Study

16 Financial Performance Indicators Play an important role in: Establishing standards Identifying and tracking progress against goals Comparing performance against internal and external standards Highlighting problems and determining areas for priority attention Sets stage for financial policy development

17 Reserves, Debt and Financial Position 1. Does your municipality have policies to guide reserves/debt levels, limits, targets? 2. Are contributions to capital reserves based on planned replacement of assets? 3. Is your municipality experiencing negative or positive trends? To what extent is the trend occurring?

18 How Much Reserves Are Required? The level of reserves required will vary from municipality to municipality for a number of reasons including: Services provided by the municipality Age and condition of infrastructure Level of expenditures Economic conditions and projections

19 Reserves as a % of Taxation Reserves as % Taxation Location 2007 Tax Reserves 2008 Tax Reserves 2009 Tax Reserves 2010 Tax Reserves 2011 Tax Reserves Average 71% 79% 70% 64% 66% Median 55% 67% 64% 60% 60% Minimum 25% 19% 21% 4% 9% Maximum 238% 232% 224% 220% 200% Survey of 85 Ontario municipalities North reserves as a % of taxation 43% - lower that the average Average of reserves as a % of taxation has been down trending in most municipalities 2012 BMA Municipal Study

20 Analyzing Reserves Total Reserves Stabilization Reserves Capital Reserves Corporate Reserves Program Specific

21 Stabilization Reserves 10% 9% 8% 7% Tax Stabilization Reserves as a % of Own Source Revenues Credit Rating Agencies Recommended Range 6% 5% 4% 3% 2% 1% Reflects levels below credit rating agency recommended levels Reflects positive trend

22 Sample Stabilization Reserve Policies 1. Maintain a separate Stabilization Reserves with a target balance of 5%- 15% of tax own source revenues. 2. Use only for extraordinary type expenditures or one-time operating expenditures including previous years operating deficits. 3. When the Tax Stabilization Reserve balance is lower than 5% of own source revenues, transfer operating surpluses to the Tax Stabilization Reserve. 4. Once the Tax Stabilization Reserve Fund has reached the lower end of the target, transfer the operating surplus to the Capital Reserves.

23 Understanding Your Assets PSAB allows a municipality to understand: What assets you have What are they worth (at least at a historical cost level) What is their useful life Approximately when assets will need to be replaced How much you should be setting aside for the future replacement of existing assets Better Information = Better Decisions

24 Asset Management A key part of the financial condition assessment is developing an understanding of: Annual funding gap Existing funding gap

25 Illustration -Capital Asset Annual Funding Gap Compare reserve contributions to annual amortization $ Tax Annual Contributions to Capital 2010 Total Annual Contribution $ 1,535,800 Annual Amortization (Historical) $ 2,575,600 Annual Amortization (Replacement Costs) $ 5,137,900 Annual Funding Gap (Historical) $ (1,039,800) Annual Funding Gap (Replacement Costs) $ (3,602,100) Reflects an annual gap of $1 million for tax related assets based on historical costs and $3.6 million based on replacement costs This situation is not unique

26 Existing Funding Gap $35,000,000 $30,000, Year Replacement Schedule Tax Related Capital Assets Can also identify how much of the asset base is beyond its useful life by using the PSAB data $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 Average Required $0 Current Contributions Overdue $33.5 million in assets that are beyond their useful life according to the asset inventory information - will take years to address the backlog

27 Capital Reserve/Asset Management Policies 1. Capital Reserves would be used as the primary source to fund the replacement of existing assets. 2. Based on affordability considerations, a phase-in strategy will be developed to provide for contributions to Capital Reserves. 3. A Business Case analysis will be prepared for new capital initiatives, including the operating cost implications based on full lifecycle costing. 4. A 5 year Capital Budget will be presented to Council, including anticipated funding sources

28 Debt Debt policies are required to ensure that: Future debt payments do not jeopardize the provision of essential services Debt obligations will not threaten the long term financial stability of the municipality Debt indicators can reveal: Increasing reliance on debt Decreasing flexibility Amount of debt that the community can absorb

29 Debt Comparisons 2011 Tax Debt Interest as % Own Source Location Revenues North Average 1.0% Niagara/Hamilton Average 1.2% GTA Average 1.3% Eastern Average 1.9% Southwest Average 1.9% 2011 Debt Outstanding per $100,000 Weighted Location Assessment GTA Average $ 230 Niagara/Hamilton Average $ 314 North Average $ 596 Southwest Average $ 694 Eastern Average $ 790 Total North is 3.3% Northern municipalities have low debt interest as percent of Own Source Revenues, however, mid-high debt outstanding relative to assessment base 2012 BMA Municipal Study

30 Sample Debt Policies 1. Debt Charges as a % of Own Source Revenues should not exceed a target of 5%. 2. Long-term debt financing should be restricted to: New initiatives Projects supported by a business plan that show revenues will cover capital and interest costs Projects where the cost of deferring expenditures exceeds debt servicing Projects tied to third party matching funding Note: These restrictions may have to be phased in to meet short term budget challenges

31 Financial Position Financial Position = Assets Liabilities Financial Position Per Capita Location Eastern $ 75 $ (426) $ (364) $ (700) GTA $ 543 $ 442 $ 391 $ 435 Niagara/Hamilton $ 795 $ 721 $ 652 $ 549 North $ 228 $ 139 $ (3) $ 35 Southwest $ 435 $ 14 $ 10 $ 39 Generally seeing a downward trend in financial position across Ontario BMA Municipal Study

32 Financial Position per Capita This municipality is in the process of developing a long range financial plan 32

33 Summary, Reserves, Debt, Financial Position Reserves, Debt and Financial Position analysis is one of the foundations to fiscal sustainability and the development of a LRFP Provides knowledge and contextual information Indispensable for future financial forecasting Policy development in this area will play a significant role in planning and forecasting

34 Net Municipal Levy Per Capita Levy per capita does not indicate value for money or the effectiveness in meeting community objectives. Net municipal expenditures per capita may vary as a result of: Different service levels e.g. transit unique for size of Ingersoll Variations in the types of services Different methods of providing services Different residential/non-residential assessment composition Varying demand for services Locational, demographic and socio-economic differences Urban/rural composition differences User fee policies Age of infrastructure What is being collected from rates as opposed to property taxes

35 Ontario Observations Fiscal Capacity On a spending per capita basis the differences are not significant but due to significantly different assessment bases, the spending per $100,000 varies considerably. Generally more flexibility in GTA municipalities 2012 BMA Municipal Study

36 Taxes Receivable Every year, a percentage of property owners is unable to pay property taxes. If this percentage increases over time, it may indicate an overall decline in the municipality s economic health If uncollected property taxes are rising, further investigation is needed to try to identify the causes (why is it happening?), assess the significance and devise action strategies (what can be done?)

37 Taxes Receivable Generally 8% is the limit considered acceptable Total North average is 16% 2012 BMA Municipal Study

38 Affordability Developing a financial plan must consider affordability Affordability is often evaluated by expressing taxes, water and sewer charges as a percentage of average household income Affordability must be balanced against optimal policies for fiscal sustainability

39 Ontario Observations 85+ Municipalities Location 2012 Est. Avg. Household Income Property Taxes as % Household Income Total Municipal Burden as % Household Income GTA $ 120, % 4.0% Southwest $ 83, % 4.8% North $ 71, % 5.0% Niagara/Hamilton $ 80, % 5.2% Eastern $ 73, % 5.2% Significant range what s important is to understand trends over time and also where affordability may become an issue 2012 BMA Municipal Study

40 Summary Financial Condition Assessment Community Profile Debt/ Reserves/ Financial Position Economic Conditions Long Range Financial Plan Asset Management & Capital Plan Affordability Operating Revenues & Expenditures

41 Financial Policy and Financial Strategic Development

42 Financial Policies Financial policies in the following key areas should be developed/updated Asset Management User Fees, Permits, DCs Capital Budgeting Reserves Debt Management Investments Disposition of Surpluses

43 Financial Policies Tips in establishing financial policies and strategies Identify key issues and challenges Look for best practices and industry suggested policies Look for municipal examples Consider the reasonableness of these policies Impact on budgets Phase-in strategies

44 Developing the Long Range Forecast Historical Trend Analysis, Financial Condition Assessment Master Plans, Planning Studies Financial Policies

45 Consider All Key Assumptions What is impact of the 10 year capital budget on the operating budget? (Reserves, Debt Charges, Debt Out., Operating Costs) What is the budget impact of CPI, utility rates forecasts? What if interest rates increase by 0.5%, 0.75% and 1%? What is the impact on taxes/rates if we funded our infrastructure deficit over 5, 10, 15, 20 years? What is the sensitivity of our consumption/assessment assumptions on taxes/rates? What if we achieved efficiencies of 2% on all controllable programs? If we changed our financing policies, what is the impact on debt metrics, rates and taxes? What is the impact of salary/benefit negotiations under various scenarios? What is the impact on a taxpayer/ ratepayer over time? Are we still in the affordability range?

46 Sample Work Plan Strategic Planning Identify & Confirm Critical Issues Analyze Financial Trends, Develop Forecasts Analyze Critical Issues Implement Through Budget Identify Imbalances Financial Strategy Workshop Prepare LRFP Implement and Monitor Key Staff Task Council & Staff Task Council & Staff Task with Critical Point of Public Input

47 LRFP Updates Long-term financing plan may not be perfectly accurate, but it is better to create them and make mid-course corrections Updating the plans on an annual, rollforward basis is recommended, consistent with the municipal budget cycle By failing to prepare, you are preparing to fail. Benjamin Franklin

48 Lessons Learned

49 Lessons Learned Identify Assumptions Keep it transparent Recognize that assumptions will change over time Know Your Forecast Drivers Focus most of your attention on the key drivers and areas of sensitivity Where do small changes in assumptions make big differences in the forecast? It is better to know some of the questions than all of the answers James Thurber

50 Lessons Learned Consider All Viable Options All options should be studied for problem solving Objective analysis of expenditures reductions Revenue generation opportunities Organizational change Changes in service levels/programs and service delivery

51 Lessons Learned Establish Performance Management Indicators Ratios are frequently best for example: Debt to Reserve ratio Reserves as a % of Expenditures Debt Charges as a % of Expenditures Levy Per Capita Taxes as a % of Income

52 Lessons Learned Concise and Consistent Messaging Demonstrate compliance with strategic plans, priorities and financial policies Communicate, Communicate, Communicate Use the plan to stimulate big picture strategic thinking Reveal future imbalances and trends Most people spend more time and energy going around problems than in trying to solve them. Henry Ford

53 Final Lessons Learned "Forget about style; worry about results. Bobby Orr

54 Jim Bruzzese, CGA, PMM BMA Management Consulting Inc