3.36 Municipal Capital Works Program. Introduction. Scope and Objectives

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1 Introduction The Department of Municipal and Provincial Affairs is responsible for matters relating to local government, municipal financing, assessment, urban and rural planning, development and engineering, and coordination of emergency planning for municipalities. Municipalities wishing to undertake capital works projects such as water and sewer or road paving must apply to the Department for approval under the Municipal Capital Works Program. Interim financing for approved cost shared projects is generally provided to municipalities by the various chartered banks. After completion of the project, the interim bank debt is then typically refinanced through the Newfoundland Municipal Financing Corporation or, in more recent years, through the chartered banks. Total approved funding for the Program was $26.6 million. Individual projects approved will be financed by the Newfoundland Municipal Financing Corporation and chartered banks. Each year, Government provides grants to municipalities to help them pay the principal and interest on this debt. Scope and Objectives We completed our review of the Municipal Capital Works Program in September Our objectives were to: determine the nature and objectives of the Program; determine whether Program guidelines were in place and were being complied with; review how the Program is administered and how funds are allocated; and assess whether monitoring and reporting mechanisms have been established to measure success towards achieving Program objectives. We were informed that officials at the Department complete the initial ranking of projects to be considered under the Program and make recommendations to the Deputy Minister who, in turn, submits them to the Minister. The Minister, in turn, makes a submission to a Select Committee of Cabinet. Any one of these stakeholders may make changes to the list of projects ranked and recommended; however, reasons for any changes are not always documented in the files. As the list of rankings forms part of a Cabinet submission, the Department declined to provide us with this information. Therefore, we were unable to fully review the systems and processes used in the ranking and selection of capital works projects. 440 Auditor General of Newfoundland

2 Officials further informed us that the Department has conducted a comprehensive review of the Program; however, we were also unable to obtain the related report as we were informed that it was intended for Cabinet as well. Conclusions Our review disclosed that: Since Cabinet makes the final decision as to which municipal capital works projects are approved for funding by the Province, the information and support for the projects were not made available for my review. Our review of the Municipal Capital Works Program indicated that there is no approved, written policy on how the Provincial and municipal cost shared ratios are determined for capital works projects. Prior to 1997, the annual cost sharing arrangements for municipal capital works projects were determined using a formula prescribed in the regulations under the Municipal Grants Act. These regulations were discontinued in 1996 with the intention that the formula for funding be replaced by departmental policy. This was never done. Departmental officials informed us that the cost shared ratios depend on the municipality s debt to revenue ratio. However, in 14 of the 20 projects reviewed, the approved cost shared ratio was not consistent with the ratio which would be expected using the criteria indicated by the Department. The Department has completed its strategic plan and is currently in the process of developing operational plans for its divisions. Although officials did inform us that policies and procedures relating to the Municipal Capital Works Program are being developed, there was no indication that the calculation of cost sharing ratios would be consistently applied and based on a prescribed formula. Findings and Recommendations 1. Municipal Capital Works Program Municipalities wishing to cost share capital works projects such as water and sewer or road paving with the Province must apply to the Department of Municipal and Provincial Affairs for approval. Interim financing for approved cost shared projects is generally provided to municipalities by chartered banks. After completion of the project, the bank loan is then refinanced either through the Newfoundland Municipal Financing Auditor General of Newfoundland 441

3 Corporation or, in more recent years, through a chartered bank. To assist municipalities in repaying these loans, the Department provides annual grants for its share of principal and interest costs. In , total funding approved by Government for the Municipal Capital Works Program was $26.6 million. The debt associated with projects funded through the Program will be repaid by the municipalities and the Department of Municipal and Provincial Affairs. Road related projects are typically financed over a 10 year period while water and sewer projects are typically financed over a 15 year period. For the Department paid $28.5 million in interest payments and $38.3 million in principal repayments for the debt related to capital works projects from prior years. As noted in the Scope and Objectives section of this report item, we were unable to fully audit the systems and processes used in the ranking and selection of capital works projects. This was due to the Department declining to provide us with the final list of projects ranked and recommended by the Department and the reasons for any changes made to these rankings during the final approval process. Presently, the Auditor General Act does not permit the Auditor General access to information that contains recommendations submitted by a Minister of the Crown to the Executive Council or the background analysis. 2. Program Administration and Funding Allocation (a) Program Criteria Prior to 1997, the annual cost sharing arrangements between the Province and municipalities for water and sewer capital works projects were determined using a formula prescribed in the regulations under the Municipal Grants Act. These regulations were discontinued in 1996 as a result of Government s Regulatory Reform Process with the intention that the formula for funding provided for under the regulations would be replaced by departmental policy. For road work prior to 1997, the Province paid 60% of the financing cost while the municipalities paid 40%. Our review of the Municipal Capital Works Program indicated that there is no approved, written policy on how the Provincial and municipal cost shared ratios are determined for capital works projects. Since there is no approved written policy on how the cost shared ratios are determined, Departmental officials informed us that cost shared ratios are calculated for each capital works project in accordance with informal criteria but are subject to change throughout the approval process. The criteria which officials provided to us are outlined in Figure Auditor General of Newfoundland

4 Figure 1 Municipal Capital Works Program Cost Sharing Ratio Criteria (Provincial/Municipal) Type of Project Debt to Revenue Ratio of Municipality Cost Shared Ratio (Provincial/Municipal) Water and Sewer Less than 40% 50 / 50 40% to 50% 75 / 25 Greater than 50% 100 / 0 Roads Less than 40% 25 / 75 40% to 50% 50 / 50 Greater than 50% 75 / 25 Source: Departmental information (b) Program Testing The Department provided a listing relating to individual projects approved under the Program for the fiscal year. The listing included 237 projects approved for 136 municipalities at a cost of $25.4 million. Figure 2 provides a summary of the 10 municipalities with the highest funding approved. As indicated in the figure, these 10 municipalities were awarded $13.8 million or 54% of the total $25.4 million in project funding. Included in these 10 municipalities were two of the Province s three cities, which were awarded a total of $8.0 million. Auditor General of Newfoundland 443

5 Figure 2 Project Funding Municipalities with Highest Funding Approved Year Ended 31 March 1999 Municipality Number of Projects Approved Total Funding Approved St. John s 9 $ 5,258,500 Corner Brook 5 2,721,000 Old Perlican 1 1,729,000 Conception Bay South 2 830,000 Hermitage-Sandyville 2 645,500 New-Wes-Valley 7 572,550 Twillingate 4 566,000 Clarenville 4 506,250 Deer Lake 3 465,000 Carbonear 6 456,327 $ 13,750,127 We selected 20 capital works projects to determine whether the cost sharing ratios were in accordance with the criteria indicated in Figure 1 as provided by Departmental officials and compared these ratios to the final approved cost sharing ratios. Our testing indicated that 14 of the 20 projects were cost shared using a ratio that was not consistent with the criteria provided. Figure 3 provides details of funding approved for these 14 projects. 444 Auditor General of Newfoundland

6 Figure 3 Project Funding Cost Shared Ratios (Provincial/Municipal) Municipality Project Type Project Cost Debt/ Revenue Ratio Cost Shared Ratio per Criteria Approved Cost Shared Ratio (Provincial/Municipal Carbonear Corner Brook Frenchman s Cove Harbour Grace Harbour Grace Mount Pearl $ 60, / / 0 1,600, / / 0 60, / / 75 32, / / 0 80, / / , / / 50 New-Wes-Valley Water and Sewer 220, / / 0 Old Perlican Water and Sewer 1,729, / / 0 Pouch Cove 95, / / 75 St. Lawrence Water and Sewer 346, / / 35 Summerford Water and Sewer 189, / / 0 Upper Island Cove Water and Sewer 372, / / 25 Victoria Water and Sewer 65, / / 0 Whiteway Water and Sewer 70, / / 0 Source: Departmental information Auditor General of Newfoundland 445

7 In the case of Frenchman s Cove, discussion with Department officials indicated that the difference in cost sharing ratio was caused by a computational error and the actual cost sharing ratio should have been as provided for in the criteria. In the case of Pouch Cove, we were advised that the difference in cost sharing ratios was caused by the use of a debt to revenue ratio that, due to the lateness of the project approval, may not have been accurate. In the other cases, Department officials indicated a variety of reasons for the differences in approved cost sharing ratios compared to those expected based on the criteria, including: the impact of transferring industrial water systems to the municipalities; the negative impact of additional debt for those municipalities which had been allocated funding under the Department s Debt Relief Funding Program; and discussions between the Department and the municipalities involved as to the municipalities responsibility or ability to repay related debt. 3. Program Monitoring and Reporting The Municipal Capital Works Program is a major Government program. In , Government approved $26.6 million in funding for the Program. In addition, Government provided grants totalling $28.5 million and $38.3 million to pay interest charges and principal debt repayments respectively relating to municipal capital works programs approved in previous years. Given the significant cost of this program there should be regular reporting on the objectives and accomplishments of this program. Our review disclosed that there is no regular reporting on this program. The Department has developed a strategic plan and is currently in the process of completing operational plans for its divisions. As a result, approved guidelines defining program objectives, organizational structure, processes, and expected outcomes were not in place for the Municipal Capital Works Program. Although officials did inform us that policies and procedures relating to the Municipal Capital Works Program are being developed, there was no indication that the calculation of cost sharing ratios would be consistently applied based on a prescribed formula. In addition, the Department has not established a process to adequately monitor and report on the program s achievements. 446 Auditor General of Newfoundland

8 Recommendations The Department should establish a formula that would ensure that municipal capital works cost sharing ratios are determined in an equitable manner and be transparent. As a result of our finding inconsistencies in the cost sharing ratios for 14 of 20 municipal capital works projects reviewed, the Department should review existing cost sharing ratios to ensure they are consistently applied. The Department should continue with its strategic planning process. The Department should report annually to the House of Assembly on the programs which it delivers including the Municipal Capital Works Program. Department s Response For the 1999/2000 fiscal year, the Department has established a 50/50 Provincial/Municipal cost sharing ratio. This formula is applied consistently with the exception of demonstrated emergency projects, whose councils have maximized their tax rates to meet the minimum requirement for debt relief. There is now no legislative requirement for Departments to table their annual reports in the House of Assembly. If such a requirement is set as policy by Government, the Department will be well positioned to present the reports as a result of recent strategic planning initiatives. Auditor General of Newfoundland 447