By Craig Binning and Andrew Mirabella
Municipalities are faced with a growing backlog of infrastructure needs, while funding sources remain limited and constrained. In Ontario, the municipal related infrastructure deficit (for engineering services) is estimated at $60 billion. If other municipal infrastructure, such as parks and recreation, libraries and cultural centres, are added to the total, the true deficit is much greater.
Ontario municipalities are faced with addressing this infrastructure deficit by maintaining infrastructure in a state of good repair, while balancing manageable tax and utility rate increases to support identified investment and operating requirements. There are three approaches they can use to optimize infrastructure investment.
Prioritizing capital works
A council-approved comprehensive asset management plan, which prioritizes capital repair and replacement requirements, is critical to the ongoing management of an infrastructure budget. Identifying how a municipality should allocate funds towards capital related activities can be a daunting task. Municipalities are faced with critical decisions related to which capital projects should be carried out, while considering the availability of funding; benefit of the work to the community; consequences of asset failure; and if the project meets strategic goals, objectives and legislated requirements.
A capital prioritization matrix to evaluate the need and timing of each project can be a great tool to help municipal decision-makers integrate asset management into long-term financial and strategic planning.
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This prioritization matrix can help a municipality tailor its long-term capital plan to specifically address capital works and consider the following: consequences of asset failure; future cash-flow implications; effect on service levels; and, any advantages/efficiencies by undertaking a project at a specific time.
Once the municipality has scored potential projects, the prioritized capital project list could prove to be a valuable piece of information when making capital investment decisions. The adoption of a capital prioritization model will provide a formal and consistent approach which municipal staff and council can use. By applying the prioritization model, a municipality can easily decipher which projects can be funded under the current budget and which can be deferred for consideration at a later date.
Planned debt is a viable financing tool
Often, the strategic use of long-term debt is overlooked as a viable financing tool to carry out municipal infrastructure projects. Delaying the response to infrastructure needs in order to pursue council-directed “no debt” policies, or efforts to minimize the use of debt, can further exacerbate the existing municipal infrastructure deficit. This can also reduce the service level that an asset can deliver. It may also increase the cost of replacement, repair and maintenance over the long term, as the quality of the asset deteriorates.
Planned debt can be a good way of spreading the costs of a project over the useful life of an asset. It also promotes intergenerational equity in which ratepayers who benefit from the asset would share the cost. Debt should be taken on in a responsible manner with reference to: the term of the debt relative to the asset’s useful life; a practical repayment strategy; and, the overall community benefits received for undertaking the project.
Given the current economic climate, municipalities may capitalize on the favourable borrowing environment as Canada’s key benchmark interest rate is amongst the lowest since the late 1970s.
Shifting services from the property tax base to other user/rate supported areas can create funding room to support capital related activities at a higher level. Municipalities have the opportunity to define and create new service categories to generate additional revenue to support existing services, which may currently be funded through the property tax base. Furthermore, existing revenues and expenditures may be directed to capital related spending on a going forward basis.
Table 1 provides a brief snapshot of a few key areas in which a municipality can create a new service category, or utilize their existing revenues and expenses as a means to support capital related activities at a higher level.
Recognizing that their funding sources are constrained, municipalities must take a proactive approach to asset management by introducing innovative methods to facilitate the repair and replacement of existing infrastructure within the current environment. Implementing transparent policies and practices, such as the capital prioritization model, will allow unbiased decisions to be made – replacing short-term objectives and solutions with responsible long-term financial and strategic planning objectives.
The three approaches outlined can be used by municipalities, together with existing practices, and as part of the annual budget process, to prioritize and maximize investments in municipal infrastructure.
Craig Binning and Andrew Mirabella are with Hemson Consulting Ltd.