POLICY REPORT
CAPITAL PLANNING
Date: March 4, 1996
TO: Vancouver City Council
FROM: Director of Finance,
in consultation with the Corporate Management Team
SUBJECT: 1997-1999 Capital Plan - Funding Limits
RECOMMENDATION
A. THAT the following general priorities be established for
evaluating proposals for the 1997-1999 Capital Plan:
Category A: First Priority
1) maintain existing capital plant
2) address safety and security concerns
3) undertake mandated environmental improvements
Category B: Second Priority
4) maintain existing service levels
5) remedy service deficiencies
Category C: Third Priority
6) increase service levels
7) provide new services
8) non-mandated environmental improvements
9) beautification
B. THAT Council set the financial limit for the 1997-1999
Capital Plan at $175 million (excluding waterworks) as
outlined in this report, subject to public input during the
review process and subject to any adjustments Council
decides to make to the final content of the Plan before its
approval in September.
C. THAT the General Manager of Engineering Services report to
Council on proposals for the 1997-99 Water Capital Plan and
that the financial limits be established for that Plan based
on projected impacts on user fees.
D. THAT Council approve the allocation equal to 14% of the
financial limit to the Park Board for project review
purposes and instruct the Park Board to report back to the
Capital Plan Review Committee by June 13, 1996 with the
details of the Board s proposed Capital Plan.
E. THAT Council approve an allocation to Supplementary Capital
of $5.0 million.
GENERAL MANAGER'S COMMENTS
The General Manager of Corporate Services RECOMMENDS approval of
A, B, C, D and E, noting that the funding limits proposed in this
report assume a continuation of property tax increases at the
rate of inflation over the next three years. Council should also
note the comments of the Director of Finance around the
challenges that the next Capital Plan will present in terms of
holding expenditures within the established financial limits
applicable to the City's capital programs.
At the plan level recommended in this report, the 15% debt charge
limitation will be exceeded after 1996, based on our projections.
On the other hand, with the introduction of the Sewer Utility
(likely on January 1, 1998), a significant portion of those debt
charges, both existing and new, related to sewerage collection,
transmission and treatment will be funded from user fees instead
of property taxes. At that point, the remaining "general
obligation" debt charges funded from property taxes will be well
below the 15% debt charge level, prompting a review of the
existing capital financial limit parameters to reflect a new
operating budget base resulting from the removal of the costs
associated with the Water, Solid Waste and Sewer utilities.
COUNCIL POLICY
The City s present policy is to plan for capital expenditures on a
three-year cycle. Funding for capital expenditures comes from a mix
of borrowed funds, cost-sharing from senior levels of government
(e.g., conditional revenue sharing grants) and a contribution of funds
from the annual Operating Budget (pay-as-you go financing).
With the exception of sewer and water borrowing, which Council may
approve without voter permission, all borrowed funds must be approved
by plebiscite.
Capital Plans are normally developed such that plebiscite borrowing
authority can be put to the electorate at the triennial civic
election.
PURPOSE
The purpose of this report is to seek Council input in the priorities
to be utilized in developing the 1997-1999 Capital Plan; to establish
a process for reviewing the Park Board portion of the Plan; to confirm
financial policies and establish funding limits for the Plan.
BACKGROUND
On November 14, 1995, Council approved the term and process for
development of the 1997-1999 Capital Plan. The process for
development of the plan will lead to a plebiscite for borrowing
authority being submitted to the voters at the same time as the
November civic election.
The capital plan development process will involve a number of steps.
This report deals with consideration of the capital expenditure
priorities that will guide the review process and establishment of
funding limits for the plan. A subsequent report will recommend the
creation of a staff review group and a review process for departmental
submissions to the capital plan. Council can also expect a series of
reports from departments dealing with proposed capital projects that
will benefit from public and Council input to the review process.
DISCUSSION
The next step in the Capital Plan development process is to request
departmental submissions. In developing these submissions,
departments will benefit from policy on the priorities that should
guide the review process and on the overall financial limits that will
be applied to the planning process.
CAPITAL PLAN PRIORITIES
During preparation of the last two Capital Plans, Council established
overall priorities for capital expenditures early in the process.
These priorities followed from a recognition that the City s first
responsibility is to maintain and preserve its basic infrastructure of
capital plant while also
giving recognition to the desire to expand services or introduce new
ones. Adopting these priorities as policy ensures that consideration
is given to achieving the appropriate balance in the Capital Plan
review process.
It is recommended that Council confirm these priority categories for
the 1997-1999 Capital Plan:
Category A: First Priority
1) maintain existing capital plant
2) address safety and security concerns
3) undertake mandated environmental improvements
Category B: Second Priority
4) maintain existing service levels
5) remedy service deficiencies
Category C: Third Priority
6) increase service levels
7) provide new services
8) non-mandated environmental improvements
9) beautification
It should be noted that these priorities do not specifically reference
the work and vision of City Plan. This aspect will be addressed in a
subsequent report to Council.
THE PARK BOARD AND THE CAPITAL PLANNING PROCESS
As part of the process to develop the previous 1994-1996 Capital Plan,
Council approved a lump sum capital allocation to the Park Board based
on historical capital allocations. The Board was then instructed to
develop its own capital priorities based on that allocation. The
Board was free to appeal the allocation to Council early on in the
process, without public delegations; however, Council was not obliged
to vary the allocation. The Board was responsible for its own
information and community involvement program during the planning
process. Once the Board s plan was completed in late June, it was
integrated with the City s plan, and publicized over the summer months
and before the plebiscite as part of the overall plan.
One of the difficulties with this approach is that it is necessary to
establish a Park Board allocation early in the planning process,
before the overall City priorities have been established. On the
other hand, without that allocation, the extensive public consultation
process involved in developing the Park Board plan runs the risk of
creating unrealistic expectations around the funds available for Park
Board capital which might otherwise be settled only with public
appeals directly to Council.
As a result, the Director of Finance recommends that this previous
process be utilized in developing the 1997-1999 Capital Plan for
Parks. Later in this report, a specific allocation to the Park Board
is recommended. The Board s responsibility will be to undertake its
planning and public consultation process and develop a list of
projects that fit within its allocation for report back by June 13.
This list would include the projected operating costs/savings
associated with these projects, so that Council will be able to
address the downstream impacts on the operating budget associated with
projects involving new or increased levels of service before they are
approved. At the time it finalizes the funding allocations and
components of the Capital Plan, Council could also have a "second
look" at the Board s capital budget allocation based on the community
input from the City s public information program.
CAPITAL PLAN FINANCIAL LIMITS
At the outset of the capital planning process, it is useful to
establish financial limits. Financial limits bring a level of
discipline to the planning process and provide departments with
realistic expectations within which their capital plan submissions can
be developed.
Current Financial Policies
The City has developed a number of financial policies in relation to
its capital programs. The foundation of these policies is a
limitation on the growth in municipal debt and annual debt charges to
levels that are acknowledged to be "best practices" for municipal
government. Since the 1970s, Council has maintained a policy of
amortizing debt costs over a 10-year period so that debt does not
accumulate to unacceptable levels over time. We have planned our
capital expenditures and borrowing patterns so that debt charges are
held to levels that are considered affordable in the longer term. We
have utilized our internal resources to facilitate Council s
objectives without diminishing those resources over time. We have
endeavoured to avoid sudden shifts in programs and expenditures that
could jeopardize the City s overall financial position. Finally, the
City has always financed a healthy portion of its capital program on a
pay-as-you-go basis, in order to control the growth of debt and
interest costs, especially in high interest rate environments.
Achievement of these policies by the City over many years is one of
the primary reasons why we retain a AAA credit rating with the three
major credit rating agencies in North America. As these ratings
affect our access to financial markets and the cost at which the City
may borrow, they ultimately influence our ability to maintain our
capital program.
The financial limits of a capital program are generally defined by the
ability of the Operating Budget to support the cost of the program
over a number of years. The major cost components arising from our
capital programs are:
- debt charges (principal and interest) on City debt;
- debt charges on the City's portion of GVS & DD debt; and
- capital from revenue, reflected in a transfer from the annual
operating budget to fund the pay-as-you-go component of the
capital budget.
These costs show themselves as part of the City s annual operating
budget and are reflected, in part, in the annual tax levy. Managing
their growth therefore impacts on Council s policy of controlling the
growth in property taxes.
The aggregate cost of these components is referred to as the capital
envelope. The policy that has been utilized by Council in developing
financial limits on recent capital plans is that:
- debt charges (the first two items) should not exceed 15% of
the annual revenue budget;
- the total of these three components should fall in the range
of 17% to 20% of the annual revenue budget; and
- the general purposes tax increases that arise from the capital
plan should fall within Council s taxation objectives.
The Director of Finance believes these are sound financial principles
and recommends that they be confirmed as the City policy in developing
the 1997-1999 Capital Plan.
Capital Plan Challenge
Developing a plan that meets the criteria established above represents
a significant challenge. First, at the City level, there are expected
to be significant demands for capital. These will arise from the need
for improvements to the water transmission and storage system,
continued demands for environmental improvements in the sewer system,
major maintenance of our basic infrastructure, upgraded communications
systems, Greenways program, community amenity improvement and the
redevelopment of Hastings Park, to name just a few. These demands
will challenge our ability to provide funding within the recommended
guidelines.
Second, over the next few years, there will be an unprecedented
increase in capital expenditures at the regional level which will
impact on the City s tax base. These include the costs of secondary
sewerage treatment, water supply and quality improvements and hospital
construction costs. Translated to debt and operating costs, these
programs will have a major impact on City tax bills and on the City s
ability to maintain our capital program at acceptable levels.
These considerations have gone into developing a financial limit for
the 1997-1999 Capital Plan. Based on our review it is recommended
that Council establish a funding limit of $175 million (dollars of the
day) for the upcoming plan. This represents an increase of
approximately $9 million over the 1994-1996 Capital Plan level, about
the same impact that an inflationary increase would have suggested.
Funded at this level, the plan will result in debt charges exceeding
the 15% guideline recommended above (reaching 17.5% in 1999) (See
Appendix A). Total capital expenditures are projected to fall within
the 20% limit although in the later years of the plan, this limit is
reached. Finally, based on the assumptions used for growth in the
Operating Budget overall, a plan at this level would be accommodated
with tax increases which fall within projected inflationary levels
(average 2.5%).
The Director of Finance is concerned about the impact of exceeding the
15% debt charge-to-operating revenue ratio and of pushing against the
maximum capital envelope. However, it is noted that the reasons for
this situation are somewhat related to short term situations:
- the growth in regional sewerage debt charges;
- a recent debt issue with a five year amortization;
- increased borrowing related to the Canada - B.C.
Infrastructure program; and
- slower growth in taxation revenues than was previously
projected in the 1994-1996 Capital Plan.
These impacts might be corrected in the longer term allowing the City
to move back toward the long term guideline level.
The alternative to accepting this position would be to reduce the
City s capital program in the upcoming plan, particularly to offset
the growth in regional sewerage debt charges. While this choice may
seem attractive, the Director of Finance notes that a reduction in
City capital spending could result in a quickly deteriorating
infrastructure and should be approached with caution.
It is also noted that one of the key assumptions that has gone into
the development of this funding limit is that Council will maintain
its policy of inflationary tax increases. A capital plan at the level
recommended cannot be achieved within the financial limits if
Council s objective is to move away from this policy. If a move to
lower than inflationary increases is to be pursued over the medium
term, then Council should reduce the $175 million limit recommended
here.
The Director of Finance recommends, at this point in the planning
process, that Council approve the $175 million funding limit. During
the capital plan review process, it will become clearer as to whether
this limit adequately provides for our needs and Council will be in a
better position to judge the recommendation of the staff review group.
Should additional funding be warranted, it would likely have to be
provided from revenue funds (rather than additional debt) if the City
is to remain in a favourable position with our rating agencies.
However, any such increase would go directly to increased property
taxes.
Restricting the growth in available funding for capital expenditures
in the face of increasing demands may have the beneficial impact of
encouraging the City to be more demanding of viable business cases
when considering capital expenditure requests. It might also
encourage staff to seek alternative funding sources to meet our
capital needs. For example:
- public private partnerships, increasingly utilized in the
municipal sector, offer the potential of achieving public
objectives beyond those that can be supported in the Capital
Plan alone;
- user fees, such as the Civic Theatre ticket surcharge, can
provide access to capital where a specific audience is the
beneficiary; and
- developer charges can utilized to achieve a variety of civic
objectives from affordable housing to park space and daycare
facilities.
FUNDING ALLOCATIONS
The Director of Finance recommends that the planning process will be
enhanced if two of the plan components have funding ceilings allocated
at the outset. These allocation would be subject to review and
adjustment by Council throughout the Capital Plan development process.
a) Park Board $24.5 million
(14% of the Plan)
One of the recommendations of this report is that a lump sum
capital budget be allocated to the Park Board. The proposed
allocation reflects a three year plan equivalent of the average
annual funding received by the Park Board over the past four
capital plans.
During 1997, the City will take possession of Hastings Park from
the PNE with the intention of redeveloping the grounds over an
extended period. Funding is in place to begin that process ($4.8
million from the 1994-1996 Capital Plan) and additional funding
in the amount of $1.5 million annually is available from the
Pacific Racing Association rent of Hastings Park Racecourse.
Given this significant amount of on-going funding for re-
development, it is recommended that Council instruct the Park
Board that any additional funding needs for Hastings Park be
accommodated within this $24.5 million allocation.
b) Supplementary Capital $5.0 million
(2.8% of the Plan)
The Supplementary Capital Budget is used by Council to address
emergent projects of a capital nature that arise during the term
of a capital plan and have not otherwise been considered in the
base funding. However, unlike other components of the Capital
Plan, Supplementary Capital has no proponent. As past history
has demonstrated, it is important to provide an allocation for
these needs, and it is recommended that $5.0 million be earmarked
in the Plan.
Council has identified another allocation for the 1997-1999 Capital
Plan. On February 8, 1996, when considering the participation of the
City in the Woodward s housing proposal, Council approved a maximum of
$5 million in funding for affordable housing. The actual allocation,
within the $5 million maximum, will be evaluated during the review
process, after staff have developed more firm plans.
These allocations leave a total of $140.5 million for the balance of
the Capital Plan (excluding waterworks). Following the receipt of
submissions from departments, the Capital Plan review process will
develop a plan for recommendation to Council.
SOCIAL IMPLICATIONS
There are social implications connected with every capital plan which
vary with the specific projects that are included. The project
categories which Council adopts for the Plan are an attempt to deal
with allocation of limited capital funding on a priority basis, giving
renewal and replacement of present infrastructure preference over new
programs and expansion of services.
CONCLUSION
This report recommends the establishment of general priorities for the
1997-1999 Capital Plan and a funding ceiling on plan expenditures.
These respond to Council s policies of restraining the growth in
municipal debt and debt charges and of holding property tax increases
at the level of inflation. There will be pressure on the $175 million
funding limit recommended and the challenge will be to construct a
plan that meets a variety of civic objectives without jeopardizing the
overall financial position of the City or its credit rating.
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