Loading...
HomeMy WebLinkAboutCS 38-07 76 REPORT TO EXECUTIVE COMMITTEE Report Number: CS 38-07 Date: October 9,2007 From: Gillis A. Paterson Director, Corporate Services & Treasurer Subject: Tangible Capital Assets PSAB 3150 Regulations and City's Sustainable Infrastructure Asset Management Program Recommendation: 1. That Report CS 38-07 of the Director, Corporate Services & Treasurer regarding Tangible Capital Assets PSAB 3150 Regulations and City's Sustainable Infrastructure Asset Management Program be received for information; and, 2. That Council approve in principle the capital asset definition for vehicles and equipment - as a tangible asset with a life expectancy of at least two years and the purchased or donated value must be at least $5,000. Executive Summary: There is a requirement for municipalities to significantly change their financial reporting by incorporating tangible capital assets within their financial statements by 2009. This requirement has been legislated by the Public Sector Accounting Board (PSAB), the body which sets the standards for reporting for municipalities. This will require the inventorying, valuation and conditional assessment of all tangible capital assets owned by the municipality. The reporting changes under PSAB 3150, are just a beginning, and further PSAB reporting changes are currently in draft mode. Council will be updated on the impact on Pickering, as these regulations are finalized. In addition to the legislated asset accounting requirements, Pickering has started an asset management program to ensure we are effectively utilizing, replacing and managing our asset infrastructure. As with all municipalities our infrastructure is aging, and asset information is required to close the "infrastructure gap", which is defined as the funding gap required to bring infrastructure to a sustainable condition. The asset management program will provide staff and Council with information to prioritize the capital budget, and forecast funding and replacements of assets into the future. The legislative requirement and the asset management program both require the collection of field data about every asset Pickering owns. Collecting field infrastructure asset data is a very significant financial and physical undertaking, and merging the two initiatives into one will optimize the investment and output value of this mandated exercise. The intention is that data about each infrastructure asset will be collected once Report CS 38-07 Date: October 9,2007 Tangible Capital Assets PSAB 3150 Regulations and City's Sustainable Infrastructure Asset Management Program Page 2 77 and will serve multiple purposes. The alternative is to execute multiple data collection campaigns for each asset to serve multiple purposes. Financial Implications: Not applicable Sustainability Implications: As the existing capital asset base ages and with an increased demand for new capital assets, the ability of local government to sustain these services will become more challenging. Information about the existing capital asset base such as cost, need for replacement will assist the City in making critical financial decisions to ensure the sustainability of the City and its asset base. Background: The Public Sector Accounting Board (PSAB) governs the City's accounting principles, standards and practices, and is the public sector regulations section of the Canadian Institute of Chartered Accountants (CICA). All levels of governments must follow these standards. Failure to comply with PSAB would result in a qualified audit opinion, which would have negative impact on the City's financial position and could affect the ability to borrow or issue debt. Since 2000, there have been significant changes to the financial statements of all public sector organizations. The City has always been proactive and complied with each of these changes on or before the deadline. In 2006, PSAB approved regulations, which will force municipalities to incorporate their tangible capital assets within the annual financial statements. The inclusion of assets within the financial statements will be significant, and PSAB 3150 along with other PSAB regulations for 2009 will change the financial statement presentation. Sections of the Municipal Act will also need to be revised, as it relates to the balanced budget requirement. Currently, PSAB requires tangible capital assets purchased or constructed to be recorded in the year of acquisition or construction. There is currently no requirement to reflect the value of the assets in the financial statements, or to expense the use of these assets by depreciating them over their useful life as private sector organizations must do. PSAB regulation 3150 requires all Canadian municipalities to incorporate their capital assets into their financial statements by the following deadlines: . December 2007 - note disclosure . December 2008 - opening balances of all assets and depreciation schedules (for comparison purposes) . January 1, 2009 - capital asset accounting implementation . December 31,2009 - asset recorded on balance sheet and depreciation expensed to departments Report CS 38-07 Date: October 9, 2007 Tangible Capital Assets PSAB 3150 Regulations and City's Sustainable Infrastructure Asset Management Program 78 Page 3 Capital asset accounting involves the recording, tracking and reporting of the City's assets, and will bring very significant change for municipalities. PSAB will not only require adherence to guidelines for reporting capital assets on an ongoing basis, but will require that assets currently owned also be reflected on the municipality's financial statement in 2009. The challenge for Pickering and all municipalities will be the development of an inventory of assets to be capitalized, which includes determining original costs and calculating the accumulated depreciation from the time of acquisition. It is important to note that this is not a one-time exercise therefore it will be critical to develop City wide policies and procedures, and provide the resources (e.g. technology, staff) to ensure asset information is accurately and consistently recorded on an on-going basis. Various associations have done significant work, and the municipal sector across Canada has been working to review the legislation collectively. The Ontario Municipal Benchmarking Initiative (OMSI) has undertaken a pilot study with six municipalities of various sizes, to try and adapt the legislative requirements to their financial systems, reporting, and procedures. The provincial government assisted with the funding of these test sites. OMS I will be issuing a guide to assist all municipalities based on the results of the pilots. The Municipal Finance Officers Association (MFOA) and the Association of Clerk/Treasures of Ontario (AMCTO) have merged to form one committee to provide educational information and guidance to municipalities. Pickering and the City's external auditors Deloitte and Touche are both members of this committee. Pickeriml's Assets Assets that fall under PSAS 3150 are defined as assets which have useful lives that extend beyond 1 year, and are used in the supply of services on a continuing basis. This is a very broad definition, and the City will break our assets into the following classes: Tanqible Capital Assets - must be valuated and depreciated . Buildings/Facilities, Equipment and Rolling Stock, Storm Water Drainage networks, Roads networks, Information Technology Software and Hardware,' Furniture & Fixtu res. Capitalized Assets - assets which must be valuated but are not depreciated . Land, Historical Artifacts & Cultural Artworks. (Land is never depreciated and its value is recorded on a historical basis.) Not included in PSAS 3150 . City's natural assets such as trees and woodlots. Report CS 38-07 Date: October 9,2007 Tangible Capital Assets PSAB 3150 Regulations and City's Sustainable Infrastructure Asset Management Program Page 4 79 Preliminary Definition of a Capital Asset The development of centralized database of asset information will require substantial investment of time and resources. In addition, one of the key issues to be undertaken is - what is a capital asset and to determining its dollar threshold or value. The stapler used by staff in theory could be, by definition a tangible capital asset. It has a useful life of greater than one year but would the City want to go to all of the effort and expense of tracking and documenting and financial reporting on an item that has a small value. From a practical business perspective, recording and tracking of a stapler's value does not make business sense. Therefore, the issue becomes - what dollar value or threshold value should be used to determine what is or isn't a capital asset. As mentioned earlier, a pilot study was undertaken by six municipalities (OMBI) of various sizes to try to implement the accounting rule changes. One of the issues they addressed was the asset threshold values. For the municipalities that were relatively Pickering's size they adopted the following dollar thresholds: Vehicles $5,000 Equipment $5,000 Recommendation two, and the adoption of a capital asset definition for vehicles and equipment are based on the experience and findings of the OMBI study. 2008 Budgetary Impact If Council adopts Recommendation two, the 2008 current and capital budgets would reflect the new capital asset definition. In other words, only those items that have a dollar value over $5,000, individually or collectively, would now be reflected in the capital budget and would be budgeted in the capital budget. For example: buying five computers with a unit cost of $1,000 each and therefore, this purchase of $5,000 would be in the capital budget. By adopting recommendation two, lower dollar valued items previously budgeted under capital would now be budgeted in the departments operating or current budgets under the "Misc. Equip & Tools" account. The advantage of this change is that smaller capital purchases would no longer "cloud the capital budget. It should be clearly noted that adopting this asset dollar value change, will not translate into additional costs to the taxpayers. Currently, the City does not have a centralized database of asset information. There is a disparate architecture of asset systems and spreadsheet information. Each division within the City has some type of asset record keeping system, some more complete and sophisticated than others. Consistency of data and the extent to which the data meets with the PSAB 3150 requirements is still to be determined. In order to comply with the Report CS 38-07 Date: October 9,2007 Tangible Capital Assets PSAB 3150 Regulations and City's S~s~inable Infrastructure Asset Management Program Page 5 regulations a complete inventory of all assets must be collected, valuated and incorporated into a corporate asset register. It is possible for municipalities to take a very narrow approach to asset management by collecting the information required for PSAB 3150 only. The collection of the historical cost, accumulated depreciation and integrating that information into the financial statements will meet the requirements of PSAB 3150 but will not provide information that can be utilized to make financial decisions regarding the City's overall state of assets and will be cumbersome to maintain on an ongoing basis. The City's approach is to utilize PSAB 3150 as a driver to meet other asset infrastructure informational needs and converge the operational need for improved infrastructure asset management with the requirement to comply with PSAB 3150 into an integrated program. This will ensure consistency between the City's strategic service provisioning goals and objectives and the tactical and operational management of the City's infrastructure assets. 2007 Capital Asset Reporting Initiatives Included in the 2007 capital budget was funding for the purchase of a "fleet management system." This new system will provide electronic record keeping of fleet preventative maintenance services, repairs and will also maintain asset record information such as purchase cost and depreciation. (Prior to purchase of this software, the City's fleet maintenance records was based on a paper system.) This new system will also link electronically to the fuel management system to provide a complete record of the vehicle's total cost by year based on preventative maintenance, repairs and fuel consumption. When fully implemented, information provided by this system will be used as part of the capital budgeting process. The City's IT section is currently working on modifying its inventory database to allow capital asset information such as cost and various depr~ciation rates to be used. Aaing Infrastructures The City is no different than all other levels of government in Canada as it reaches the point where infrastructure is aging, and funds are required to renew or replace assets. The total amount needed to re-establish infrastructure to a sustainable condition is known as the "infrastructure gap". This is the difference between the required renewals and replacements needed versus the current funds which are actually being spent. In order to report on the City's "infrastructure gap", it is critical to collect additional data on each asset, such as replacement value, asset condition etc. The City's capital budget is the primary decision making tool currently used by Council to determine priorities and spending. For the last seven years the City's capital budget has been prepared on a short term basis - one to three years. It is recognized that a long term plan is required. The City took its first step towards the development of the long term financial plan during the 2007 budget process. Staff presented to Council a multi-year financial plan outlining projected levy increases for the years' 2008 to 2014. Report CS 38-07 Date: October 9,2007 Tangible Capital Assets PSAB 3150 Regulations and City's Sustainable Infrastructure Asset Management Program Page 6 81 The capital asset database will generate financial reports that will quantify the dollar value of the "infrastructure gap." This information will be used to update the City's financial model and will assist Council to develop financial policies that will address the infrastructure gap which in-turn will support a sustainable City infrastructure. . The City currently does not recognize the cost of using existing capital assets in the operating budget, as their use is strictly on a "non-cash" basis. In other words, when road's staff use the snow plow truck to clear City roads, no cost is recorded for using the truck. Rather, funds are budgeted for repayment of debt related to the original purchase, and transfers to reserves are made for future replacement of some assets. In 2009, the City will be required to expense the "use" of the asset or recognize "depreciation". The charge for depreciation will now be reported in financial statements. How this depreciation expense relates to our current provisions for debt and reserve transfers is not known at this time. Furthermore, the effects on our annual budgets and financial reporting are also unknown at this time. Go-forward Approach: Inte~ratin~ PSAB 3150 with Asset Mana~ement Integral to the City achieving PSAB compliance and overall improvement of asset management is the definition and development of a universal list of data attributes for each asset group and assets within a group that will meet all regulatory and non- regulatory requirements. The universal data attribute record will support the single effort-multiple purpose data collection strategy and enable the City's management to meet the legislative accounting requirements as well as provide sound information for analysis, prioritization and determination of the existing infrastructure gap. In order to develop the capital asset database, policies and consistent procedures for documenting, managing and reporting information about the City's capital assets will be required. To meet the time constraints regarding PSAB 3150 compliance, additional staffing resources will be required. Pickering's neighbouring municipalities have addressed the staffing resource issue by two ways: increasing their full time complement or using contract staff. Regardless of the staffing method used - the bottom-line is that all of the municipalities have had to increase their staffing complement. The 2007 budget included some staffing dollars to implement PSAB 3150 reporting requirements. The 2008 budget (submitted to Council) will request additional staffing resources and computer software systems. Canada-Ontario Municipal Infrastructure Fund (COMRIF) On December 6, 2006, the Federal and Ontario governments announced an Asset Management Program (AMP), a component of COMRIF program. They have dedicated $5.96 million to assist eligible municipalities to move forward with asset management programs. The funding can be used for the five principal stages of asset management: Report CS 38-07 Date: October 9, 2007 Tangible Capital Assets PSAB 3150 Regulations and City's Sustainable Infrastructure Asset Management Program 82 Page 7 diagnostic, inspection, valuation, sustainability planning, and financial modeling. AMP will help eligible municipalities improve and increase their capacity to manage their infrastructure needs, and this funding would be used to partially offset the significant costs of implementing an asset management program. Municipalities with populations less than 250,000 are eligible for the grant. Pickering's asset management program has been designed to move through similar five stages of the asset management continuum. Report to Council CS 32-07 entitled "COMRIF Asset Management Program Funding" outlined Pickering's application to this funding program. As indicated in this report, the City is to receive $32,440 to assist in the implementation of the AMP. Attachments: Not applicable Prepared By: Approved I Endorsed By: ..--z.,-.----..-..--.. .'~.,~ ..~,-- - ~~~~~ ~ ._-~~~-==~ & ,p.'" """-~ Gillis A. Paterson Director, Corporate Services & Treasurer Stan Karwowski Manager, Finance & Taxation GAP:vw Copy: Chief Administrative Officer Recommended for the consideration of Pickering City Council ;:? .II' /.