POLICY NUMBER: CS – 027, Rev. 01
RESPONSIBILITY: Finance Department
APPROVED BY: Mayor and Council
APPROVAL DATE: June 17, 2019, Revised June 22, 2020
DATE OF NEXT REVIEW: Staff 2 years (June 2021), Council 5 Years (June 2024)
1.0 Purpose
The capital budget is a multi-year financial plan, forecasted over a ten-year timeline. The budget provides for the planning of future financial resources required to finance capital expenditures. The capital budget should also identify the future financial resources to be allocated from the operating (revenue fund) budget to use and maintain the capital asset.
This policy supports a disciplined approach that reflects the City’s strategic plan of reducing its debt servicing. The capital budget will be reviewed by management and council to ensure the City has the financial capability to cover the costs over the long term, through its various sources of funding.
2.0 Policy Statement
The capital budget is an important planning tool, it allows the City to provide for the necessary infrastructure to maintain or enhance future service levels. Through capital budgeting, the City can plan future operating budget expenditures, debt repayment and potential reserve fund needs in order to manage the financial position of the City over a five to ten year period. In addition, the capital budget provides the basis for the implementation of the official plans, master plans and strategic plans, and also provides the financial mechanism to implement Council’s planning and fiscal policies.
3.0 Scope/Application
1. Development of Capital Project Submissions
The initial phase of the budget cycle involves the collection of information on the future capital requirements of the City. The preliminary review would identify all projected new capital projects and the related expenditure requirements and a review and evaluation of current ongoing projects to confirm or amend their future expenditure requirements.
The capital budget preparation requires extensive communication and a coordinated effort with staff responsible for budget allocations. To be successful, teamwork is required from all department managers and directors.
User department managers are required to identify new capital needs for maintaining and enhancing their service objectives (see Capital Project sheet – Appendix 1). Identification of these needs can arise from many different sources; some examples are:
- Asset Management Plans
- Master plans
- Strategic plans
- Official plans
- Community committee input
- Service development or enhancement objectives
- Council requests
- Review of asset inventory (for replacement)
- Provincial or Federal Government initiatives
- Emergency issues (Health & Safety)
- Joint initiatives with other local municipalities, the County or community groups
The operating budget impact of the capital project (net of associated revenue) is to be projected for each year of the forecasted period.
In addition to new projects, existing projects, which have been previously approved by council that are not complete, will also have to be reviewed. The status of the emerging costs versus the approved budget and the timing of the remaining expenditures will have to be documented and reviewed (see the Work-in-Progress sheet – Appendix 2).
2. Review of Capital Project Submissions
The Senior Management Team (Team) represents all user departments and assists with the evaluation of timelines for carrying out the process. The Team consists of the Chief Administrative Officer, Director of Finance, Accounting & Budgeting Manager and the appropriate representative Director. The Team will review the information submitted i.e. project papers regarding capital requests.
As resources are not available to finance all capital projects submitted, the Team will rank and prioritize the various capital projects with the use of a Prioritization Matrix (Appendix 3) that takes into account the City’s strategic objectives, project criticality, funding opportunities and risk management. A comment will be provided to substantiate or explain the rationale as to why a particular priority has been assigned to a respective project.
The CAO, Director of Finance and Accounting & Budgeting Manager will have the responsibility for assigning internal sources of financing (reserves, tax levy etc.) and for recommending which projects should be debt financed. Input from the appropriate departmental staff will be taken into consideration.
The Work-in-Progress is a key review for the capital budgeting process since delayed projects or projects coming in under budget may free up financial resources. Alternatively, projects that experience cost overruns, if approved by council, will call on financial resources. The expenditures to date and financing applied to the approved project to date are elements to be included on the Work-in-Progress sheet.
It is important to distinguish between previously committed projects and new projects, since previously committed financing will reduce funds available for the new budget cycle.
3. Review of Capital Budget by Council
It is essential that staff and Council are committed to working together. Two-way communication is critical to sustain and direct energies towards incorporating the City’s strategic focus into the budget. Council’s input to the process is imperative as it will establish the direction the City will take over the short to medium term. The capital budget affects future operating expenditures, therefore guidance should be sought to ensure that the desired service levels and tax levels are managed and planned. Council remains responsible for all budget decisions.
Staff will formally present a recommended capital works program to council. The following will be communicated:
- Identification and prioritization of capital projects
- Summary of Works in progress and financial commitments made to date
- Summary of Capital spending by service
- Summary of Funding Sources
- Summary of Debt amounts anticipated
- Long term impact on tax and user rates
- Listing of works that did not get included in the capital program
When the ten year projection is presented, it is noted that year’s one through five are approved whereas years six and forward represent a forecast for consideration with approval in subsequent years. That being said, the capital program will be updated and provided to Council for re-adoption annually.
4. Public Information Session
The community is given the opportunity to provide feedback on the draft capital budget. The timing, location and types of services the City is planning to acquire or construct is presented along with a summary of the financial implications.
5. Review of Capital Budget by Council
The capital budget is developed and given final approval at the same time as the operating budget.
Approving a multi-year capital budget gives the City several advantages. Projects can be tendered early in the construction season, multi-year projects can be tendered as a complete initiative, and larger quantities of similar products (e.g. busses) can be tendered simultaneously for staggered receipt dates, thereby achieving optimal tender prices. It also helps spread the heavy workload associated with the budget process over a longer period of time, thereby achieving a more efficient use of staff time and resources.
After final approval, the capital plan is adjusted, subject to council approval, when the following circumstances occur:
- Emergency capital requests are received,
- There are changes to the City’s financial capacity (e.g. new grants),
- There are changes in strategic priorities (e.g. mandated by higher levels of government).
Reference the Procurement of Goods and Services Policy for how budget exceedances are managed.
6. Sources of Financing
Sources of capital funding can be categorized into three main groups:
- External sources of financing include other government subsidies and grants (both federal and provincial), development charges, developer fees, fundraising or donations/bequests, third party contributions under public/private partnership arrangements, etc. Projects dependent on external funding will not commence until such funding is secured.
- Internal sources of financing include property taxes, transfers from other City funds (i.e. operating or reserves) or sales of existing assets. Reference the Reserves and Reserve Fund Policy for more information on how reserves are managed by the City.
- Debt or lease financing includes external borrowing and other long term repayment obligations. Reference the Financial Policy Statement for more information on how debt is managed by the City.
4.0 Definitions
“Annual Budget” means a budget applicable to a single fiscal year for the City.
“Budget” means a plan of financial operations embodying an estimate of proposed expenditures for a given period and the proposed means of financing them.
“Current Budget” means the annual budget prepared for and effective during the present year for the Revenue Fund.
“Capital Budget” means a plan of proposed capital fund expenditures and the means of financing them from the current fiscal period and over a longer term planning horizon.
“Capital Fun” means the capital fund is used to accumulate the revenues and expenditures for the acquisition or replacement of the capital assets of the municipality. In general, capital assets refer to the buildings, equipment and infrastructure of the municipality. Included are municipal buildings, arenas, trucks, graders, roads, water/sewer systems and the like.
“Capital Expenditure” means a capital expenditure is one that results in the acquisition, construction, development or betterment of a tangible asset.
“Criticality” means the severity of a given consequence against the probability of that consequence occurring. For example, if there is a high probability that an asset will fail in a way that causes great personal injury or severe operational issues, that asset is highly critical and should be prioritized accordingly.
“Debt” means an obligation resulting from the borrowing of money for the purchase of goods and services.
“Debt Limit” means the maximum amount of gross or net municipal debt permitted with OMB approval as regulated by the province.
“Debt Charges” means the annual charges required to service the long term debt of the City including the amount for principal repayments, interest due within the year, and required sinking fund contributions.
“Debt Term” means the borrowing term of all long-term debt incurred by the City equal to or less than the estimated life of the assets being financed.
“Debt Retirement” means the long-term debt is retired at final maturity through serial retirements.
“Fund” means an independent fiscal and accounting entity with a self-balancing set of accounts segregated for the purpose of carrying on specific activities. There are three funds; the Revenue Fund, Capital Fund and the Reserve Fund.
“Pay-As-You-Go” means the term is used to describe the financial policy whereby capital outlays are financed from current revenues and/or reserves rather than debt.
“Reserve Fund” means those funds that have been set aside either by a by-law of the council or by a requirement of provincial legislation to meet a future event. As a result, reserve funds are either “permissive” being those set up by council or “regulatory” being those set up by virtue of a requirement of a provincial statute.
“Revenue Fund (Current or Operating Fund)” means the revenue fund is the principal fund, found in all municipalities. This is the fund into which the main sources of financing available to the municipality are recorded. Taxation revenue, grants, interest earned on investments, service charges, licenses and permits are all recorded in this fund. It is also the fund that records disbursements for the everyday operating expenditures of the City.
5.0 Policy
Please refer to Section 3.0 Scope.
6.0 Roles and Responsibilities
This policy shall be reviewed by the CAO, Director of Finance and the Accounting and Budgeting Manager at least every two (2) years and by Council at least every five (5) years.
7.0 Process
Please refer to the Operating and Capital Budget Guidelines (staff document).