July 6, 1999

To:Policy and Finance Committee

From:Chief Financial Officer and Treasurer

Subject:2000-2004 Capital Program & 10-Year Capital Plan

Proposed Timetable, Process and Guidelines

Purpose:

To propose a process, timetable and preliminary guidelines for the 2000 - 2004 Capital Program and 10-Year Capital Plan.

Financial Implications:

The financial implications of the 2000 - 2004 Capital Program will be reported to the Policy and Finance Committee in October 1999.

Recommendations:

It is recommended that:

(1)The proposed process and timetable as described in this report and outlined in Appendix C and Appendix D for the 2000 - 2004 Capital Program be adopted; and

(2) The financial protocol for dealing with in-year capital budget changes as described in this report and outlined in Appendix E be adopted.

Discussion:

The City of Toronto's capital planning process requires a strategic approach to ensure Council's capital program priorities are balanced with the City's ability to finance capital infrastructure over the long-term. This strategic approach involves building upon the success of last year's capital budget process by refining the process and guidelines for the 2000 - 2004 Capital Program.

Upon completion of last year's capital budget process, the Budget Services Division completed a survey of the program areas to determine the issues and develop an action plan to improve the 2000 Capital Budget process. Based on this survey, the following improvement areas were identified:

(i)Need for an overall corporate financial plan and vision of the ultimate capital budget process and document

(ii)Need to reduce paper through each phase of the review process.

(iii)Need for clearer terminology and re-affirm the distinction between operating and capital budget items.

(iv)Need for better systems support to eliminate duplicate systems and increase efficiency.

(v) Need for project prioritization within programs and between programs.

(vi)Need for capital project harmonization relating to maintenance and facilities.

Background:

Upon the conclusion of the 1999 - 2003 Capital budget cycle, Council effectively approved a 1-year capital program, with associated cash flows. All prior year approved projects were re-visited, primarily to determine their active status and incorporate cash flow requirements carried forward. Current year (1999) projects received spending approval for up to a maximum of two years. Future year projects, commencing in 2000 and beyond, were received for information. Feasibility studies and needs assessment initiatives were not complete to support a defensible future year capital program. Prioritization of these projects was also not possible. In essence the future year component of last year's capital program reflected a preliminary outlook of a 5-year capital program.

The Mature Capital Budget

The 2000 - 2004 capital budget cycle proposes an evolution towards a mature capital budget consisting of a fully-justified ("hard") 5-year capital program, with enhanced role and priority-setting responsibilities for the Standing Committees.

The capital program will become integrated with multi-year business planning and linked to Council's strategic priorities. A 10-year planning horizon will provide an enhanced decision-making tool to highlight long-term issues and accommodate the long-term growth related capital projects related to the proposed Development Charges By-Law. The capital program will be re-evaluated in every budget cycle and integrated with the multi-year business plans in each program area, which are in turn linked to Council's Strategic Plan. In the long-term, a mature capital budget will be developed that incorporates an evaluation tool that prioritizes projects across programs. However, this can only occur once a standardised evaluation tool is developed and accepted at the program level.

A mature capital budget involves approval of a full "hard" 5-year capital program based on feasibility studies and justifications for each new construction and maintenance projects. As more rigor is added to the capital planning cycle and the respective Standing Committees conduct comprehensive reviews of the various standards, policies and related studies that have been or will be developed by the program areas as a basis of their capital program, Council will have moved from receiving a "soft" 5-year capital program into approving a "hard" 5-year capital program. If an existing project is recommended for deferral during the capital budget review, it can be deferred beyond the 5-year timeframe and other projects accelerated in its place.

Within the next 3 to 5 years, it is envisaged that Council will approve a complete 5-year plan (a hard capital program). Once a project gets approved within the 5-year plan, it would proceed on the basis that Council has already been assured of the business case for that project. The project justifications will include capital replacement, rehabilitation and maintenance items. Approval of the project will also entail approval of all operating costs associated with the project, including transfers to reserve funds for future capital replacements.

A mature capital budget implies that projects approved within the 5-year program will proceed. If projects outside of the 5-year program need to be accelerated or new projects added, trade-offs (i.e. deferrals, deletions or phasing of projects within the 5-year program) will be required to maintain the capital program within the original funding envelope. As a "hard" 5-year capital program becomes a reality, the future budget cycles would roll forward year 6 of the capital plan into year 5, with the first four years already adopted.

The 2000 Capital Budget Process

The capital budget process proposed in this report incorporates the successful elements of 1999 and builds in new processes and techniques for the 2000 capital budget process in an evolution to the mature capital budget. The 2000 process will form the building blocks for moving to the mature capital budget process by focusing on the following elements:

(1) In 2000, for on-going capital projects of a maintenance nature such as "Pavement and Curb Reconstruction" the intention is to have Council approve a 5-year capital program level with an annual review of the standards, and service levels being delivered. These are high priority projects that that address core infrastructure requirements and are basically fixed over the 5-year plan. In 2001, future years new construction projects will receive full approval, conditional upon supporting business cases and feasibility studies being brought forward during the capital budget reviews.

(2) Capital project costs and associated cash flow requirements (i.e. planned expenditure pattern) will again be categorized into prior year approved, new and future year projects. Program areas will be required to analyze the status of previously approved projects to determine which projects can be closed and which projects need carry-forward funding in the current year to provide for completion of the project. Cash flow projections will be used to determine long-term financing requirements and develop a comprehensive debt management policy.

Prior year approved projects will not be re-visited unless the scope of the project has changed significantly. Cash flow from all prior year approved projects will be totalled and reviewed for impact on debenture requirements. The in-year capital variance reporting process will be used as a tool to monitor previously approved projects.

(3) Approval of last year's capital program was primarily based on cash flow requirements (i.e. planned expenditure pattern) for prior year approved and current year projects. Future year commitments arising from approval of the 1999 program were also identified and received approval based on the cash flow projections. However, the spending approval for these projects was limited to two years.

For the 2000 capital budget process, projects will receive total project cost approval and full cash flow approval (not limited to a two-year cash flow).

(4) The 2000 - 2004 Capital Budget process will require program areas to submit new business cases /justifications supporting each project and sub-project (refer to Appendix A for an example). Each business case will provide details of the total project cost and planned expenditure pattern (cash flow forecast).

Where a business case is requesting funding in support of a multi-phased project such as a new park development or a community centre - programs will be required to present the "big picture" in the year that phase 1 funding is requested. For example, a new park development is planned in the year 2000 with a total project cost of $3 million to be spent over 2000/2001. Plans and drawings also include park features such as a playground, ball diamond and a water park (phase 2) at $1 million planned for say 2003. In this situation, the business case must not only provide justification for the current year total project request of $3 million but must also provide support for the park features planned for future years. Assuming adequate support was provided, then the total project cost recommended for 2000 would be $3 million. The additional $1 million for the parks feature would remain in the year 2003 and be revisited / re-evaluated in 2003 relative to the priorities in that year. In the event that sufficient support was not provided for phase 2, then that phase of the project would be deleted or deferred beyond the forecast period. This process would be followed until a "hard" 5-year capital plan is implemented.

Program areas will have the opportunity to justify new projects. To assist in determining priorities, the status of a new project will be reviewed based on whether it is; (i) stand-alone, current year only, (ii) on-going/phased or (iii) new for 2001 and beyond.

The objective here is: (a) to have all the facts when making a decision about a multi-year project (i.e. no surprise add-ons), and (b) to discourage consideration of projects that were not part of the previous year's approved 5-year program, risking displacement of other projects that are scheduled to start.

(5) Capital project harmonization issues related to maintenance and facilities will be addressed. The business cases and justifications for each capital project and/or sub project will focus on harmonization issues related to service standards (maintenance and facilities) and development related issues.

(6) Clear criteria and guidelines will continue to be used for defining capital and operating items. During the 1999 Capital Budget process, Council requested the Chief Financial Officer and Treasurer in consultation with the appropriate program areas to report back on the impacts and a phase-in plan for the capital expenditure definition guidelines. The criteria for defining a capital budget item for the 2000 - 2004 capital budget process have not changed from last year. They are as follows:

(a)Useful Life

The expenditures must be for items with a useful life that at least matches or exceeds the standard debenture term of 10 years.

(b)Physical Asset

Only expenditures reasonably related to the acquisition of a physical asset should be considered as capital. The expenditures must relate to the acquisition or betterment of an asset with a multi-year life. Betterment is defined as enhancing the service potential or extending the useful life of the asset. Assets that are consumed during the fiscal year and costs to maintain an asset in its original state are defined as operating items.

(c)Materiality

Assuming the above two criteria are met, then the final determination of a capital expenditure is the materiality of the expenditure and the ability of an operation to absorb the expenditure within a given year. The suggested level of a capital item would be $250,000, however, this would depend on the size of the organization and the grouping of expenditures.

(d)Operating Items

In general, items that do not meet the above criteria and can be reasonably accommodated within the operating budget should not be capitalized. Large infrequently occurring operating expenditures may be financed through regular contributions to reserves.

Comprehensive policies on defining capital and operating budget items will be developed once feedback from program staff has been received. In the meantime, and, as was the case during 1999, any difficulties which may result from the shifting of capital to operating or operating to capital will be addressed on a program-by-program basis.

(7)Identifying, where possible, ongoing capital maintenance and capital replacement costs for any new facilities proposed. The impact of the capital plan on the operating budgets will be addressed in more detail as the project and sub-project business cases are submitted.

(8)An objective method for prioritizing capital programs and projects based on project categories and affordability criteria will be established. The priorities will focus on "State-of-Good-Repair" and "Legislated/City Policy" project categories. The remaining two categories, "Growth/Expansion" and "Service Improvement" will be used to prioritize new projects.

For the purpose of prioritizing the 2000 - 2004 Capital Program, the capital project categories have been streamlined. The 2000 capital budget aims to provide a comprehensive "State of Good Repair" program for all of the city's infrastructure, balanced with the need to begin capital facility harmonization across the city.

Definitions of the proposed categories are as follows:

State of Good Repair

A capital project that allows for the maintenance, repair or replacement of existing assets. This includes asset rehabilitation required to meet health and safety issues and extending the useful life of the asset by 10 or more years before replacement is necessary. Asset replacement should be considered if rehabilitation is not feasible and delayed replacement could result in potential safety hazards.

Legislated or City Policy

Capital expenditures required by Provincial or Federal legislation or compliance with City Policy (ie. Environmental initiatives). In the capital project justification section of each business case, the specific legislative or City Council reference will be provided as well as the action required to meet the requirements and timeframe.

Growth/Expansion

Any capital project that supports growth and development across the City. Potential development charge revenues will be identified for these projects.

Service Improvement

Any capital project that improves service delivery above the current Council approved standard or provides for the introduction of new services.

(9)Program areas will be provided with an optional ranking tool to assist in prioritizing capital projects within their respective program areas. The 2000 capital program aims to provide a more refined ranking of projects within a program area. The system involves the evaluation of a capital project by assigning a point rating to several pre-defined criteria (i.e. capital project category, service level standards, link to Council's strategic plan etc.). The points for each criterion are then multiplied by a percentage-weighting factor to determine an overall point score for the project. Projects can then be ranked in priority order based on the point rating. Appendix B provides a sample of this evaluation system, which individual program areas can modify to meet specific needs. Plans are to work with the program staff in developing this tool for 2000 and standardizing a tool for 2001 across all programs.

(10) Targets will be developed when all capital budget submissions are received and consolidated, and reviewed on a preliminary basis. The objective is to allow program areas to first specify their needs without imposing financial constraints up-front. In 2001 Standing Committees would be involved in reviewing their priorities and policies before the capital program submission is developed.

(11) Thedebt management policy based on the 2000 - 2004 capital program will continue to be referred .

(12) A streamlined budget review process to focus on the critical issues and a system for tracking decisions arising from each stage of the administrative and political reviews will be developed.

Capital Project Submission - Example

Appendix A provides a sample Business Case and Financial Summary format to be submitted by the program areas in support of their 5-year capital program. The Business Case will be reviewed by the Budget Services Division and will be made available for review in the capital budget review process.

Proposed Review Process and Timetable

Appendix C and Appendix D outline the capital budget process and the tentative timetable for the 2000 Capital Budget process. Final Council approval is targeted for December 16-17, 1999. To meet this date, the timing of the review process has been accelerated from last year's process.

The Chief Administrative Officer and Chief Financial Officer and Treasurer, in conjunction with Budget Services and program staff, will review the program submissions in early October. The program submissions will again be summarized into a "CAO Recommended Capital Program" for consideration by Committees and Council.

The Policy and Finance Committee review is planned in October 1999 with a high level overview of the capital submissions, the related issues and challenges.

The detailed political review will then commence in late October, with a preliminary program by program review by the Budget Advisory Committee. During this phase, Budget Services will provide a corporate report to outline the issues and financial implications of the recommended Capital Program. In addition, Budget Services will provide a consolidated departmental report to summarize the key recommendations by program area.

After the completion of the preliminary review, the CAO recommended Capital Program and Budget Advisory Committee's comments will again be forwarded to the relevant Standing Committees and Community Councils for consideration. Standing Committees will review the capital program to determine service priorities from a City wide perspective. Community Councils will review specific capital programs related to service needs in their respective communities. The merger of recommendations flowing both from Standing Committees and Community Councils will be considered during the capital budget reviews by Policy and Finance Committee.

At each stage of the political reviews, Budget Services will track both the financial and non-financial recommendations, for presentation to the Policy and Finance Committee in early December. The recommended Capital Program is then submitted to Council for approval in mid-December.

Changes to the meeting dates and any special committee review dates will be communicated as necessary.

Financial Protocol for In-Year Capital Budget Changes:

Until a "hard", completely justified 5-year capital program is developed, there will be in-year changes arising as a result of capital projects with scope changes or new projects of an urgent nature. A process to address these in-year changes is outlined in Appendix E and Appendix F.

Appendix E outlines a process for addressing in-year capital budget changes at Standing Committees. This process is recommended for capital projects that require in-year funding and are not part of the approved capital program and/or reflect a change in scope that requires additional funding. All projects of this nature will be reviewed with the Chief Administrative Officer and the Chief Financial Officer and Treasurer for concurrence in regards to the funding recommendations. Where possible, a project of this nature should be deferred for consideration in the following year's capital budget. However, where the request is deemed to be "urgent", the decision tree outlined in Appendix E should be followed. The objective is to have the financial implications and the funding sources clearly identified prior to consideration by the Policy and Finance Committee.

Appendix F outlines the financial protocol which will be followed by the Finance Department to make recommendations on funding sources for any in-year capital budget changes being considered by the Standing Committees.

Conclusion:

The City of Toronto's capital planning process requires a strategic approach to ensure Council's capital program priorities are balanced with the City's ability to finance capital infrastructure over the long-term. This strategic approach involves building upon the success of the last year's capital budget process by refining the process and guidelines for the 2000 - 2004 Capital Program.

This year, we will; (i) develop comprehensive capital policy guidelines, (ii) move to a total project cost basis for capital project approvals (including spending approvals), (iii) develop a sustainable debt management strategy based on cash flow projections, (iv) develop a methodology for prioritizing capital projects within program areas, and (v) deliver support systems to streamline the review process. The quality of the capital works planning process will evolve over the next few years as programs strive to: (a) rationalize, assess and prioritize the "State of Good Repair" within their envelope of responsibility and (b) assess and standardise the level of major maintenance required for the City's existing inventory of facilities and infrastructure.

With Standing Committee's assistance, programs will align their capital works program with Council's Strategic Plan. The Capital Program will be re-evaluated every budget cycle and integrated with multi-year business plans. As more rigor is added to the capital budget planning cycle, Council will be able to move from receiving a "soft" 5-year capital program into approving a "hard" 5-year capital program, as we move towards a mature capital program.

The Chief Administrative Officer has been consulted on the proposed 2000 capital budget process contained in this report and concurs with the recommendations.

Wanda Liczyk,

Chief Financial Officer and Treasurer

Contact Names:

John Di Lallo397-4207

Josie La Vita397-4229

Paul Chenery397-4204

Appendix ASample Business Case / Financial Summary

Appendix BSample Evaluation System for Ranking Projects

Appendix CProposed Capital Budget Process Overview

Appendix DProposed Timetable for the 2000 Capital Budget Process

Appendix EFinancial Protocol for In-Year Capital Budget Changes at Standing Committees

Appendix FFinancial Protocol for In-Year Capital Budget Changes (Finance)