Tangible capital assets
Tuesday, Jan 24, 2012 06:00 am
On behalf of myself, town council and administration, I would like to wish you all the best of 2012.
I wanted to take this opportunity to talk about Tangible Capital Assets (TCA), what they are, and what they mean for the future.
About three years ago, the provincial government made it a requirement for all municipalities to account for and record the value of all assets (streets, sidewalks, underground piping, equipment and facilities, etc.) As well, municipalities are required to amortize their values each year. Think of amortization as how much of an asset is used in a 12-month period. This is an effort to get a better understanding of what the true infrastructure deficit is in all Alberta communities.
To better understand TCA and the amortization expense is to think of purchasing a house in 1991. The house has a new roof that will last approximately 20 years. In 1999 the roof is valued at $10,000. Every year, the homeowner should put away $500 to fund the future replacement of the roof. By 2011 the homeowner would have $10,000 in savings to purchase a new roof, however the same roof in 2011 may cost $15,000, leaving a shortfall of $5,000. This is another issue with TCA in that values and amortization are based upon historical cost.
Every asset has a different life cycle expectancy ranging from three years for computers to 75 years for storm water and/or sewer lagoons, making the recording process somewhat complicated.
In Didsbury, the total value of our TCA was calculated at $53.7M, with life-to-date amortization of $22.5M giving us a net book value of $32.9M.
Our amortization expense on our assets is $1.3M per year. Which means in order for the town to replace these assets within their life cycle, we would need to put away $1.3M in reserves every year. The amortization expense is based upon historical cost and is therefore undervaluing the real expense of using our assets.
In 2011, the town was able to set aside approximately $300K into reserves, and in our current budget deliberations for 2012 council is considering setting aside $230K into reserves for TCA amortization expense.
In talking with other surrounding communities about TCA, most are in a very similar or even worse situation where some are not able to put any reserves away towards TCA depreciation.
So what do we do? We extend the use and life cycle of our infrastructure for longer periods of time in an effort to buy time to save the monies needed to replace the infrastructure (only repair what breaks). That is what has been happening in most municipalities for the past 50+ years and why, when repairs have to be done, they are major repairs because the infrastructure completely fails due to age and use.
We could raise taxes to build up the reserves needed, which would mean a 10 to 15 per cent increase to taxes just to meet our yearly amortization expenses of $1.3M, which is not a realistic option.
My concern is that if municipalities go down the road of funding their yearly TCA amortization, the province might look and see all those reserves which have been built up and ultimately cut back on grant funding to municipalities, pushing the burden back onto the local taxpayer.
Questions need to be asked of our provincial government. What are its plans going forward with a new leader in place and an election looming, and how is it going to commit to helping fund this major infrastructure deficit that all Alberta municipalities, urban and rural, have been facing for years?
Council and administration are doing our best to manage the town’s TCA to maximize the life and value of these assets, but we can only do so much until the money runs out. We need predictable long-term funding from the province so that we can properly plan, repair or replace infrastructure on a priority basis that best serves all residents and businesses in Didsbury without it becoming a major tax burden to our taxpayers.
Brian Wittal is the mayor of Didsbury