Capital Investment Planning and Budgeting

Capital Investment and Budget Planning

Capital and Investment Budget Planning

For all governments, long-term expenses are something they must deal with. This is to ensure that the continuing needs of an area are met through facilitating economic growth and addressing the demands of the general public. To fully understand this process requires examining the capital and investment budget planning process. This will be accomplished by comparing the city of Toronto's budget presentation with the 8 step method and carefully analyzing this model. Together, these elements will highlight how administrators are able to account for spending on large projects and ensure that there is enough funding to meet these needs every single year.

Part

Compare Toronto's capital budget presentation with the eight step model

For the most part, the city of Toronto is following the eight step model to highlight the long-term needs of the area between 2009 and 2018. Some of the different elements that are included in the proposal which are following the guidelines include: identifying current service characteristics, determining environmental trends, developing service objectives, creating a list of capital project / estimated costs, determining the available financial resources and selecting a subset of projects that will help with five years of planning. These different factors are ensuring that the city is able to improve its infrastructure, enhance its quality of life and create an environment. That is taking into account the needs of stakeholders. ("2009 to 2013 Recommended Capital Budget and Plan," 2008) ("Capital Assets," n.d.)

For example, inside the city's projected capital expenditures there is a focus on several different areas. The most notable include: public safety / emergency services, transit, public spacing, enhancing the quality of life inside the community / protecting the ecology and improving public services. Each of these areas is concentrating on how the city can fund these projects over the long-term in order to address the continuing needs of Toronto. ("2009 to 2013 Recommended Capital Budget and Plan," 2008) ("Capital Assets," n.d.)

Moreover, the funding and long-term effects this will have on the budgetary process are circled in the tables outlining these overall costs. Evidence of this can be seen in the 2009 to 2013 and 2009 to 2018 categories. In 2009 to 2013, these expenses are expected to be $10.87 million. The total funding for these projects is projected to come in at $10.86 million. The total expenditures for 2009 to 2018 are estimated to account for $17.34 million. While the revenues to support these initiatives, is expected to be $17.34 million. In these examples, the city is showing where the funding for the various projects will come from two different periods of time. This helps in their planning by demonstrating how needs of stakeholders is addressed over the long-term and the impact it is having on everyone. ("2009 to 2013 Recommended Capital Budget and Plan," 2008) ("Capital Assets," n.d.)

The obvious strengths of the capital budget for Toronto are through providing stakeholders with additional information. This is highlighting the long-term effects they will have on revenues and expenses that are received. However, there are two apparent weaknesses in the process. These include: the ability to determine the way these recurring costs will impact the city's budget and the fact that these figures were not provided in the first year. ("2009 to 2013 Recommended Capital Budget and Plan," 2008)

This is problematic, as the lack of numbers in these areas is not taking into account the needs of stakeholders. The way that this is occurring is to show transparency and where the funding will come from. Yet, actuaries are not providing any kind of insights as to how this could impact the city's budget from 2009 going forward. If the local economy were to go through a series of challenges, this could create a situation where there will be a budget shortfall from failing to take this into account these variables. ("2009 to 2013 Recommended Capital Budget and Plan," 2008) ("Capital Assets," n.d.)

Furthermore, the inability to include these figures makes it seem as if city officials are not fully disclosing the financial impact this will have on the budgetary process. To deal with these challenges, there needs to be more transparency in these areas. Other than these issues, the city of Toronto's budget is basically following the 8 step model. This provides stakeholders with insights as to where long-term spending will take place and how it will be funded. ("2009 to 2013 Recommended Capital Budget and Plan," 2008) ("Capital Assets," n.d.)

Part 2

Analyze the 8 Step Model

The 8 step model is concentrating on different areas that will help government planning and ensuring they have the financial resources for long-term capital projects. The most notable include: identifying current service characteristics, recognizing environmental trends, developing service objectives, classifying how financial resources will be utilized, selecting subset projects for a 5-year capital investment plan, determining the recurring costs on the budget and including the first year of the capital investment plan (CIP) in the budget. These elements will provide stakeholders with disclosures about the projects that are being conducted. At the same time, it will highlight the projected costs and the way they will impact the budgetary process. These areas will offer administrators with the tools they need to ensure the project remains within the projected costs. This is the point when they can more accurately predict what is happening and mitigate the chances of a cost overrun. ("Capital Assets," n.d.)

For example, in 1982 the city of Boston and the Commonwealth of Massachusetts did not utilize the 8 step method when accounting for a project known as the Big Dig. This is when these two levels of government were working together to re route all of the city's major freeways. When the project was first proposed, it was supposed to cost an estimated $2.6 billion. (Brooks, 2009)

However, the inability to account for changes in the budgeting process and additional forms of funding made it difficult maintain the projected expenses. This is when costs ran out of control from the ability of administrators to address these issues. In 2006, when everything was nearing completion, is the point that expenses reached $14.86 billion. This is 486% over the projected costs. (Brooks, 2009)

What increased them so much is no one had effective control of the overall expenses associated with the project in the long-term. This is when they rose exponentially in order to deal with these challenges. If they had utilized the 8 step method, actuaries would have more control over the entire process. This is when, they could have accounted for increases in costs and provide long-term forms of revenues for funding it. (Brooks, 2009)