Corporate commissioner Dennis Egert, centre, discusses proposed changes to how City of Medicine Hat business units calculate and pay dividends during Tuesday's committee meeting at city hall as chief administrator Bob Nicloay (left) and Chair, Coun. Robert Dumanowski look on.--NEWS PHOTO COLLIN GALLANT
cgallant@medicinehatnews.com@CollinGallant
Major changes are coming to how the City of Medicine Hat’s business entities calculate how they pay profits to the city, along with a policy about how those dollars are used.
The changes, presented at Tuesday’s corporate services committee meeting, would expand a distributable cash model across all the city’s business units, then earmark pooled cash dividends for use in terms of need on prorated basis.
Currently, three different dividend policies and a host of delineated reserve funds are used for an array of purposes.
When coupled with a new system of determining capital requirements and debt management, it would protect equity in units, simplify cash flow and better manage debt loads, said finance officials.
“We’re trying to look at the sustainability of the business units while earning income and providing cash,” said commissioner Dennis Egert. “That’s a fine line, and as shareholders, there needs to be a direct benefit to the citizens of Medicine Hat.”
The plan is a sea-change from the complex, evolving and often sector-specific way payouts were previously calculated, and how proceeds could be spent.
“There’s a lot to take in,” said committee chair, Coun. Robert Dumanowski.
“What’s actually happening is quite simple … there are so many spending priorities and this is a departure, but it’s the right time.”
Committee is recommending council approve the changes at the Dec. 21 meeting, so changes for the city’s reserve funds, totalling $109 million, would take effect Jan. 1 for this year’s deposits.
All calculations would move to a distributable cash model to evaluate amortization and replacement costs into account before paying out cash – the gas production business did this years ago to avoid eroding equity by paying out a set dollar amount each year no matter the business conditions.
And the array of current funds would be filed under two umbrellas.
Cash would be divvied into funds according to, first, the needs of the new “operating reserve,” then the new “capital reserve, then one fifth the remainder to Heritage Savings Fund endowment, and finally, a dividend directly to the municipal operating budget.
The amounts for each would be determined year to year and in line with forecasting that accounts for separate debt to equity calculations.
“We want to ensure that we have enough cash to meet organization’s needs, and make sure we’re not holding cash unnecessarily,” said Lola Barton, the city’s general manager of finance.
Once the Financially Fit budget gap is eliminated, the operating reserve would be maintained at one-month’s city’s expenses, or about $10 million.
The target balance of the capital reserve would be determined by short and long-term spending plans on capital projects and purchases.
Committee member Coun. Darren welcomed the changes.
“I’m over the moon,” he said, stating the system would maintain the health of the individual business units, utilities and real estate.
“Any future ideas (for spending) will have to compete … and it takes money that’s been sitting in departments for years and puts it to use.”
In a major policy shift, the power plant (denoted as ‘Genco’ in city accounting) and gas production business (Prodco), would form the commodity (Comco) business unit.
They would produce a joint dividend, meaning that power profits would help manage huge deficits during the shutdown of most of the city’s unprofitable gas wells over the next few years.
More typical utility departments have paid their profits directly to municipal coffers.
Any excess profits in the land and properties department at present are delineated for the community capital reserve, which funds special projects. Two years ago a lack of working capital led to an unexpected halt to payouts, but land dividends have always varied greatly depending on market conditions.
Now, a larger real estate department within Invest Medicine Hat will operate and retain more cash to make it “self-sustaining.”
A distributable cash model factors in amortization and maintenance spending priorities before dividends are calculated. Cash requirements are adjusted against set debt-to-equity ratios, say administrators.
“There’s a question about how to continue with community growth without using debt to finance it,” said city CAO Bob Nicolay, who added that within the funds, “discipline” will be required and substantial analysis will be done to determine spending requirements in each department.
“This will avoid that (over reliance on debt financing) from happening and we’ll plan well in advance on what debt levels should be.”
