REPORT TO COMMITTEE(S) OF COUNCIL

FINANCIAL PLAN FOR WATER SERVICES

PLAN FINANCIER CONCERNANT LES SERVICES D’EAU

ACS2010-ICS-ESD-0021 City Wide/À l'échelle de la Ville

Dixon Weir, General Manager of Environmental Services, was present in support of staff’s recommendations. He was accompanied by Sally McIntyre, Program Manager, Environmental Programs, and Mona Monkman, Deputy City Treasurer, Corporate Finance. Staff provided a detailed overview of the report and recommendations by means of a PowerPoint presentation, a copy of which is held on file with the City Clerk.

Mr. Weir provided an overview of the background and context of the recommended Water Service Financial Plan, reviewed its objectives and the work completed to date. He emphasized that it was a living plan, subject to change over time, and did not pre-commit future Councils in future budget processes. In his presentation, Mr. Weir highlighted the fact that the length of the City’s water distribution system had increased significantly over time since the mid 20^th Century. This is significant because the aging of that expanded infrastructure requires that City plan both operationally and financially to continue renewing and rehabilitating that infrastructure in order to continue a high level of service. He noted that reinvestment in capital assets already formed a large part of the annual budget, which would continue under the proposed plan.

Ms. Monkman provided a detailed overview of the financial plan, as outlined in the PowerPoint presentation. She began by pointing out that the financial statements in the report paralleled the new format of the City’s consolidated audited statements, and noted that their format and content differed from that of the annual budget. She suggested these financial statements, in addition to being required by the province, had value in that they allowed the City to examine whether it was providing the appropriate revenue sources to allow for the required capital reinvestment. She suggested that there were some key indicators in the statements that staff would continue to look at going forward.

Ms. Monkman then provided Committee with an overview of the regulated financial plan requirements, financial plan objectives, assumptions, and a detailed overview of the statements contained in Document 1 of the staff report, namely the Statement of Financial Position, Statement of Operations, and Statement of Cash Flows. Upon conclusion of the staff presentation, Committee asked questions to staff with respect to the report.

In response to questions from Councillor Monette, Mr. Weir explained that, as more of the City’s assets aged, the City was entering an era where reinvestment is required, and emphasized that the proposed plan would allow the City to continue investing in their infrastructure over time. He noted the City had consistently been able to provide a high quality, reliable source of drinking water, but emphasized that the infrastructure upon which the City relies to deliver that service has reached a stage where it requires reinvestment. In response to further questions from Councillor Monette with respect to the reserves that had been kept for this purpose, Mr. Weir explained that the reserves were at a stage where they required replenishment. He noted that, while the reserves would dwindle in the first part of the plan, they would be replenished in the latter years.

Councillor Monette wondered whether the system would be considered sustainable once the 2019 water rates had been achieved. Mr. Weir suggested that, based on the assumptions in the report, it would. He emphasized that it was important to review the assumptions on a yearly basis in the annual budgeting process. Mr. Weir confirmed that approval of the plan would not bind any future Councils; rather, it would provide an overarching direction subject to annual review. He suggested that if there were significant changes made in the future, it would be incumbent upon the City to submit a revised financial plan. In response to further questions from the Councillor, Mr. Weir expressed his belief that staff had looked at all the options before arriving on the proposed plan.

Councillor Monette wondered whether the proposed reinvestment for the next nine years could be amortized over a longer period, such as 30 years, resulting in lower rate increases. Mr. Weir emphasized that they were not asking taxpayers over the next nine years to pay for 70 years of deterioration; rather, he suggested the next nine years were part of a continuum. He stated that, although the report contains a 10-year plan, many of the assumptions and decisions staff developed look at a much longer time frame, including spreading the contributions over time and using long-term debt. He further explained that, after the 2019 end of the plan, the City would need to continue to submit six year plans that will look at the aging infrastructure and asset requirements over time. He suggested the need for reinvestment was not something that would likely plateau at the end of 2019, and noted they were using debt as a tool to spread the rate increases over time.

Councillor Bellemare noted that one of the main pressures on water rates in upcoming years appeared to be the objective of closing the “infrastructure gap,” and asked staff if they could quantify that gap. Mr. Weir suggested the infrastructure gap was a concept that would change year by year as infrastructure aged. With reference to the presentation, Mr. Weir explained that a large part of the rate increases above inflation was attributed to trying to go further in addressing the infrastructure gap as infrastructure gets older. Councillor Bellemare noted that the City as a whole had identified an infrastructure gap for all its assets, and wondered why this could not be done for water services, with an understanding that variables could change the variables in the future. To that effect, he put forward the following direction to staff.

DIRECTION TO STAFF:

That, before Council, staff provide a snapshot of what the infrastructure gap is at the present time for Water Services.

Mr. Weir indicated that staff would endeavour to put something together before the June 23 Council meeting that would provide the requested information.

With respect to the statement of Financial Position, Councillor Bellemare noted that the amount of cash and cash equivalents would decline significantly from 2009 to 2013, before rising again by 2019. Ms. Monkman explained that this could be attributed to the attempt to mitigate the amount of debt issued and the amount of rate increases by using the cash balances on hand. She noted that there was a peak in spending compared to revenue in the years 2012 and 2013, and there was an attempt to not increase the rates more than necessary in those years by using the cash on hand.

In response to questions from the Councillor Ms. Monkman explained the three types of “value” highlighted in the financial statements: gross book value, net book value, and replacement value. She explained that the gross book value was the historical value of the assets when they were acquired, the net book value was the depreciated historical cost, and replacement value was the value of what it would cost to construct the assets today.

In response to questions from Councillor Bellemare with respect to provincial debt guidelines, Ms. Monkman explained that there were provincial guidelines, not specific to the water system, on the amount of debt servicing the City could have on an annual basis. She noted the provincial guideline was 25 per cent, the City’s more conservative assumption in the Fiscal Framework was 7.5 per cent, and the City as a whole sits below that five per cent. As to how the City’s percentage of debt servicing compared with other jurisdictions, Ms. Monkman suggested that the percentages of debt servicing in the plan would be increasing beyond the City’s 7.5 per cent general assumption, but would be well below provincial averages, and consistent with where other municipalities were going in terms of how to fund this kind of infrastructure. She emphasized that staff felt the amount of debt issued in the plan was sustainable and reasonable. Mr. Weir noted a number of other municipalities were tabling similar financial plans, and suggested the proposed plan was quite consistent with those, and suggested the City was in a better position than some. He further noted that the Treasurer was proposing to address the issue of the capital-intensive areas of service as part of the next Long Range Financial Plan.

Councillor Bellemare wondered whether the City was striking the right balance between debt and rate stability. He noted the assets depreciate over decades, and hoped the City would be doing the cost-benefit analysis to determine whether it would be better to take on more debt to close the infrastructure gap and maintain rate stability targeting annual rate increases of five per cent or less.

Mr. Weir highlighted that they had engaged a consultant to help develop the plan, George Raftelis, whose firm had extensive experience in both Canada and the United States. He noted the consultant indicated Ottawa was well positioned on this issue.

Councillor Hunter wondered why debt as a percentage of net book value was considered important, given assets could not be sold at that value to pay off the debt. He noted that, while the City was now taking in more revenue than they had in net debt, it was projected that after 2013 debt would exceed annual revenue. He suggested this was an indication that the system was going deeper into the financial hole. With respect to the infrastructure gap, he suggested there was a need for a better, more concrete understanding of what the infrastructure gap is. To that effect, the Councillor put forward the following direction to staff:

DIRECTION TO STAFF

That staff provide the following information prior to Council: What are the pressures and projects from now to 2015 that will drive greater than inflationary cost increases for the consumer?

Mr. Weir indicated that they could provide a breakdown in each service area of what is growth vs. renewal spending, suggesting that would help Council understand what the rate of renewal would be in tangible capital spending, to give a better sense of the reinvestment rate. Councillor Hunter noted that the City had been working on upgrading the infrastructure system for a number of years, and expressed surprise to hear there was still such a deficit. Mr. Weir emphasized that much of the infrastructure required continuous reinvestment in order to make the service sustainable.

Councillor Qadri suggested every part of the City should have a long term plan, and expressed his support for the fact that the proposed plan was projecting long terms costs. However, he expressed his concern that operating costs appeared to be mixed in with capital costs in the model. Ms. Monkman explained that the definition of “capital” in the plan was in accordance with the capital asset policy developed in accordance with what other municipalities were doing; however, it differed from what Ottawa classifies as “capital” in the annual budget. She noted Ottawa had historically included in their annual capital budget some items that were not considered to be “capital” for accounting purposes, such as one-time items or those requiring funding over a number of years (i.e. major planning studies, computer systems.) She explained that, for the purposes of depreciation, useful life or amortization, such items were no longer in the accounting records as capital assets. While they are still in the accounting records, they are written off in the year they are spent, as opposed to being written off over time. She suggested that, in the future, it would be easier for the municipality to have the same budgeting as reflected in the financial statements, and this was where staff wanted to move over the coming years. However, they will need to find a way to fund those items, such as providing for a reserve. In response to further questions from the Councillor, Ms. Monkman confirmed that the day-to-day operating costs were part of the Statement of Operations, because the city was required to account for what all the revenue is spent on.

In response to questions from Councillor Qadri with respect to how the book value and replacement value were modeled, Ms. McIntyre explained that for the above-ground plant, staff sat down with the asset owners, itemized all the assets, and broke them down into different types of assets as different assets have different life spans. For the below-ground plant (pipes etc.) staff have used various models over time to determine the lifespan, and based upon that lifespan and when the infrastructure was put in the ground, staff can anticipate when it will need replacement. A calculation of all the assets combined determines how much will need to be invested in the infrastructure over time. With respect to the infrastructure gap, she explained that staff can estimate how much money on averages should be invested every year, and a gap develops when that investment is not made. She emphasized that the goal was to not allow infrastructure to reach the critical point.

In response to further questions from Councillor Qadri with respect to the longer life span of newer infrastructure, Ms. McIntyre noted that growth was built into the 50-year plan, so staff know what new infrastructure will come on line at a certain time. She explained that, since the new infrastructure is projected to last upwards of 80-100 years, its replacement is not included in the 50-year model; however, everything above the ground, is included in the 50-year plan, and infrastructure renewal is started immediately and taken into consideration in the long-term financing.

In response to a question from Councillor Qadri with respect to the two per cent infrastructure levy, Mr. Weir confirmed that, as that levy was a tax levy and went towards tax projects, it was not taken into consideration in this plan as none of the projects were tax-funded. As to whether the model has taken into account trends such as reduced water consumption, Mr. Weir explained that staff had indeed taken decreasing water demand into account, and a billing revenue forecast had been developed to do so.

Councillor Qadri noted that it appeared the City was trying to recoup all of the costs of the problems in a short period of time. He suggested that those costs should be projected out over a longer period, and the City should not expect the ratepayers over the next few years to pay for the closing of the infrastructure gap. He emphasized the need to make the plan not only revenue-neutral for the City, but as cost-neutral as possible for the ratepayers. He suggested that was something that should be looked at and reviewed before it went to Council. He emphasized that the affordability of rate increases for ratepayers should be taken into consideration in this and any financial model.

Ms. Monkman explained that there were many assumptions in the model in terms of the appropriate debt level vs. the appropriate tax impact level. She emphasized that the model included some increasing debt issuance, which needs to be fit into the city’s long-term planning and fiscal framework target. She noted the assumptions could be revisited in future revisions.

Councillor Doucet began by putting forward the following direction to staff:

DIRECTION TO STAFF:

That staff provide the following information prior to Council: The rate of growth of the pipe system compared with the rate of growth of the City’s population.

The Councillor expressed his concern that the City’s costs were increasing faster than they wanted as a result of an emerging gap between population growth and the amount of pipe used to service them. He likened this to the situation with roads, where the percentage growth in roads was higher than that of the City’s population, resulting in a smaller group of people paying for a larger road system.

Councillor Feltmate inquired about the likelihood of rates increasing even higher in future years, beyond the immediate increases projected in the plan. Mr. Weir emphasized that the plan was predicated on a host of assumptions which are more concreted in the near future and less so in the long term, and suggested the plan would require annual review as part of the budgeting process to deal with that uncertainty.

In response to further questions from the Councillor with respect to how the City’s rates compared to other municipalities, Mr. Weir made reference to the presentation and noted Ottawa was listed as below the annual average for water and wastewater services in terms of cost of service delivery. He suggested Ottawa was positioned, and noted other municipalities were facing the same aging infrastructure situation as Ottawa and all major municipalities to compile similar financial plans. He suggested that, based on those they had seen, other municipalities were following similar approaches in terms of addressing aging infrastructure through rate increases and debt.

In response to further questions from the Councillor, Mr. Weir confirmed that regulation required that the plan be updated every five years. There was also the opportunity to adjust the plan if there were significant changes, and amend and resubmit to the Ministry. He further confirmed that, by the next budget cycle, staff would have had the opportunity to compare Ottawa’s with those of other municipalities. He noted that there were a number of annual opportunities to check the City’s progress against the plan.

In response to questions from Councillor Monette, Mr. Weir indicated that a seven per cent water rate increase represented an increase of approximately $20 per household.

Committee then approved the report recommendations, as presented:

That the Planning and Environment Committee recommend that Council approve the Financial Plan for Water Services described herein, attached as Document 1, and submission of the Financial Plan to the province by July 1, 2010, as per the requirements of Ontario Regulation 453/07.

CARRIED

Councillor B. Monette Dissented

DIRECTION TO STAFF:

That staff provide the following information prior to Council:

1. A snapshot of what the infrastructure gap is at the present time for Water Services.

2. What are the pressures and projects from now to 2015 that will drive greater than inflationary cost increases for the consumer?

3. The rate of growth of the pipe system compared with the rate of growth of the City’s population.