4.             Financial Plan for water services

 

PLAN FINANCIER CONCERNANT LES SERVICES D’EAU

 

 

Committee recommendation

 

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.

 

 

RECOMMENDATION DU COMITE

 

Que le Conseil approuve le Plan financier concernant les services d’eau décrit dans le présent rapport, joint en tant que Document 1, et le Plan financier sera soumis à la province d’ici le 1er juillet 2010 conformément aux exigences du Règlement de l’Ontario 453/07.

 

 

 

 

 

 

DOCUMENTATION

 

1.                  Deputy City Manager’s report, Infrastructure Services and Community Sustainability, dated 31 May 2010 (ACS2010-ICS-ESD-0021).

 

2.                  Extract of Minutes dated 8 June 2010.

Report to / Rapport au:

 

Planning and Environment Committee/

Comité de l'urbanisme et de l'environnement

 

and Council / et au Conseil

 

31 May 2010 / le 31 mai 2010

 

Submitted by/Soumis par: Nancy Schepers, Deputy City Manager/Directrice munipale adjointe, Infrastructure Services and Community Sustainability/Services d’infrastructure et Viabilité des collectivités

 

Contact Persons/Personne ressource : Dixon Weir, General Manager/Directeur général

Environmental Services Department/Services environnementaux

(613) 580-2424 x22002, Dixon.Weir@ottawa.ca

 

And / et au

 

Marian Simulik, City Treasurer/Trésorière municipale

Finance Department / Service des finances

(613) 580-2424 x14159, marian.simulik@ottawa.ca

 

City-Wide / À l’Échelle de la ville 

Ref N°: ACS2010-ICS-ESD-0021

 

 

SUBJECT:

Financial Plan for water services

 

 

OBJET:

PLAN FINANCIER CONCERNANT LES SERVICES D’EAU

 

 

REPORT RECOMMENDATIONS

 

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.

 

RECOMMANDATIONS DU RAPPORT

 

Que le Comité de l’urbanisme et de l’environnement recommande au Conseil d’approuver  le Plan financier concernant les services d’eau décrit dans le présent rapport, joint en tant que Document 1, et le Plan financier sera soumis à la province d’ici le 1er juillet 2010 conformément aux exigences du Règlement de l’Ontario 453/07.

 

EXECUTIVE SUMMARY

 

Ontario Regulation 453/07 requires municipal drinking water system owners to submit a Financial Plan as a condition of the Municipal Drinking Water License Program.  The plan must demonstrate a sustainable financial approach towards management of assets and be submitted no later than July 1, 2010.

 

This plan is designed to put the City’s Drinking Water Program on long-term, sustainable firm financial footing and guarantee the delivery of top quality service to residents.

 

Over the next 10 years, the main financial driver in the drinking water service program is the cost of infrastructure renewal and repair needed to maintain the system. These costs are directly related to the size and age of the system and are almost entirely independent of water sales.

 

Our drinking water system consists of more than 2,800 kilometres of pipes, several pumping stations, reservoirs and purification plants, much of it built more than 50 years ago. Like all other municipalities with similar sized and aged systems, the City needs to renew this critical health and safety infrastructure.

 

This report outlines these needs and puts forward a plan to meet them in a cost-effective and responsible manner in order to ensure the delivery of clean, fresh drinking water to residents and businesses.

 

This plan is different than financial information and budgets presented to Committee and Council in the past. This financial plan conforms to new accounting standards for municipal governments effective for 2009.  This new full accrual basis of accounting reports tangible capital assets and the related amortization expense of these assets over their useful life. This information has not been required under previously documented reports, budgets or financial statements.

 

Following the guidance provided by provincial regulation, a 10-year financial plan has been developed which reflects both monetary and capital assets. All water related investment requirements as well as revenue sources have been captured to provide an indication of future viability. The inclusion of figures reflecting the capital value of City water assets in this documentation is a new process.  The overall results of this new approach are moving us closer to an integrated asset management philosophy with respect to water systems. This direction is complementary to existing efforts adopted by the City to improve the management of its physical assets.

 

Data produced from this work reflects available information generated through existing City processes, as well as calculated future projections, based on an understanding of water system assets and their lifecycles. Council is presented with four (4) financial statements that make up the Water Infrastructure Financial Plan as follows:

 

·         Statement of Financial Position (Balance Sheet);

·         Statement of Operations (Income Statement);

·         Statement of Cash Flow; and,

·         Tangible Capital Assets (TCA) Continuity Schedule.

 

In summary, the Financial Plan for Water Services covers the period 2010-2019 and contains the following key information:

 

·         Net book (depreciated) value of existing drinking water assets as of January 1, 2010;

·         Projected infrastructure needs to meet lifecycle renewal, growth, regulatory, and city-policy requirements over the ten-year period;

·         Projected operating and capital costs to plan, design, build, operate, maintain, rehabilitate, and replace those assets;

·         Projected net book value of existing and planned assets;

·         Projected water sales and other revenues;

·         Projected cash needed to meet operating and capital activities;

·         Projected debt financing;

·         Projected cash position; and,

·         Projected rate increases.

 

Financial Implications

 

The report provides information on the current status of the water infrastructure financial position.  The information provided should be used as the basis for future planning and decision making in terms of guiding the collection of revenue reflecting the true cost of ownership and operation. The financial projections included in this report will form the drinking water component of the City’s next Long Range Financial Plan.

 

This report does not commit Council to the assumptions implicit in the plan such as projected rate increases, pace of necessary capital expenditures or projected levels of debt financing. These decisions will continue to be subject to the normal yearly budget approval.

 

Legal/Risk Management Implications

 

Adoption of the Financial Plan is an acknowledgement by City Council of the costs and revenues needed to sustain the drinking water system over time.  There are no legal/risk management impediments to implementing any of the recommendations in this report.

 

Public Consultation/Input

 

Extensive consultation was undertaken throughout consideration of alternative rate structures during earlier phases of this project.  Ontario Regulation 453/07 prescribes that the plan be released to the public which will occur on May 31, 2010, and that the approved document be accessible via the municipal web site.

 

RÉSUMÉ

 

Le Règlement de l’Ontario 453/07 exige des propriétaires de réseaux municipaux d'eau potable qu’ils soumettent un plan financier; il d’agit de l’une des conditions du Programme des permis de réseaux municipaux d'eau potable.  Le plan doit démontrer faire la preuve que les propriétaires ont adopté des principes de gestion financière durable des actifs et doit être soumis au plus tard le 1er juillet.

 

Ce plan est conçu de manière à établir une base financière solide, viable et à long terme pour le programme d’eau potable de la Ville et garantir la prestation des services de la meilleure qualité qui soient aux résidents.

 

Au cours des dix prochaines années, le principal moteur du programme de service d’eau potable sera le coût du programme de renouvellement de l’infrastructure et des réparations nécessaires pour maintenir le réseau en bon fonctionnement. Ces coûts sont directement liés à la taille et à l’âge du réseau et sont presque entièrement indépendants de l’aspect ventes de l’eau.

 

Notre réseau d’eau potable consiste en plus de 2 800 kilomètres de tuyaux, de plusieurs stations de pompage, de réservoirs et d’usine de purification, qui pour la plupart, ont été construits il y a plus de 50 ans. Comme c’est le cas d’autres municipalités de taille similaire qui ont des réseaux âgés, la Ville doit renouveler les éléments de cette infrastructure de santé et sécurité essentielle.

 

Le rapport présente ces besoins ainsi qu’un plan afin de les combler de manière rentable et responsable pour assurer la distribution d’une eau potable fraîche et propre aux résidents et aux entreprises.

 

Ce plan est différent de l’information financière et des budgets présentés au comité et au Conseil antérieurement. Ce plan financier est conforme aux nouvelle normes comptables établies pour les administrations municipales en vigueur en 2009. Selon cette nouvelle méthode de comptabilité d’exercice, les immobilisations corporelles, ainsi que les charges d’amortissement connexes de ces actifs, sont comptabilisées pour la durée de leur vie utile.  Cette information n’était pas exigée dans les rapports, budgets ou états financiers documentés précédents.

 

Par suite de la diffusion des lignes directrices fournies conformément à la réglementation provinciale, nous avons élaboré un plan financier sur dix ans qui tient compte tant des actifs monétaires que des immobilisations. Toutes les exigences concernant les investissements liés à l’eau, ainsi que les sources de revenus ont été prises en compte afin de fournir une indication de la viabilité future. Fait nouveau, nous avons également inclus à cette documentation les montants qui indiquent la valeur en capital des actifs liés à l’approvisionnement en eau de la Ville.  La nouvelle approche ainsi mise en oeuvre s’inscrit dans le cadre d’une philosophie de gestion des actifs intégrée concernant les réseaux de distribution d’eau. Cette orientation complète les efforts déployés par la Ville pour améliorer la gestion de ses biens matériels.

 

Les données issues de ces travaux tiennent compte de l’information générée par les processus actuels de la Ville, ainsi que des projections futures, et sont fondées sur la compréhension des réseaux de distribution d’eau et de leur cycle de vie.  Le Conseil aura quatre états financiers à consulter qui composent le plan financier de l’infrastructure d’approvisionnement en eau comme suit :

 

·       historique des immobilisations corporelles.

 

En résumé, le plan financier des services de distribution d’eau couvre la période de 2010 à 2019 et contient les renseignements principaux suivants :

 

·      valeur comptable nette (après amortissement) des actifs d’approvisionnement en eau potable actuels au 1er janvier 2010;

·      besoins en infrastructure prévus afin de satisfaire aux exigences en matière de renouvellement du cycle de vie et de la croissance, et aux exigences réglementaires et  à celles relevant des politiques municipales pour la période de dix ans;

·      frais d’exploitation et dépenses en immobilisations prévus pour planifier, concevoir, construire, exploiter, entretenir, remettre en état et remplacer ces actifs;

·      valeur nette projetée des actifs actuels et planifiés;

·      ventes d’eau et autres revenus prévus;

·      besoins en trésorerie prévus pour les activités d’exploitation et d’immobilisation;

·      financement par emprunt prévu;

·      position de trésorerie prévue;

·      augmentations de tarif prévues.

 

Répercussions financières

 

Ce rapport fournit de l’information sur l’état actuel de la situation financière de l’infrastructure d’approvisionnement en eau.  L’information fournie doit servir de base à la planification et à la prise de décision futures en ce qui a trait à l’orientation à donner à la collecte de revenus qui tiennent compte des coûts véritables de l’exploitation et de ceux associés à la propriété. Les projections financières incluses dans ce rapport permettront d’établir la composante eau potable du prochain plan financier à long terme de la Ville.

 

Le rapport n’engage pas le Conseil relativement aux hypothèses implicites dans le plan comme les augmentations de tarif projetées, le rythme des dépenses en immobilisation nécessaires ou les niveaux de financement par emprunt projetés. Ces décisions demeurent assujetties à l’approbation budgétaire annuelle régulière.

 

Répercussions juridiques/gestion du risque

 

Le Conseil de la Ville reconnaît en adoptant le plan financier les coûts et les revenus nécessaires pour soutenir le réseau de distribution de l’eau potable à long terme.  Il n’y a pas d’obstacle juridique ou lié à la gestion du risque qui empêche la mise en œuvre de la recommandation énoncée dans le présent rapport.

 

Consultation publique/commentaires

 

De vastes consultations ont été entreprises pendant l’examen d’autres structures de tarifs pendant les premières phases de ce projet.  Le Règlement de l’Ontario 453/07 prévoit que le plan soit rendu public, ce qui a été effectué le 31 mai 2010 et que le document approuvé soit accessible dans le site Web de la municipalité.

 

 

BACKGROUND

 

The scope and content of the Financial Plan for Water Services is driven by two key regulatory requirements:

 

Ontario Regulation 453/07 requires municipalities to submit a council-approved Financial Plan for their drinking water systems no later than July 2010, in accordance with Generally Accepted Accounting Principles, which requires municipalities to report the net book (amortized) value of their tangible capital assets (TCAs) and the amortization expense of these assets over their useful lives.

 

Projections included in the required Financial Statements will provide a snapshot of a drinking-water system’s projected financial situation, as well as the resources required to run and sustain the system

 

City policies were also considered during development of the plan:

 

The City’s 2007 - 2010 Fiscal Framework addresses many of the same principles set out in the regulation.  For example, key City objectives and guiding principles include:

 

·         Capital assets are maintained and/or replaced using models of best economy;

·         Capital and operating costs for water and sewer to be 100 per cent recovered;

·         Sufficient revenues are raised to fund operations, while maintaining appropriate levels of debt and equity;

·         Equity (reserves) provides flexibility to respond to economic cycles and manage financial risk;

·         Financial decisions based on a multi-year forecast; and

·         Recovery rates for services to consider…extent of private, commercial and community benefit (including environmental considerations).

 

The City’s 2007-2010 Strategic Plan’s Infrastructure Renewal Objective 5 is to “Close the gap on sanitary and storm sewer and water line replacement by 2015.”  The recommended plan allows for achievement of this objective.

 

The following activities were carried out to prepare the Financial Plan:

 

·         Drinking water assets were inventoried, assigned lifecycles, and valued;

·         The lifecycle requirements of existing assets were projected; rehabilitation and replacement needs identified; and net book values calculated;

·         Future growth and regulatory requirements were identified and projected—both operating and capital;

·         Existing City-policy commitments were considered, namely elimination of the “infrastructure gap” by 2015, and the policies contained in the Fiscal Framework;

·         The impacts of inflation, scheduled pay increases and changes in per capita consumption were considered;

·         Based upon the above, revenue needs were projected, vetted, revised, and an affordability check carried out; and

·         Debt was projected at the level required to ensure system sustainability through capital investment while maintaining rate stability

 

Water Infrastructure Financial Plan Reporting

 

Commencing in 2009 municipalities are moving from the “modified accrual basis of accounting” to “full accrual basis of accounting”. The main change is to move from an expenditure basis to an expense basis method. Unlike expenditures, which are the cost of goods and services acquired by the government in the period, expenses are the cost of goods and services consumed in the accounting period. A new set of financial statements has been created in order to detail the full accrual methodology. Full accrual basis of accounting recognizes the financial effects of transactions in the period(s) in which they occur irrespective of when the cash has been received or paid.  It requires that tangible capital assets be reported on the balance sheet (statement of financial position) at historical cost and expensed (amortized) in the annual results of operations over their estimated useful lives. The Water Infrastructure Financial Plan presented in this report follows this new regulated methodology.

 

 

DISCUSSION

 

The accounting schedules that constitute the Financial Plan for Water Services are contained in Document 1 attached hereto.  These include four key statements described below:

 

  1. Statement of Financial Position

This statement highlights four key figures that describe the financial position of the City at the reporting date.

    1. The cash resources of the City are its cash and cash equivalents.
    2. The net debt position of the City is calculated as the difference between its liabilities and financial assets.
    3. The non-financial assets of the City are assets that are, by nature, normally for use in service provision and include purchased, constructed, developed, or leased tangible capital assets, and inventories of supplies.
    4. The accumulated surplus or deficit of the City is calculated as the sum of the net debt of the City and its non-financial assets. This indicator represents the net assets of the City.

 

Each of the three remaining financial statements illustrates the change in one of these aspects of the City's financial position.

 

  1. Statement of Operations

This statement reports the surplus or deficit from operations in the accounting period. The statement displays the cost of City services provided in the period, the revenues recognized in the period and the difference between them. It measures, in monetary terms, the extent to which a City has maintained its net assets in the period.

 

  1. Statement of Cash Flow

 

The statement of cash flow reports the change in cash and cash equivalents in the accounting period, and how the City financed its activities in the period and met its cash requirements.

 

  1. Tangible Capital Assets (TCA) Continuity Schedule

 

The TCA Continuity Schedule reports the changes in value of tangible capital assets over time. This information describes in financial terms the value of physical assets reflecting changes due to disposal, creation, and amortization. 

 

It is a requirement in the regulations that these statements are provided for a minimum reporting period of six (6) years. The information developed under this project includes these financial statements covering a period of 10 years. This is consistent with, and supports the City’s water and wastewater rate budget process which covers a 10-year period. As part of the current legislated licensing program for municipal water systems, these statements are anticipated to require updates and re-submission to the province on a minimum interval of five years.

 

The following sections discuss underlying principles and assumptions in preparing the financial plan.

 

Cost Drivers

 

Figure 1 illustrates the 2010 Water Services Rate Budget, valued at $121M.  Over 50% of capital costs are for infrastructure maintenance, rehabilitation, and replacement.  Approximately 20% of operating costs is for personnel compensation.  All of these costs are a direct function of the size, complexity, age, and continuous growth of the city’s water system, and are independent of the amount of water sold.  All are subject to inflation, with compensation costs also subject to the terms established in collective agreements.  Less than 7% of total costs vary with the amount of water sold.


FIGURE 1- 2010 Water Rate Budget

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Infrastructure Renewal

 

Figure 2 illustrates the major expense components shown on the Statement of Operations.  Where a municipality plans to meet its future investment needs, this will be result in projected annual operating surpluses. 

 

FIGURE 2 – Understanding Accounting Surplus /Deficit Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Figure 3 shows that the City’s water infrastructure capital acquisitions will continue to rise with inflation, as the system ages and grows, and as regulatory requirements increase.  Annual infrastructure needs will far exceed the projected annual amortization expense of tangible capital assets and will result in a planned operating surplus for water.

 

FIGURE 3- Capital Requirements versus Amortization

 

 

 

Cash Balances

 

To ensure sound fiscal management and preserve City Council discretion in its resource allocation decisions, to minimize the impact to citizens of potentially significant rate increases, and to preserve a sound credit rating, a water infrastructure operating reserve target was established based on the following principles:

 

The water infrastructure operating reserve balance would build over the plan period based on affordability from year to year and until such time as the target was met.

 

FIGURE 4 - Water Service Funding & Projected Rate Increases

 

 

Figure 4 shows how Drinking Water Services revenues are projected to grow over the next decade to help fund required expansion and renewal. Projected rate increases have been limited to between seven and five per cent. It is important to note that the projected rate increases include inflation at an anticipated rate of two per cent per year.. These projected rates will be subject to change as new or unforeseen factors, such as regulatory changes, are incorporated into the model. The project rates are subject to normal yearly budget approval.

 

 

RURAL IMPLICATIONS

 

There are no rural implications.

 

 

CONSULTATION

 

Extensive consultation was undertaken throughout consideration of alternative rate structures during earlier phases of this project.  Ontario Regulation 453/07 prescribes that the plan be released to the public, which will occur on May 31, 2010, and that the approved document be accessible via the municipal web site.

 

 

LEGAL/RISK MANAGEMENT IMPLICATIONS

 

Adoption of the Financial Plan is an acknowledgement by City Council of the costs and revenues needed to sustain the drinking water system over time.  There are no legal/risk management impediments to implementing any of the recommendations in this report.

 

 

CITY STRATEGIC DIRECTIONS

 

Infrastructure Renewal Objective 5 of the City’s 2007-2010 Strategic Plan is to “Close the gap on sanitary and storm sewer and water line replacement by 2015.”

 

The City’s 2007 Fiscal Framework sets out the following strategic objectives and guiding principles for financial planning.

 

·       Capital assets are maintained and/or replaced using models of best economy;

·       Capital and operating costs for water and sewer to be 100 per cent recovered;

·       Sufficient revenues are raised to fund operations, while maintaining appropriate levels of debt and equity;

·       Equity (reserves) provides flexibility to respond to economic cycles and manage financial risk;

·       Financial decisions based on a multi-year forecast;

·       Changes in user fees to be transparent; and

·       Recovery rates for services to consider…extent of private, commercial and community benefit (including environmental considerations).

 

The recommendations of this report will help the City to achieve the renewal objective, and to ensure long-term financial stability.

 

 

FINANCIAL IMPLICATIONS

 

The report provides information on the current status of the water infrastructure financial position.  The information provided should be used as the basis for future planning and decision making in terms of guiding the collection of revenue reflecting the true cost of ownership and operation. It is expected that the financial projections included in this report will form the drinking water component of the City’s next Long Range Financial Plan.

 

This report does not commit Council to the assumptions implicit in the plan such as projected rate increases, pace of necessary capital expenditures, or projected levels of debt financing. These decisions will continue to be subject to the normal yearly budget approval.

 

 

SUPPORTING DOCUMENTATION

 

Document 1 – Water Service Financial Plan:

Schedule 1 – Statement of Financial Position

Schedule 2 – Statement of Operations

Schedule 3 – Statement of Cash Flows

Schedule 4 – Tangible Asset Continuity Schedule

 

 

DISPOSITION

 

That Environmental Services Department publish and submit the Financial Plan per the requirements of Ontario Regulation 453/07.