Extract of Draft Minutes

Long Range Financial Plan Subcommittee

04 and 08 October 2004

Presentation - The Long Range Forecast for the Tax Supported Capital Program

Greg Geddes, Chief Corporate Services Officer; Lloyd Russell, Director of Financial Services and City Treasurer; Marian Simulik, Manager, Financial Planning; Steve Finnamore, Director, Real Property Asset Management; Richard Hewitt, Director, Infrastructure Services; and, Jocelyne St. Jean, Director, Corporate Planning, appeared before the Committee. A copy of staff’s PowerPoint presentation is attached as Appendix 1 to these minutes. After each segment of the presentation, staff responded to questions from the Committee pertaining to that specific section.

Chair Chiarelli explained the intent of this meeting was for the Sub-committee to receive the staff presentation, table all documents and ask questions of staff, but that debate and consideration of the staff recommendations would take place at the subsequent meeting of Friday, 08 October 2004.

Mr. Russell introduced the item and gave a brief outline of the presentation.

"Comprehensive Asset Management Strategy – Buildings and Parks"

Mr. Finnamore presented this portion and then he and Pierre Jolicoueur, Manager, Comprehensive Asset Management Division, responded to questions from the Committee. The following is a summary of the main points raised.

• The City should communicate better to its residents the difference between the capital expenditure and operational sides of the budget;
• There is no City policy that would prevent a community group from coming forward to fund a recreation project or program. For example, a community group that wanted to add onto a City recreation building. City staff would monitor the entire process to ensure compliance with proper standards and building codes, and to ensure that the facility incorporated materials that could be sustained over a long period of time, as the City would typically end up maintaining the facility once it was completed;
• There have been examples of loans being provided by the City to groups wishing to undertake recreation projects;
• Community and Protective Services Department is undertaking a policy development exercise with respect to shared funding for Capital works;
• Staff will be bringing forward in the near future, a comprehensive corporate sponsorship policy for the new City. Municipalities such as Edmonton have had much success from such sponsorships;
• Life Cycle Work Prioritization (ranked in order): Health and Safety/Legislative Compliance; Program Integrity/ Asset Condition; Financial/Investment Considerations; Timing and Implementation; and Community Priorities;
• Prior to amalgamation, some municipalities had a good inventory of their buildings and parks, while others had none. It took a year and half to complete the building inventory and database; the inventory of property the City actually owns is still being compiled;
• Even those municipalities which possessed good programs and inventories, suffered from insufficient funding to deal with maintenance issues (e.g. in some municipalities, programs that should have been funded at 70-80% to be viable were funded at a level of 30%. Last year, the City of Ottawa had funded the department at 10% of its requirements, which will lead to difficulties in taking care of buildings, keeping them operational and viable while at the same time trying to figure out a long-term strategy;
• In 2003, approximately $11 million was spent on the life cycle renewal programs for buildings (including buildings, heritage properties and transit facilities, but excluding parks). In 2004, the amount funded was under $3 million. For 2005, staff had selected, as a starting point around $12-$13 million (i.e. what the first LRFP had chosen as a number for the contribution), ramped up over the following five years to the full $21 million needed to sustain the program;
• Detailed audits had been done on about one-quarter of the City’s most high profile, significant buildings. Staff had a level of comfort with respect to the deferred maintenance level, which he felt was very conservative. Staff is working to put in place a mechanism and policies concerning options (other than simply infusing money into maintenance) for buildings found to be in excessively bad shape;.
• About 30% of the City’s building inventory had been inventoried. Particular emphasis had been placed this year on transit facilities, i.e. St. Laurent, Merivale and Pinecrest campuses of the Transit Facilities portfolio;
• With respect to parks, staff have been performing some audit work including a review of park sites, play structures and hard landscaping in an attempt to forecast the expected replacement cycle on these park assets;
• The industry standard investment in life cycle renewals is approximately 2% and the ratio of planned to unplanned maintenance is 70/30. Staff are recommending the City ramp up to 1.5% (between 2005 and 2009) and that the deferred maintenance also be dealt with (in addition to the 1.5%). In the next four or five years, the target ratio of planned to unplanned preventative maintenance is 60/40;
• As part of the IBS program there were three components that RPAM was involved with i.e. the real estate module (an inventory database of approximately 3,700 properties); project scheduling model; and, preventative maintenance program (a preventative maintenance program will be developed for every building). As a result, $2.5M worth of costs ($1.7M for preventative maintenance alone) have been avoided and this money has already been taken out of the budget;
• The environmental rationale program is a separate capital investment program but is coordinated with the work that is done in the maintenance of a building and with the life cycle capital works that is done (e.g. if a furnace has to be replaced, and a higher efficiency furnace can be put in for 15% more cost, this would be done). Staff confirmed that the allocated $1.5M per year is sufficient, if that funding remains stable;
• Staff to provide members of Council with a list of buildings and parks and as well, if Councillors desired they could demonstrate the program that sets out the dates for the major pieces (this does not include parks).
• There is a separate life cycle program in the capital budget for parks and playing fields. However, this does not include trees as there is a program in Public Works that deals with trees
• There are two options to deal with buildings that sit on properties that are no longer viable to maintain or no longer support programming. The property can be declared surplus and sold or the use of the building can be redefined (i.e. with a proper business plan and Council approval).

Mr. Hewitt, then spoke to the portion of the presentation that dealt with the Public Works Infrastructure. In responding to questions from the Committee, the following points were raised:

• Ottawa is one of the few municipalities that is moving into the non-linear analysis (a much more sophisticated approach to infrastructure investment levels) and this basis is going forward in the Long Range Financial Plan 2 document;
• Ottawa is largely in line with best practices but there will be some refinements brought forward, which will allow the City to us to move in a direction of continuous improvement;
• As evolving technologies (e.g. new resurfacing treatments for roads) are implemented, and as the Department starts to modify its unit costs, this will affect future Long Range Financial Plans, however, these savings would not likely be large enough to cause dramatic changes in estimating at the high level;
• Many other municipalities have not approached the funding gap to the extent that Ottawa has. Edmonton is the only other municipality that staff have found to have a long range financial plan. The City of Toronto has done some work on total capital requirements in the major municipalities in Ontario – and this study revealed that there are three municipalities (i.e. Toronto, Ottawa and Hamilton) annually funding in excess of $100M a year. By way of example Ottawa’s funding for solid waste, transportation and transit is $95M annually as compared to the Region of Peel who spends $16M.
• Inter-Provincial bridges are typically funded by the federal government. As light rail evolves and if there is a spur that runs through Gatineau, the City will have to address life cycle maintenance issues through tri-party agreements;
• The building of the storm water holding tank in downtown is part of the rate supported program. Staff are of the opinion the City is on the right track for building this. There is capacity in the existing system that has to be accessed and utilized that could defer the requirement for the building of the holding tank.
• In 2003 the storm water holding tank in downtown Ottawa was identified in the capital budget and as well, some debt financing was identified as there was not sufficient cash financing. The existing rate structure supports this and future rates will have to take the debt charges into account. The major water rate increase was in 2002 and was driven more by legislative changes from the Province. The sewer surcharge (except for harmonization) has stayed constant since 2001.

Mr. Russell provided an overview of the growth projects and Mr. Mawby addressed the issue of Strategic Initiatives in Social Housing. The committee posed questions on these two areas and the following summarizes the key issues raised:

• An investment by the City of $403M would result in 5,000 units i.e. 500 units per year over the next five years (the current waiting list for affordable housing is 11,500). The former model used by the City was to subsidize the rent paid by persons with low income. For example, an apartment with a rent of $1,000 would be subsidized by the City in the amount of $700. This was done on an operating cost basis and there is no new funding for this from the Federal or Provincial governments. This model is trying to find ways to reduce the cost of providing the unit to the point where people can afford it without the need for a subsidy, i.e. by providing a one time capital grant;
• The majority of the people on the social housing waiting list are in the 15th income percentile and lower (i.e. $20,000 and lower). Action Ottawa will have 60% of the units affordable to the $20,000 income and 40% affordable to households with incomes of $30,000 to $40,000. This will help to get people off of the waiting list;

Mr. Russell then presented the sections on Financial Results of Needs Identification; Funding; and, Applying the Funding Strategies and Priorities. Ms. St-Jean addressed the issue of Strategic Initiatives – Priority Setting and then Mr. Russell reviewed the staff recommendations contained in the PowerPoint presentation.

• 150 Elgin Street (the concert hall) show up in strategic initiatives. This type of project falls out of the various Ottawa 20/20 plans. Ideally, with the planning process in place, such projects would be shown as coming forward. However, there will always be projects that other levels of government or other organizations want to advance and if these will be at a net lower cost to the City, it can deviate from the plans.
• Just because projects are not shown in black and white in the Long Range Financial Plan, it does not mean that the City is falling away from the LRFP objectives. The City has room to follow the 20/20 initiatives in very broad framework. If an opportunity presents itself (such as 150 Elgin), this is not really deviating away from the LRFP objectives rather it is identified as a pressure on the capital budget.
• The capital budget should contain are the necessary infrastructures to support the 20/20 vision. Things may get moved around for a variety of reasons at any point in time but it should be seen more as moving the timing forward.
• Councillor McRae expressed the hope when discussing the capital budget in the future (i.e. when the plan is in place to deal with some of the other things), it will not be just about maintenance and growth for the traditional items but also about the social infrastructure.
• Although the City is increasing net debt the proportion on the taxpayers is actually 60% vs. 100%. Mr. Russell to provide Committee with the dollar impact on the average tax bill;
• Because of way the recommendation has been structure, staff do not believe it will affect the City’s debt rating (i.e. the City is picking up a dedicated revenue stream to pay for it and there is no pressure on property taxes). The main focus of the two credit rating agencies the City uses is on the tax supported debt side. The City’s debt would still be at half or less of the Province’s maximum;
• Councillor Stavinga asked that staff explore ways in which to convey this information to the average citizen.

The Committee adjourned the meeting of 4 October 2004 at 1:20 p.m. and reconvened on Friday, 8 October 2004 at 11:00 a.m.

The Committee agreed to hear a presentation from Mr. Ron Tomlinson, President, National Capital Heavy Construction Association (CHCA). A copy of the PowerPoint presentation given by Mr. Tomlinson is held on file with the City Clerk. The main thrust of Mr. Tomlinson’s presentation was to encourage Council to invest in (i.e. make it a priority) the maintenance of existing roads, water and sewer infrastructure, as well as new roads, water and sewer infrastructure to support growth.

Councillor C. Doucet questioned what the delegation meant by "short term operating expenses". Mr. Tomlinson responded that roads, sewers, etc. were being built but the City is not maintaining the infrastructure in the long term. The Councillor noted that City services are declining but the taxes are going up and he asked if the delegation had any advice in this respect. Mr. Tomlinson said if one were to look at the current infrastructure and the department in charge of it, they have been moving steadily towards providing a road system that is more cost effective (i.e. changing the design, specifications, requirements of asphalt mixes, etc.) and these things will help the costs to come down in the long term.

Councillor Doucet asked the speaker for his advice on how to balance expenditures for the transit and roadway systems. Mr. Tomlinson replied the City currently has a $16 Billion road and sewer system that needs to be maintained. He said he did not know how the City could look at expanding and creating more infrastructure, when it is not currently looking after the infrastructure it has.

Councillor Stavinga questioned to what extent the CHCA was involved in advocating on behalf of the City with respect to sustainable funding from the federal and provincial governments. Mr. Tomlinson replied the CHCA is involved with the Ontario Sewer and Watermain Association, Ontario Hot Mix Producers and the Ontario Road Building Association. These are the three lead groups that tend to lobby at the provincial and federal level on behalf of the CHCA.

Councillor Stavinga asked the delegation if they recognized the necessity of the City achieving a balance between maintaining existing infrastructure and providing infrastructure for the growth areas. Mr. Tomlinson stated that absolutely there had to be a balance and there is nothing more important to the CHCA than the growth and prosperity of the community. He clarified they were trying to stress that additional funding had to be put into the existing infrastructure to maintain it.

Mr. Russell then spoke to the documentation he had provided to members of the Sub-committee since the meeting of of Monday, 05 October 2004. The documents were: Summary of Recommendations, List of projects to be transferred from Capital to Operating Budget; List of Strategic Initiatives; Notes on Debt Servicing; and, the TD Bank report "Mind the Gap, Finding the Money to Upgrade Canada’s Aging Infrastructure". These documents are held on file with the City Clerk.

Councillor Chiarelli asked staff to respond to a question posed by the delegation, namely, if there is no gas tax revenue how would this affect the capital program. Mr. Russell stated without this revenue, elements of the capital budget would need to be restructured. He said in looking at the difference between revenues and expenditures, the City would simply be facing a much bigger gap. The three options to deal with this would be: 1) increase taxes; 2) increase debt (which would mean a tax increase); or, 3) defer projects.

In response to questions from Councillor Stavinga with respect to projects on both the List of projects to be transferred from Capital to Operating and the Strategic Initiatives document, Mr. Russell responded that the items in question would have to be checked individually. He said with some of the projects being transferred, there is only the staff component being transferred (i.e. the costs that will be there every year) and other costs would remain in the Capital. He said further that some of the items in the strategic initiatives document need to be culled to determine whether they should be in this document or have been moved over . These refinements will be made as staff works towards the budget process.

Councillor Stavinga then asked if the details of the projects to be transferred from capital to operating, could be provided to Councillors when the matter is before the Corporate Services and Economic Development Committee. Mr. Russell indicated staff would do their best to provide this information, however, he pointed out this would only provide staff with four working days to gather this information for the report.

Responding to further queries from the Councillor, Mr. Russell advised that the Strategic Initiatives list was still being vetted and these would not be included in the report to CSEDC (this list was simply provided to the Sub-committee for information i.e. to illustrate the types of projects this list might contain). He said a final list would come forward in the 10 year plan of the capital budget.

Councillor Doucet asked staff to explain the purpose of switching capital projects to the operating budget. Mr. Russell explained that the costs that will exist every year regardless of the size of the program would be put into operating (e.g. O-Train). The capital program should contain items that are infrastructure related or major improvements to infrastructure. This should make the accounting system and allocation of resources more transparent and more consistent.

Councillor Doucet commented that most people do not understand that growth does not pay for itself. Mr. Russell stated that depending on the type of work, Development Charge’s would pick up varying shares of the costs (e.g. likely a bigger share of water and sewer than transportation). He said overall on the tax supported capital program, about 21% of the gross costs related to growth projects are picked up by property tax base; 68% is covered by the Development Charges; and, the balance is covered by provincial subsidies (mostly related to transit). The rate-supported side is similar, although the non-growth share is slightly less. Mr. Russell noted that after the most recent Development Charge study, the DC’s are picking up a bigger share but there is still a share that falls on the existing taxpayer.

Councillor Stavinga noted that one recommendation of the LRFP 1 was that there be a separation on the tax bill for capital and operating. She asked if she should be moving a motion to bring this recommendation forward. Mr. Russell responded that it is staff’s view that any recommendations that were in the LRFP 1 (unless the Committee or Council were to make changes) would be brought forward.

The Sub-committee then considered the staff recommendations and amending motions from the Committee.

Councillor Jellett agreed to move the following motion on behalf of Chair Chiarelli.

Moved by Councillor R. Jellett

That recommendation 5 be amended by the following:

"and, that these include action to eliminate the addition of higher tax-rate supported debt by the end of 2006."

CARRIED

Referencing recommendation 6, Councillor Hume commended staff for agreeing with his suggestion regarding an endowment fund be utilized for the proceeds of the Hydro Ottawa refinancing. He said this would result in a significant difference in the rate of return the City would receive and the City must therefore ensure that the special legislation required is granted. To do so he felt the support of the Association of Municipalities of Ontario and the Large Urban Mayors’ Caucus, would be very helpful and moved an amendment to recommendation 6.

Councillor McRae suggested the motion also direct the Clerk to send the letter to all of the Councils across the Province to advise them of what the City is doing. Councillor Stavinga also suggested the letter go to the local MPP’s. Councillor Hume agreed to accept these as friendly amendments.

Moved by Councillor P. Hume

That recommendation 6 be amended by adding the following:

That City Council request our representatives of the Association of Municipalities of Ontario (AMO) and the Large Urban Mayors’ Caucus of Ontario (LUMCO) present the request for special legislation and seek AMO and LUMCO’s support for this request; and,

Further that the City Clerk prepare a letter to Ottawa’s local MPP’s and all Ontario Municipalities seeking support for City Council’s request.

CARRIED as amended

The motions as amended were then approved.

That the Long Range Financial Plan Sub-committee recommend that the Corporate Services and Economic Development Committee and Council approve:

1. The definition of a capital program as described in the Instructions for Completing the Financial Information Return amended by adding a disclaimer related to development charges funded projects."A capital expenditure is any significant expenditure incurred to acquire or improve land, buildings, engineering structures, machinery and equipment. It normally confers a benefit lasting beyond one year and results in the acquisition or extension of the life of a fixed asset. It includes vehicles, office furniture and equipment. An expenditure on repair or maintenance designed to maintain an asset in its original state is not a capital expenditure. A capital expenditure may include the costs of studies, etc., undertaken in connection with acquiring land or constructing buildings. It may also include interest on temporary borrowing for capital purposes and transfers for capital purposes to unconsolidated local entities, hospitals, universities and similar organizations."Notwithstanding the preceding definition, expenditures that qualify for development charge funding will remain as capital projects, even if not in compliance with the capital expenditure definition, above.

2. The list of projects that are to be transferred from the capital budget to the operating budget (attached as Appendix 1) be approved and that a similar transfer of pay-as-you-go funding offset them.

3. A portion of the Hydro Ottawa dividends be set aside for the operating budget consistent with the Budget Directions Report with the remaining future dividends used to fund the capital program.

4. The annual Pay-as-you-go contributions be indexed in accordance with the City’s Infrastructure Price Index as published by Statistics Canada.

5. That the funding directions and strategies identified in the staff presentation be included in a staff report to Corporate Services Committee and be used as the basis for developing the 2005 Capital Budget, and, that these include action to eliminate the addition of higher tax-rate supported debt by the end of 2006.

6. That the City establish an Endowment Fund with the proceeds of the Hydro Ottawa refinancing and that the City request special legislation that would allow the fund to be invested under the Trustees Act; and

That City Council request our representatives of the Association of Municipalities of Ontario (AMO) and the Large Urban Mayors’ Caucus of Ontario (LUMCO) present the request for special legislation and seek AMO and LUMCO’s support for this request; and,

Further that the City Clerk prepare a letter to Ottawa’s local MPP’s and all Ontario Municipalities seeking support for City Council’s request.

7. That a future funding strategy be brought forward for future affordable housing initiatives.

CARRIED as amended

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