Part C: Capital assets

Capital Funding Overview

Municipalities finance capital costs through reserves and reserve funds, provincial and federal grants, contributions from developers and long-term borrowing. The graph below depicts the 2006 capital budget broken into four financing categories: revenues and grants, reserves, development charges and debt.

2006 capital budget financing ($1,183 million)

Funding principles

The two previous Long-Range Financial Plans identified a number of funding principles for the City to use in developing the capital budget. These principles include:

• Maintain the current tax-supported debt servicing costs by allowing approximately $40 million in new tax-supported debt authority each year (not including Police Services).

   

• Maintain the tax-supported reserve balances at $50 million and the rate-supported reserves at $20 million.

   

• Finance the City portion of the expansion of rapid transit and other growth-related projects through debt financing and apply future gas tax payments to pay the debt charge.

In addition, Council adopted the policy of increasing annual contributions to capital reserves based on the City's Infrastructure Construction Price Index as published by Statistics Canada.

Revenues and grants

At $480 million, revenues and grants represented the largest portion of capital financing in 2005. However, federal and provincial capital grants have decreased significantly from the early 1990s, as shown in the graph below, putting more pressure on the City to find other sources of financing.

Capital grants, 1993-2005

Federal and provincial gas tax

Over the past few years, both the federal and provincial governments have reinvested in municipal infrastructure by sharing gas tax revenues.

The provincial government has committed to permanently providing two cents of its gas tax to municipalities. The revenue is to fund transit capital initiatives that increase ridership or pay for operating costs. The City's share of the provincial gas tax will peak at $37.3 million in 2007. Of this amount, Council determined that $7.1 million is to fund growth-related operating costs. Council approved the remaining $30.2 million to service debt used to fund the Light Rail Transit project.

Municipal revenues from the federal gas tax will increase to a peak of $50 million per year by 2009. Federal gas tax revenues must be spent on transit capital projects; however, the federal government has stipulated that this funding cannot be applied to the Light Rail Transit Project. In addition, Bill C-66 will provide municipalities with additional federal gas tax revenues totalling $40 million in 2006 and 2007.

Development charges

The amalgamated City of Ottawa established its first Development Charges (DCs) by-law in July 2004. DCs are paid when developers build new communities and are designed to pay for capital facilities that service growth such as new roads, sewers and watermains. These charges do not fund replacement, rehabilitation or City operating costs.

Council policy is that growth should pay for itself. Provincial legislation directs that revenue recovered from development charges must not exceed actual costs. The Development Charge Act was amended in 1997, and as a result, DCs no longer cover growth costs such as:

• Service discounts: Municipalities are required to finance 10% of the growth-related costs of providing transit, parks, recreation, child-care, libraries, paramedics, studies, work yards and vehicles. As a result, 10% of these growth-related costs are excluded from the DC and must be financed through taxes or existing user fees.

   

• Service levels: The DC is calculated to recover costs based on the average level of service over the previous 10 years. If Council wants to provide a level of service beyond the 10-year average, it will not be covered by DCs and must be financed through taxes or user fees.

   

• Excluded services: Amendments to the Act in 1997 excluded charges for parkland acquisition, cultural facilities and solid waste. As a result, all capital projects in these areas are funded from non-DC sources.

   

• Excess capacity: To ensure minimum disruption and cost, municipalities often build oversized sewers and watermains to meet future growth needs. However, provisions of the Act make it difficult to use current growth to pay for that portion of the capital works that may benefit future growth.

These are just a few areas in the legislation that need to be addressed to make growth truly pay for itself.

Other revenue sources

In addition to the sources of revenue already cited, the City has a number of non-tax sources to fund capital requirements, including:

• Cash-in-lieu of parkland, a requirement of the Planning Act that is paid by developers if they do not provide the required amount of green space in a new development.

   

• Cash-in-lieu of parking, a requirement of the Planning Act that is paid by commercial property owners if they cannot provide the required number of parking spaces for their property.

Debt financing

The first Long-Range Financial Plan contained the following recommendation in an effort to confine debt financing to certain types of projects:

"Long-term debt financing should be restricted to specific project types. Debt funding for lifecycle projects should be reduced and ultimately eliminated. Instead, debt financing should be employed on projects related to capacity expansion or growth, projects financed by development charges, future new non-traditional infrastructure projects, and projects tied to third-party matching funding. These restrictions may have to be phased in to meet short-term budget challenges."

The rationale for the use of debt as a financing mechanism is that it spreads the cost of major growth projects over a number of years, similar to a mortgage on a home. Consequently, such projects are paid for by a broader tax base, making the forecast in the 10-year capital work plan achievable.

Repayment of principal and interest charges is funded from property taxes, revenue derived from water and sewer surcharge rates, or from non-tax/rate-supported revenues such as federal and provincial gas tax revenues and DCs. Additional debt will be issued from non-tax/rate-supported sources over the next four years, as discussed earlier in the section on Council-controlled programs.

A capital expenditure is defined as any significant expenditure incurred to acquire or improve land, buildings, engineering structures, machinery and equipment that confers a benefit lasting more than one year and results in the acquisition or extension of the life of a fixed asset. In 2006, Council approved $1,183 million in new capital expenditure, comprising $847 million for growth projects, $276 million for asset renewal and $60 million for strategic initiatives.

2006 capital budget expenditures, by category ($1,183 million)

Categories of capital works

Renewal of City assets - This category covers the funding required to maintain or replace all existing capital assets throughout the full life of the assets. These assets include buildings, structures, roadways, transitways, bridges, vehicles, equipment, computers, computer networks and various other facilities.

Studies have been undertaken throughout the various City program areas to determine what funding is required to maintain the asset at provincial or federal standard levels. Reports have been brought to Council over the past two years that recommend related lifecycle maintenance projects. Capital priorities, identified as renewal projects within the capital budget, are based on those studies. The goal is to fully fund identified lifecycle needs within a 10-year period.

Growth - This category includes all projects identified in the Development Charges Background Study and priorities contained in the 2004 Official Plan. Funding from this source reflects the most recent changes to the Development Charges By-law, approved by Council on December 8, 2004. Additional information on this by-law is provided later in this section.

Strategic initiatives - This category includes all other capital expenditures, such as: the implementation of various master plans or the Ottawa 20/20 plan; acquisition of environmental areas; enhancement of current services and growth costs not funded through development charges. It also includes initiatives to enhance organizational effectiveness, new legislated requirements, Council-approved programs not related to growth, and changes in demand for services.

Capital assets will be added to the City's balance sheet

One of the more significant changes introduced by the PSAB is a shift to full accrual accounting for tangible capital assets, such as roads, buildings, land, water systems, office furniture and vehicles. This is a significant accounting change and means Ottawa will add tangible capital assets to its financial statements in 2009. Assets will be expensed in the same time period in which they are consumed. For example, if a road costs $20 million to build and is expected to last for 20 years, a $1-million expense will be recorded each year as the value of the asset used in the year.

This reporting change will take significant resources to plan and implement - the City is currently in the planning stages of this project. An inventory will be undertaken of all assets, including each asset's value, useful life and depreciated value.

Adding tangible capital assets to financial statements will provide better information to decision-makers as they plan for related maintenance and replacement costs. It will also give residents clear information about spending on capital assets. The PSAB aims to reinforce municipal stewardship responsibilities and provide information to hold municipalities accountable for capital spending decisions.

Historically, there has been a trend to defer capital rehabilitation and renewal to meet the pressure for balanced municipal budgets without large tax increases. The May 2006 research report on municipal finances prepared by Standard & Poor's, reported that:

"Municipal infrastructure renewal is now an important national issue. Municipal infrastructure deficiencies are typically related to water, sewer, road and transit networks, and municipal building and facilities. Estimates of the total national municipal deficiency, ranging from C$60 billion to C$120 billion, have been frequently reported."

The inclusion of tangible capital assets on financial statements is a step towards making this deficiency transparent to Council and residents.

Operating impacts from capital construction

Each year, the City builds new infrastructure (roads, traffic lights, community centres) or purchases assets (buses, fire trucks) to address community growth requirements. The City also receives what is termed as "donated assets," such as residential roads or water and sewer mains from developers once new communities are built. Since receipt of these assets does not involve municipal capital expenses, they are not included in the City's capital budget.

However, once assets are built or received, they must be maintained and repaired on a regular basis. They also require City staff to operate them to provide service to the public. Ongoing operational costs associated with building or receiving assets have a significant impact on the City's operating budget.

In 2006, approximately $7.5 million was added to the City's operating budget to address these types of growth-related costs, representing a tax increase of 0.8%.

The following table provides some examples of where the City's capital program has a monetary and/or personnel impact on the operating budget: