Long Range Financial Plan - issues and strategies

Provincial social programs should not be on the tax bill and the Province is not adequately funding its share of cost-shared programs.

The City delivers many programs that are controlled primarily by the provincial government. These programs are funded from a combination of property tax and provincial subsidy. Ontario is the only province in Canada to fund more than $3.5 billion annually of primarily social programs (social services, social housing and public health) from property taxes. Because the Province controls service levels and the overall cost of these programs, Council cannot change the amount that must be raised from property taxes.

If the Province funded all of its mandated cost-shared programs, the average urban residential household in Ottawa would pay $670 less in property taxes per year.

As discussed in previous sections, the cost for services mandated by the Province is projected to increase significantly over the forecast period. Preliminary projections for 2007 indicate that rates for Ontario Works, the employment and financial services program, will increase by 2%. Prescription drugs are projected to increase at rates higher than inflation, as will Ontario Disability Support Payments. Per diem rates and operating subsidies in the housing program are also projected to increase at rates higher than originally projected. On an annual basis, the costs for mandated programs are forecast to increase between $6 to $8 million per year.

Ontario municipalities have argued for many years that income redistribution programs, such as social assistance, should not be funded from property tax - a regressive tax that does not reflect the income level of a property owner. Instead, it would be more appropriate to fund these programs from provincial income taxes.

Moving beyond the argument around which level of government should fund a program, the level of funding received by municipalities must be examined. There are significant funding gaps in many provincially legislated and cost-shared programs. In this context, a gap is defined as the difference between the funding set by cost-sharing agreements, and the actual amount the Province provides the City.

For 2006, the funding gap for such programs totals approximately $16 million. Under the current arrangement, there is no other choice than to fund the gap from Ottawa property taxes. The City is mandated to provide these programs at the level of service determined by the Province.

Strategies to reduce the impact of provincial social programs on property taxes or to have them removed from the property tax bill:

• Request provincial funding for provincially mandated programs that live up to cost-sharing agreements.
• Lobby the Province to remove social programs from the property tax bill.
• Work with the Province to align program accountability and responsibility with funding responsibility.
• Request the Province to allow provincially mandated programs to be shown separately on the tax bill.
• Use increases in provincial program funding to reduce taxes, not to enhance the level of service provided.

Provincial funding inequities favour Toronto taxpayers over Ottawa taxpayers.

The grants and subsidies from the Province and other municipalities that Toronto receives reduce its social assistance program costs by 65%. Ottawa's share only reduces program costs by 55%. In 2006, the owner of an average Ottawa home paid $2,548 in municipal property taxes, excluding provincial education tax. The owner of an average home in Toronto paid $2,093 or $455 less.

The peer-to-peer spending comparison showed that Toronto spends more per household on social assistance than Ottawa. It also showed that the two cities require comparable amounts of tax per household for social assistance. Toronto's high social assistance costs have been recognized by the Province, and a program was put in place requiring neighbouring municipalities to contribute to Toronto's social service costs. In 2005, this equalization formula helped Toronto taxpayers save $189 million in property taxes.

Ottawa's social assistance and social housing costs are higher than the provincial average, but Ottawa does not benefit from any type of pooling. If Ottawa were to be included in the same pooling formula, Ottawa residents would pay $53 million less in taxes.

The Province has recognized that social service costs are causing significant budget pressure in many municipalities, and has recently revised the Ontario Municipal Partnership Fund (OMPF). Contrary to how municipal funds are raised (based on assessment), the OMPF will provide grants to municipalities with high social costs that are relative to the household income levels of its residents. This formula ignores the fact that commercial properties also contribute towards social service costs. While Ottawa has a smaller commercial base than Toronto, it has higher household income. Ottawa will receive $6 million from the OMPF, or approximately 3% of social program expenditures. Toronto will receive $34.9 million in OMPF grants, representing 6% of its social program costs. If Ottawa residents were treated the same as Toronto's residents, Ottawa's grant would be $12 million.

The issue of Ottawa receiving its fair share of grant programs is related to the strategy of having provincial expenditures removed from the local municipal tax bill. The City's position is that funding for social services should be part of provincial income taxation. That way, funding would be based on the principle of "ability to pay" rather than property ownership.

Strategies to remove inequities in provincial grant allocations:

• Provide detailed input for the Provincial-Municipal Fiscal and Service Delivery Review being conducted over the next 18 months.
• Lobby the Province to provide Ottawa with the same level of grant allocation for social programs as are provided to Toronto.

Ottawa taxes are similar to other large Ontario cities.

Ottawa taxes have increased by an average of 2% per year over the last six years - less than any other major municipality in Ontario. Despite lower annual increases, Ottawa property taxes are among the highest in Canada. This is largely due to Ontario being the highest property tax jurisdiction in the country as a result of social program funding requirements on the property tax bill.

Ottawa has recently been faced with many challenges as a result of the provincial property tax system. Taxpayers have been frustrated by changes in their property assessment and resulting tax increases. Tax shifts have been misinterpreted as budgetary tax increases and Ottawa City Council has had to implement emergency programs to mitigate the negative impacts of these shifts. To allow Council to focus on its priorities rather than the impacts of re-assessment, the property tax system has to be fixed.

While Ottawa's taxes are not the highest in the Province, comparisons are often made between the residential taxes paid in Ottawa and those paid in Toronto. Because the real estate markets in each city are different, the use of a single assessment value for tax comparison purposes is misleading. For example, in Toronto the average home is valued at $369,000 compared to an average home in Ottawa at $276,245. An average homeowner in Toronto paid $455 less in taxes in 2006 than an average homeowner in Ottawa. That is only part of the story.

Commercial properties in Ottawa make up 14% of the assessment base but pay 26% of the taxes, or 1.85 times their value. Toronto's commercial properties make up 17% of the assessment base, but pay 37% of the taxes or 2.18 times their value. As commercial properties are paying a larger share of total taxes in Toronto, the residential sector does not have to pay as much.

The Province requires that tax increases resulting from assessment changes in the commercial classes be phased in through the use of a tax cap. This means that some properties have tax increases limited because of the cap. Other properties not under the cap end up subsidizing capped properties. Since 1998, the tax cap has resulted in mainly small Ottawa commercial properties paying more tax to provide tax relief to larger commercial properties. The objective of tax predictability has been achieved at the expense of tax fairness.

Another inequity built into the current tax system is the way the education tax rate is calculated for residential properties. The Province calculates the rate using all of the residential property assessment values in Ontario. Ottawa's residential property assessment increases have been above the provincial average. As a result, Ottawa residents are paying a larger share of education taxes than they should. Since 2001, Ottawa residents have paid $28 million more in education property taxes.

There are many other tax policy issues that must be addressed to ensure the property tax system is equitable and explainable. The Province has just announced a two year freeze on assessments to deal with the results of the Ombudsman's report on problems with the Municipal Property Assessment Corporation. This will give the City a short reprieve from the issues that stem from re-assessment. However, unless changes are made to existing tax policy, or Councils are allowed more tools and discretion in the application of tax policy, the issues will not go away.

Strategies to fix the re-assessment and tax systems to restore fairness:

• Work with the Province on the review of MPAC over the next two years to reduce the frequency of re-assessments and allow municipalities to phase in changes.
• Request provincial changes to the tax system to give more tax policy discretion to councils to reduce the negative impact of capping and tax shifting.
• Request the Province to either remove education taxes from the property tax bill or establish the amount to be collected rather than the education tax rate.

The City's operating spending is in line with other Ontario cities, but costs are rising above the Consumer Price Index.

In 2001, the amalgamated City of Ottawa was created to provide streamlined governance and more efficient, cost-effective delivery of municipal services. This has been achieved with more than $101 million in permanent savings. The City was able to achieve tax savings by focusing on finding major efficiencies without affecting service levels. During the first three years after amalgamation, the City was able to maintain existing property tax levels while other municipalities across Ontario and the rest of Canada saw their taxes increase.

Comparison of peer-to-peer city spending (on a per-household basis) between Ottawa, Toronto and a seven-city average of Ontario municipalities (Peel, York, Halton, Niagara, Durham, Hamilton and London) shows that overall spending in Ottawa is only 4% higher than for the seven-city average, but 30% less than in Toronto.

Ottawa's spending was comparable to or below the seven-city average for more than half of the 21 services reviewed. Spending was higher than the seven-city average for big-city services such as social assistance, social housing and transit.

However, Ottawa spends the same or less per household than Toronto to provide those big-city services. In fact, Ottawa spends less for over three-quarters of the services when compared to Toronto.

Ottawa spends more on providing winter services such as road and sidewalk snow clearing and salting than Toronto or the other seven cities due to harsher winters and the larger geographic size of the City. In addition, Ottawa is still growing and must pay for programs and services in new communities. Toronto does not face these pressures because the city infrastructure and services have already been built.

As with other municipalities, the cost of goods and services needed to run City operations has outpaced increases in the Consumer Price Index (CPI). The bulk of budget pressures large municipalities face every year are made up of cost increases above CPI for employee compensation, energy, fuel, steel, concrete and many other goods and services.

In the past six years, the City has been able to manage these pressures as a result of savings from amalgamation and the implementation of efficiency programs and service reductions. The City remains committed to continuously improving efficiency and obtaining best value for purchased goods and services through competition. However, these savings will be much lower than those achieved immediately following amalgamation.

Based on the best information currently available, it is projected that the cost increases to maintain existing City services will range from $55 to $61 million on an annual basis.

Strategies to control costs and reduce consumption:

• Maintain existing service levels and continue to review performance and processes to become more efficient and cost-effective.
• Continue to obtain the best price for purchased services and supplies through the use of competitive tendering, forward contracting and purchasing consortiums.
• Continue to implement conservation and reduction guidelines and policies that minimize the amount of goods used.
• Maintain appropriate operating reserves for programs with expenditures that can vary significantly from year to year to smooth the budgetary impact.

Managing compensation costs is one of the most important issues for large municipalities.

Approximately 95% of the City's workforce is unionized. Arbitrated wage decisions are often based on awards made in the Greater Toronto Area, which raises costs to the highest level for all municipalities, regardless of work environment. This makes controlling compensation costs a major challenge for all municipalities.

A review of compensation by Mercer Human Resource Consulting showed that unionized City positions are paid the same as those in other municipalities, and the same or slightly better than positions in the private sector. The same is not true for many specialized technical positions and many management positions, which are paid below the median rates for the private sector.

The City is managing compensation costs by ensuring that there are tight controls on staffing levels. At amalgamation, there were 12,786 Full-Time Equivalent (FTE) positions. Through reductions from amalgamation, the Universal Program Review and the 2006 budget, 1,236 FTEs have been eliminated.

There has been an overall net increase of 682 FTEs since amalgamation (including 306 more police FTEs), or 5.3% more than in 2000. However, it is important to note that the ratio of staff per thousand residents has declined since 2001 from 16.2 staff per thousand residents to 15.5 staff per thousand. There are 367 fewer administrative and support staff than in 2000 and 743 more operational or front-line service staff.

Strategies to better manage compensation costs:

• Work with large municipalities across Ontario on the collective bargaining task force to share experience, strategy and information on settlements between the municipalities.
• Work in partnership with the City's unions with the goal of keeping compensation increases at or below CPI.

Changing demographics mean changing municipal service needs.

Ottawa's population is growing and the demographic profile is changing. As a result, there is pressure on the City to respond with expanded services or infrastructure and programs that reflect the demographic make-up of the City.

The City has limited sources of funding to respond to these pressures. Therefore, it is paramount that Council prioritize the issues it would like addressed in the short-term. The City Corporate Planning process has been established for this purpose and will be used to allocate any funding available for these new or enhanced services.

One of the main sources of revenue from which the City can fund new infrastructure is the Development Charge legislation. However, there are a number of changes needed to this legislation before growth can truly pay for itself.

A list of strategies available to assist in addressing the impacts of a growing and aging population follows.

Strategies to ensure City services respond to changing and growing needs:

• Use the City Corporate Planning process for priority setting to determine which services will be maintained or enhanced and which strategic capital initiatives will be undertaken.
• Include the costs of population and infrastructure growth in the budget.
• Require requests for operational service enhancements to include a business case identifying the additional revenue required and whether other services can be reduced or eliminated to pay for it.
• Take demographic changes into account when prioritizing and developing new City programs or services.
• Incorporate the equivalent of a 1% tax increase to go toward contributions to the strategic initiatives category of the capital budget.
• Fund additional debt for growth-related projects from non-tax sources of revenue.
• Request that the Province change the development charge legislation so that all costs of growth are paid from development charges.

Cities need new revenue sources other than taxation.

There are only three funding tools available to cities that they can control: property taxes, user fees, and development charges. It would require increases well above inflation for these three funding tools to meet the annual growth in City of Ottawa expenditures. Ottawa is already more dependent on property taxation than other Ontario municipalities because it does not receive the same level of assistance for its social programs. Ontario municipalities have the most limited access to other forms of non-taxation revenue in Canada, but pay a greater share of provincial programs.

Recognizing the limitations on property tax increases, the City of Ottawa has adopted a user pay approach since amalgamation to fund a portion of program or service costs. Ottawa adopted a policy that ensures user fees increase with the cost of providing a service so that tax subsidies do not increase. The City also created a target for transit fare revenues to pay a higher percentage of operating costs. Garbage collection and disposal are also paid through user fees.

However, the City must look beyond taxation and user fees to other sources of revenue if it is to become financially sustainable.

Strategies to increase revenues:

• Increase user fees by the percentage increase in the cost of providing the service to maintain the existing tax-to-user-fee ratio.
• Ensure that user fee increases do not reduce the number of people using those services.
• Move towards implementing new user fees for programs or services when specific users can be identified.
• Define a target tax-to-user-fee ratio for major service areas for Council approval.
• Request the Province to provide access to other forms of revenue.

Canadian cities are having difficulty finding adequate funding for infrastructure projects.

The City has responsibility for maintaining a variety of major types of infrastructure, with an approximate replacement value of $26.4 billion. These assets include roads, water and sewer networks, public transit, buildings, buses and paramedic vehicles. The City budget classifies infrastructure projects into three categories: renewal of City assets, growth, and strategic initiatives.

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."⁴²

Recent studies attempting to measure the infrastructure gap in Canada show that it is still significant and must be addressed if Canada is to remain internationally competitive. Ontario municipalities are responsible for the largest share of public infrastructure in Canada and the needs in this province are the greatest.

Ottawa is an older city (some infrastructure is more than 100 years old) and it is continuing to grow. Projects providing proper maintenance of existing City assets compete for funding with projects to add new assets such as roads and sewers. Other capital projects responding to demographic changes or Council priorities are also required. As a result, sources of revenue for capital projects are not sufficient to meet the needs in all three areas.

LRFP I successfully framed the debate around the need for sustainable sources of funding from other levels of government to bridge the City's infrastructure gap. The provincial gas tax and the federal gas tax are welcome funding for municipalities, but they have very limited application. The City would like to be able to progress on all its capital needs, not just those associated with transit. The current funding rules do not allow this.

The capital program as presented in LRFP III identifies a $6.7 billion requirement over the next 10 years to address the renewal of existing infrastructure, growth requirements and strategic initiative projects in support of the City's Corporate Plan. Based on the funding sources currently available to the City, a "funding gap" of approximately $2.1 billion is projected. Of this gap, $1.1 billion of the projected shortfall would address renewal requirements funded from taxation. The remaining $1 billion of the shortfall would fund strategic initiatives projects.

While there may be sources of funds to build new assets (primarily development charges), once they are built they must be maintained and repaired, or may require staff to operate. This causes pressure on the operating budget, which in turn causes pressure to defer maintenance in order to avoid a large tax increase.

Increasing contributions to capital from taxes competes with the desire to keep taxation increases below the rate of inflation. The City uses debt to fund some of its infrastructure needs, but this source of funding is limited to projects funded from non-taxation sources of revenue. As a result, debt repayment, as a percentage of the total tax bill, has declined since amalgamation.

Strategies to ensure infrastructure projects are adequately funded:

• Increase contributions to the capital budget at the rate of increase in the Construction Price Index, as set by Statistics Canada, to ensure the City's contribution to capital is not eroded by inflation.
• Set infrastructure renewal as the priority for capital funding by increasing contributions to the capital budget.
• Continue to minimize the amount of debt used for infrastructure renewal and set the amount of tax-supported debt to a fixed percentage of the total tax bill.
• Maintain a minimum tax-supported reserve balance of $50 million to ensure emergency repairs can be managed.
• Work with the Province to identify new sources of revenue to fund capital renewal and rehabilitation in the new Municipal Act.
• Request that the Province both maintain and enhance current renewal subsidy programs.
• Given Ottawa's uniquely rural and urban geography, work with the Province to ensure that Ottawa has access to rural infrastructure programs and other future rural programs.
• Investigate new technologies that reduce maintenance requirements or extend the life of a capital asset.
• Introduce programs that reduce consumption, thereby increasing the life of the existing assets and reducing the need to expand to accommodate growth, (e.g., increasing the modal split, smart meters for water consumption).
• Set the amount of tax-supported debt to a fixed percentage of total taxes.

⁴²Standard and Poors, Public Finance Report Card: Municipalities. May 25, 2006.

Liabilities that are incurred today must start to be funded by today's taxpayers.

One of the measures of financial sustainability is that future generations are not forced to pay for services provided to the current generation. The City incurs expenses that do not have to be paid immediately (liabilities). For instance, the City will face future budget pressures when existing landfills are full and must be closed and maintained. Pressures will also mount as the City workforce ages and post-employment or post-retirement benefits start to be paid out in larger quantities.

Prudent and sustainable financial management strategies are needed to ensure future generations are not required to absorb a disproportionate share of these costs.

Strategies to deal with expenses incurred today but paid for in the future:

• Report tangible capital assets in the 2009 financial statements and increase contributions to the capital budget each year by the amount that new tangible capital assets add to the depreciation expense.
• Incorporate a landfill liability charge into the garbage fee.
• Defer the post-closure costs for landfills by extending the life of landfills through increased diversion rates.
• Develop a strategy to fund, over time, the post-employment or retirement employee benefits liabilities.

LRFP III provides information the new Council will need to work with residents in developing a new Corporate Plan that will identify priority programs and services. This will lead the way to developing a multi-year budget that will allow the City to deliver on its priorities. This important debate will shape the City's future over the next term-of-Council while moving towards long-term financial sustainability. The LRFP will be updated at the end of Council's four-year term or earlier, if there are significant changes in the City's financial situation.