Operating forecast - tax-supported programs and services

Higher base pressures - Based on departmental reviews of projected cost pressures for 2007, the requirements for 2007 to provide and maintain existing services have increased.

Higher growth pressures - The revised amount forecasted for growth pressures will more accurately address operational requirements due to infrastructure and population increases.

Lower provincial mandatory, cost-shared programs pressures - The original forecast was based on recent experience during the 2005 and 2006 budget cycles. Ontario Disability Support case loads and support payments along with prescription drugs are projected to increase at rates higher than inflation. Per diem rates and operating subsidies in the housing program are projected to increase at rates higher than originally projected. Offsetting these increases are decreases in the Ontario Works case load along with higher subsidies for administration costs.

Efficiency target - The $5 million increase to the 2007 target is recommended for deferral. The June 30, 2006 Operating Status Report identified that a significant portion of the 2006 corporate efficiency and overtime targets totalling $12.9 million will not be achieved in 2006. Any remaining balance will be carried forward for achievement in 2007. The Branch Process Review Program (BPRP), which is designed to uncover these efficiencies, started in 2006 with two pilot reviews. Next year, the BPRP will review six branches. Deferring the $5 million increase in the efficiency target for one year will allow the projected savings to match the target and prevent a deficit within the year.

Increase in contribution to capital from the operating budget - Council policy states that annual contributions to the City's capital reserves are to increase by the City's Infrastructure Construction Price Index. The original forecast assumed an increase of 2%. However, the 2005 index has been calculated by Statistics Canada at 5.1%. This reflects the significant increases that are occurring for construction materials such as steel, asphalt, copper and fuel. The 2007 forecast has been revised to include this increase.

One-time provincial funding - In 2006, the City budgeted for and the Province provided an additional $20 million to the City, $10 million of which was allocated for transit operating requirements. There has been no indication that this transit funding will be provided on a permanent basis.

Ontario Municipal Partnership Fund funding to continue at an increased level - In the LRFP II forecast it was projected this grant would be eliminated as per the original announcement in 2005. The 2006 provincial budget reinstated this program and the City will receive an additional $4.5 million based on social service program costs. The forecast for 2007 was revised to include increased funding.

Additional paramedic funding - The 2006 provincial budget indicates that the Province will phase in additional funding to achieve 50/50 program cost sharing. For 2007, this will result in an additional $5.3 million in provincial revenues.

Every year, the City faces a number of cost pressures that must be addressed to set the budget and to finalize taxes for the year. The budget pressures facing the City in the near- and medium-term have been categorized as follows:

Maintain existing services - additional funding requirements to continue delivering City programs and services at current Council-approved service levels. Increases in compensation resulting from collective agreement settlements are the largest cost in this category. Inflationary increases in energy costs, contracted services, materials and supplies are also included in this category.

In 2005 and 2006, $50 million and $60 million respectively were added to the budget to cover the costs of maintaining services. Increases in user fees have partially offset some cost increases.

Provincial/legislated services - additional funding requirements resulting from provincial legislation or regulations that:

• increase the cost of providing existing programs and services at current service levels
• result in the implementation of a new program, or
• enhance the service level of an existing program or service

Pay increases from collective bargaining for employees delivering provincially mandated cost-shared programs and services are also included in this category. Budget pressures have ranged from $4 to $8 million in the last two years.

Costs of growth - additional resources required to provide services to address growth in the population of the City each year, and to service the new infrastructure and equipment added to the City's inventory as a response to population growth. In the last two years, growth-related costs added from $7 to $15 million to the operating budget. These expenses were predominantly due to expansion in the City's transit and road systems.

Service level improvements - additional resource requirements to provide new programs and services to businesses and residents, or to provide a higher level of service for existing Council-approved programs and services. Improvements include increases to the contribution towards the City's capital program. Either Council approves these service-level enhancements during the course of the year, or improvements are recommended as part of the City Corporate Plan. In the last two years, the cost of Council-approved enhancements has added $21 million to the City budget.

The changes to the original 2007 budget forecast identified above have been reflected in the development of forecasts for the 2008 to 2010 period. As with most forecasts, the ability to make meaningful, accurate cost pressure projections decreases as forecasts are extended into the future years.

The forecast tax increases listed above were based upon the following assumptions:

• Costs to provide all programs and services at current levels are presented in the maintain existing services category
• Compensation increases were based on bargaining mandates where known, or on the forecasted Ottawa inflation rate plus forecasted cost of salary increments, and, corresponding employee benefit cost increases
• No benefit rate increases have been forecast; the benefit to compensation ratio has been kept constant for the forecast period
• General inflation projected at 2.3% for 2008, 2.4% for 2009 and 2.1% for 2010, reflecting the Conference Board of Canada's Metropolitan Outlook forecast (autumn 2006)
• Energy costs projected at 7%
• Winter maintenance provision maintained at 2007 level, assuming that 2008 to 2010 will be within the established three-year average
• User fee increases set to maintain cost-to-revenue relationship along with increases to transit fares to achieve Council-directed target
• Increases to garbage collection costs are to be recovered through an increase to the garbage collection fee
• Assessment growth has been maintained at $20 million each year, which represents 2% in 2008
• Provincial cost-shared program funding continues at 2007 levels
• Annual increases in Ontario Disability Support Payments (ODSP) at 2%, with a 3% annual increase in ODSP caseload
• Annual increases of 6% for the Employment and Financial Assistance's prescription drugs program and annual increases of 2% in the Ontario Works rate
• Annual 2.1% increases for rent supplement programs and annual 3.2% increases for costs associated with the public housing program
• Provincial/legislated program estimates include compensation increases based on bargaining mandates where known, or on the forecasted Ottawa inflation rate plus forecast cost of salary increments; and, corresponding employee benefit cost increases
• Annual increases reflect estimated operating impacts of growth plus estimated operating costs for Light Rail Transit, starting in 2009, as identified in the Council-approved report on the North-South Light Rail Transit Project. Any adjustment to the timing will be reflected in future forecasts
• Annual increases to contribution to capital reserve funds based on estimated Infrastructure Construction Price Index (2.4% for 2008, 2.7% for 2009 and 3.4% in 2010)
• Annual increase equivalent to a 1% tax increase to address strategic initiatives capital projects
• Annual increase equivalent to a 1% tax increase to address Council-determined priorities and enhancements to services, plus amounts for the solid waste organics program in 2008 and 2009
• No new sources of revenue or new taxation powers
• Ottawa Police Service increases as provided by police finance staff
• Any one-time grants received to be pursued on a permanent basis

The 2006 Draft Budget Summary presented a forecast of the cost pressures and resulting impact on property taxes for 2007. A tax increase of 8% was projected, based on the following assumptions:

• Costs to provide all programs and services at current levels are presented in the maintain existing services category
• Compensation increases were based on bargaining mandates plus forecasted cost of salary increments, and corresponding employee benefit cost increases
• General inflation was projected at 2% per year (except for energy costs at 7%)
• An increase in the winter maintenance provision will be required to deal with additional winter storm events
• No forecasted increase in Ontario Works (welfare) caseload
• An annual increase in Ontario Disability Support Payments of 2.9%
• User fee increases set to maintain cost-to-revenue relationship, with increases to transit fares to achieve Council-directed target of 55% of direct operating cost
• Increases to garbage collection costs, plus landfill closure liability costs, to be recovered through an increase to the garbage collection fee
• Assessment growth of 2% per annum
• Provincial cost-shared program funding continues at current levels except for increases announced for public health and paramedic services
• Annual increases to reflect estimated operating impacts from legislative changes
• Annual increases to reflect estimated operating impacts of growth
• Annual increases to contribution to capital reserves based on the Infrastructure Construction Price Index
• Annual increase equivalent to a 1% tax increase to address strategic initiatives capital projects
• Annual increase equivalent to a 1% tax increase to address Council-determined priorities and enhancements to services
• No new sources of revenue or new taxation powers
• Ottawa Police Service increases as provided by Police finance staff
• Tax rate increase based on the total 2006 taxation assuming that a 1% increase will generate 1% of the total 2006 taxation

Potential short-term solutions

1) Reduce or eliminate funding for program and service enhancements

The four-year forecast provides for annual increases of $9.5 to $11 million (representing a 1% annual tax increase) to address potential Council-directed enhancements. Enhancements are at the discretion of Council and can therefore be reduced or eliminated by Council. However, reducing or eliminating program and service improvements can limit the City's ability to address community priorities.

2) Reduce or eliminate funding for some capital projects or finance an increase in the capital program with debt

The four-year forecast provides for annual increases of $9.5 to $11 million (representing a 1% annual tax increase) to fund capital strategic initiatives projects in support of the City's Corporate Plan. Reducing or eliminating this funding will limit Council's ability to address the Corporate Plan agendas and community expectations. As an alternative, 10-year debt financing on an annual strategic initiatives budget of $9.5 million would result in annual debt servicing costs of $1.2 million.

3) Pursue the Province to address cost-sharing shortfalls or provide other grants

The funding shortfall on cost-sharing arrangements for existing programs is approximately $16 million. The City will continue to work with the Province to obtain adequate funding for cost-shared programs.

4) Use of the provincial gas tax to replace one-time transit funding

The rules for the use of the gas tax revenues have been modified. They now allow these revenues to be applied against transit operating costs regardless of whether they enhance ridership. Allocating $10 million of gas tax revenues to fund transit operating costs will reduce the amount available to fund transit capital requirements.

5) Property tax increases above the rate of inflation

In the absence of other provincial or federal revenue sources or service level reductions, increasing property tax above the rate of inflation will provide additional funding to minimize the impact on current service levels.

6) Increase user fees more than the rate of inflation or introduce new user fees

Increasing user fees at more than the rate of inflation has the potential to make City services unaffordable to some residents, potentially resulting in lower usage and lower revenues. The City has introduced new user fees over the past several years to assist in recovering program costs. However, opportunities to generate additional revenues under the current legislative framework are limited.

7) Reduce current service levels

Council has the ability to review current service levels and reduce services. However, it should be noted that in the 2004 EKOS survey, the vast majority of residents indicated that City services should be maintained or expanded.

Potential longer-term solutions

1) Eliminate funding shortfalls on provincial cost-shared programs - seek new revenue sources or powers

Through the Association of Ontario Municipalities, the City will strongly encourage changes as part of the recently announced Provincial-Municipal Fiscal and Service Delivery Review to improve the delivery and funding of municipal services. However, the report is not scheduled to be released until the spring of 2008. In the interim, the City will continue to work with the provincial government to reduce funding shortfalls on cost-shared programs and propose new revenue sources.

2) Pursue provincial and federal governments for stable, predictable funding

A number of federal and provincial programs have emerged over the past few years to help municipalities address capital infrastructure requirements. The City will continue its best efforts to obtain stable, predictable funding to address operating responsibilities.

3) Defer growth-related projects

Growth-related infrastructure results in ongoing maintenance and programming cost pressures on the City's operating budget. The process to begin revising the City's Official Plan will start in late 2007, with completion in 2008. The process to enact a new Development Charge By-law by 2009 will also commence in 2008. Subject to growth projections and infrastructure requirements, delaying the construction of new infrastructure may be feasible without significantly affecting public expectations.

The options presented above will need to be considered by Council as it provides direction for the preparation of the 2007 to 2010 budgets.