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Long-Range Financial Plan II

Rate Supported Programs

A report, endorsed by City Council on December 8, 2004, that identifies the nature and magnitude of the financial challenges facing the rate-supported programs of the City of Ottawa.

That the Corporate Services and Economic Development Committee recommend that Council approve:

  1. The definition of a capital program as described in the Instructions for Completing the Financial Information Return be 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 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) to 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.

The Long Range Financial Plan Sub-committee met on 4 October 2004 and again on 8 October 2004 to receive a presentation from staff on the Long Range Financial Plan 2, Tax Supported Program Overview and to consider the recommendations brought forward by staff, as follows:

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

The Sub-committee approved these recommendations, as amended by the following two motions:

Moved by Councillor R. Jellett

That recommendation 5 be amended by adding: "And that these include action to eliminate the addition of higher tax-rate supported debt by the end of 2006."

Moved by Councillor P. Hume

That recommendation 6 be amended to add: "That City Council request our representatives of the Association of Municipalities of Ontario (AMO) and the Large Urban Mayors’ Caucus of Ontario (LUMCO) to 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.

The recommendations, as amended by the foregoing, are now before the Corporate Services and Economic Development Committee for consideration and recommendation to Council.

Document 1 – List of projects that are to be transferred from the capital budget to the operating budget, attached.

Document 2 – Copy of staff PowerPoint presentation made to the Long Range Financial Plan Sub-Committee on 4 October 2004, entitled "City of Ottawa, Long Range Financial Plan 2, Tax Supported Program Review).

Document 3 – Extract of Draft Minutes of the Long Range Financial Plan Sub-Committee meetings of 4 October 2004 and 8 October 2004.

Document 4 – Background Report from Staff on the Long Range Financial Plan 2

Appendix 1 - Policy Recommendations Contained in the First Long Range Financial Plan

Appendix 2 - Transfers to Operating

Appendix 3 - Capital Project Summary - Tax Supported

List of projects

Document 1 - List of projects that are to be transferred from the capital budget to the operating budget, attached.

      Recommended Transfers ($000)
Reference Branch Program / Project Request Tax Supported Rate Supported
Public Works & Services
 

Infrastructure

Resurfacing

1,100

1,100

 

900337

Solid Waste Services

Trail Road/Nepean Landfill-Perpetual Maintenance

265

265

 

900343

Solid Waste Services

Acquisition Of Recycling Bins/Containers

300

300

 

900349

Solid Waste Services

Household Special Waste Mobile Depots

250

250

 

902567

Infrastructure

Protective Plumbing Grant Assistance (Stormwater)

30

 

30

901062

USB-Sewer

Municipal Drains Maintenance

25

 

25

902211

Traffic & Parking

Transportation System Management

150

150

 

902961

USB-Sewer

Pumping Station Equipment Replacement

125

 

125

900260

USB-Sewer

Operational Loss Control Program

150

 

150

901149

Waste Water Collection

Protective Plumbing Grant Assistance (Wastewater)

20

 

20

 

Traffic & Parking

Area Traffic Management

60

60

 

903022

Traffic & Parking

Cycling Facilities Programme

75

75

 

901095 / 902941

Traffic & Parking

Street Lighting Rehabilitation

1,100

1,100

 

 

Traffic & Parking

Transportation Demand Management

200

200

 

901085

Traffic & Parking

New Sidewalks

30

30

 

 

Transit Services

Light Rail Pilot Project

4,580

4,580

 

 

 

 

8,460

8,110

350

Planning and Growth Management

902353 Environment Community Environmental Project Grants 50   50
      50 - 50
Community and Protective Services
900763 Parks and Recreation Minor Capital 750 750  
901038 Fire Fire Agreement Forests Program 25 25  
      775 775 -
Corporate Services
901016 Real Property & Asset Management Real Property Environmental Remediation 940 940  
901018 Real Property & Asset Management Landfill Assessment and Remediation 600 600  
901040 Real Property & Asset Management Operational Response-Administrative Buildings 500 500  
901045 Real Property & Asset Management Program Properties Operational Responses 2,800 2,800  
900569 Information Technology Services Records Information & Management 161 161  
900447 Information Technology Services Network Infrastructure Improvements 160 152 8
900475 Information Technology Services SAP Platform Sustainment Program 2,477 2,378 99
      7,638 7,531 107
    Total 16,923 16,416 507

Staff report supporting the recommendations of the Long-Range Financial Plan

BACKGROUND

In October 2002, City Council approved the first LRFP and a number of recommendations related to the long term funding required to meet the capital needs facing the City. Significant progress has been made on those recommendations particularly with getting other levels of government to recognize the problems municipalities are facing with respect to infrastructure. The recommendations from that report, those made by the Committee, and an update on their status are included at Appendix 1 for information.

At the time LRFP was approved it was recognized that until the Official Plan was finalized and the accompanying studies and master plans were completed the full capital needs of the City would be incomplete. It was also recognized that further work needed to be completed to determine the state of the existing infrastructure and the future funding requirements to maintain the City’s capital assets in an on-going state of good repair.

The Official Plan has now been completed, the master plans developed, the study of growth costs and new development charges completed and the analysis of existing assets are now in place. Accordingly, the costs that will be faced over the next decade are in a more complete form reflecting the visions of the 20/20 plan. As well, a number of funding changes have been introduced by the upper levels of government which improve the funding picture for the City. These and other changes will be detailed in this report which provides a view of the next ten-year period.

This report details only the City tax-supported capital programs. The rate supported program and police services plan will be brought forward to the Long Range Financial Plan Committee and Corporate Services and Economic Development Committee during the month.

The purpose of the Long Range Financial Plan is to provide a high level funding strategy for the capital program. Detailed project listings will follow as part of 2005 Capital Budget and 2006-2014 forecast.

DISCUSSION

THE 10-YEAR NEEDS

The capital program has been divided into three specific categories, Renewal of City Assets, Growth, and Strategic Initiatives.

The Renewal of City Assets category reflects the funding required to maintain and/or replace all existing capital assets throughout the full life of those assets. These assets include buildings, structures, roadways, transitways, bridges, vehicles, equipment, computers, computer networks and various other facilities. A number of studies have been undertaken throughout the various City program areas to determine the funding levels required to meet acceptable standards and reports have been brought forward to Council in a number of those areas over the past two years.

The capital projects identified within the Long Range Financial Plan are based on those studies and will reach a level that fully meets the identified lifecycle needs within the ten-year review period. Each program area has developed its own timetable for reaching the full needs and the costs contained herein reflect its estimates. This category totals $2.4 billion over the ten-year period compared to $2.1 billion identified in the first Long Range Financial Plan. Although comparison to other municipalities is difficult in that few municipalities have completed the same process as we have undertaken, a review of similar municipal jurisdictions indicates that these estimates compare to those jurisdictions.

The next category is Growth expenditures. This category includes all projects that would have been identified in the Development Charges background study that reflects the new Official Plan and formed the basis for the new development charges approved by Council in July.

The total cost of growth projects is $4.093 billion. The growth program has approximately doubled since the original Long Range Financial Plan with the Light Rail Transit program representing almost 75% of that increase.

As part of determining the growth costs and revenues, it was assumed that the revenues from the provincial and federal governments identified in support of the first phases of the light rail transit program will continue throughout the future phases. In total, revenues fund approximately 33% of the growth program, with development charges picking up 46%, leaving 21% to be funded by the tax base.

Since development charges fund a very significant share of the growth program, the City has an obligation to provide the non-growth funding share to put in place the infrastructure to serve the growth areas.

The third category of expenditure is Strategic Initiatives. This category includes all other capital expenditures. The types of expenditures shown here include initiatives such as implementing various master plans or the Ottawa 20/20 plan, acquisition of environmental areas, the enhancement of services currently being provided and growth costs not eligible for development charges. It also includes initiatives to enhance organizational effectiveness, implement new legislated requirements, and respond to changes in demand for services. Spending requirements in these areas total approximately $1.1 billion over the ten-year period. One of the major new initiatives within this category that was not included in the first LRFP is social housing.

Social Housing

Over the next 10 years, the Housing Branch has identified a need for up to $403 million of capital investment to support the development of 500 units of low-income affordable housing per year. Targeted to households at and below the 20th income percentile ($30,055 in 2003), this direct public investment is needed to ensure that the City’s targets for affordable housing under Ottawa 20/20 and the Official Plan include a range of households and incomes. The City’s Official Plan defines affordable housing as being affordable to households at or below the 40th income percentile ($54,273 in 2003). The low-income target of 500 units per year represents about 40% of the expected annual number of affordable housing starts as defined by the Official Plan targets, or about 10% of the total expected number of housing starts, and over 10 years will result in 5,000 units affordable to the 11,500 households currently on the social housing waiting list.

The core issue for affordable housing is the gap between what it costs to provide the units and what low-income households can afford to pay. The former social housing programs provided on-going operating subsidies to bridge that gap. These programs ended in 1995. The current approach is to provide a one-time capital subsidy to developers to reduce the cost of construction enough so that the units can be affordable without the need for an on-going operating subsidy. Based on estimates from the Federation of Canadian Municipalities (FCM), capital subsidies of up to $100,000 per unit may be required to achieve low-income affordability. The Housing Branch projection assumes a capital subsidy of between $70,000 and $90,000 per unit.

The City is currently providing an average capital subsidy of $60,000 per unit via the Action Ottawa program, supporting 368 units to date, with 220 additional units to be funded in 2005. The City is the primary funder of Action Ottawa, although funds from the federally funded, Provincially administered "Community Rental Housing Program" started to flow in 2004. The current capital subsidy is comprised of $33,000 City, $25,000 Federal, $2,000 Provincial per unit.

The Long Range Financial Plan proposal is based on an assumption of at least 50% of the required funds coming from other levels of government, although equal (1/3) cost sharing would be a more desirable outcome that staff will continue to lobby for. The Province currently has approximately $320 million available via the Federal program, and is expected to increase its contribution to match the Federal portion in 2005. Affordable housing was the priority issue identified in the Liberal Task Force on Urban Issues. Both the Federal and Provincial governments have moved towards recognition of housing as essential "social" infrastructure, partly because of the scale of the need and the mechanisms for funding.

Council should continue to advocate for increased and more appropriate funding from other levels of government, and staff will continue to work with staff from other municipalities via the FCM for a more systemic approach to dealing with housing issues. Staff will also pursue alternative sources of funding for affordable housing. Some of the mechanisms identified for further exploration in the discussions for the affordable housing policies in the Official Plan include: dedicated fees or levies for affordable housing, including linkage fees for commercial development to ensure housing is affordable to workers; dedicating proceeds from the sale of civic assets to an affordable housing fund; cash-in-lieu payments for developments that do not fully meet the Official Plan targets that 25% of new housing be affordable; increased use of tax receipts for donations of property (land trust); and new mechanisms to support more financing more appropriate for low-income housing.

For the time being, staff will bring forward annual requests for capital funding to meet the current needs and opportunities. The intent is to move towards a more predictable funding process to help sustain the necessary longer-term planning by developers in the community. Only minimal production will be able to be supported if city funding is the only capital available. Full Federal and Provincial participation will be required to meet the desired target of 500 units per year.

Definition of Capital Projects

In 2003 and 2004, considerable discussion occurred regarding a number of projects included within the capital budget that could be considered to be operating expenditures. In the 2004 budget, a number of these were transferred to the operating budget and staff undertook to review all other projects for consistency. In doing so a consistent definition of what was a capital project was required. Staff reviewed a number of jurisdictions for a definition and recommends the following which is derived from a former provincial definition.

"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 proceeding definition expenditures that qualify for development charge funding will remain as capital projects, even if not in compliance with the capital expenditure definition."

The list of projects that are recommended to be transferred from the capital budget to the operating budget based upon this definition are attached as Appendix 2. It is also recommended that since these projects are currently using Pay-as-you-go funding that an equal amount of funding also be transferred to eliminate any operating budget impact for 2005.

FUNDING THE CITY’S NET SHARE

The overall costs and revenues that have been identified for the three categories for the next ten-year period are summarized below:

  Gross Costs $M Revenue $M DC’s $M Net City Cost $M
Renewal of City Assets 2,399 113 9 2,277
Growth 4,093 1,361 1,863 869
Strategic Initiatives 1,092 234 17 841
Total 7,584 1,708 1,889 3,987

A functional breakdown of each category of expenditure is shown in Appendix 3.

The balance of this report will focus on the net city share and how to fund this requirement or as much of it as possible.

The following chart illustrates the net City share of identified capital needs annually over the period 2005 to 2014.

graphic illustrating the Annual Capital Needs by Category - Net City Share

The chart illustrates the on-going funding that existing infrastructure will require in order to avoid future major reconstruction and ultimately greater costs. The total costs for the renewal of city assets dramatically exceed those of the other two categories. The growth costs are fairly evenly spread over the years with the exception of those years when new light rail projects are initiated. The Strategic Initiatives projects fluctuate more noticeably from year to year reflecting the nature of the projects that are contained in that grouping.

There have been a number of new funding sources that have evolved since the first Long Range Financial Plan. A brief outline of each funding source is described below.

GST and Gas Tax

In 2004, the federal government announced that the portion of the Goods and Services Tax (GST) that municipalities were required to pay would be refunded as the first step of introducing new revenues to the municipal sector to assist with their infrastructure deficiencies. This initiative will generate approximately $16 million annually from tax supported City operations.

Also in 2004, the Province of Ontario approved the transfer of up to 2 cents of provincial gas tax revenues to the municipal sector starting in late 2004 and reaching full value in 2007. The full on-going annual new revenue to the City is estimated to be $37 million annually.

In the throne speech this month, the federal government introduced the sharing of gas tax revenue with municipalities starting in 2005 and being phased in over the next four years. The phase-in period that is now anticipated is slightly different than staff had forecast, therefore, the numbers included in this report are slightly different than those provided to the Long Range Financial Plan Committee. The commitment outlined by the federal government is to share five cents of gas tax which will result in annual revenues to the City that are estimated at $60 million upon full implementation. The details of how these revenues will be allocated to each municipality have not been finalized, however, staff believe the estimates are on the conservative edge. Since the LFRP is planned to be updated every three years, these revenues will also be updated based on the most recent information available.

The Long Range Financial Plan utilizes development charge revenues that are consistent with the development charge work plan and the rates approved by Council. Any changes to the rates now in place will have some impact on the overall growth costs and the net City share that are shown here.

Ottawa Hydro Funds

City Council has approved a refinancing plan for Hydro Ottawa and will be receiving $200 million as part of the refinancing. It is recommended that these funds be used to derive the maximum benefit to the City in funding its capital program in the future.

A review of other major cities in Canada indicates that when major assets have been sold that the money has been put into an endowment type of fund and the income from that fund used to provide monies annually to the cities. These types of funds are invested by professional investment firms and managed by the cities as a type of trust fund. They are allowed to invest in both bonds and equities and have provided returns well in excess of 10% annually. Staff believe that this type of fund would derive the maximum benefit over time for the City of Ottawa.

Staff recommend that the City of Ottawa establish an Endowment Fund with the proceeds of the Hydro Ottawa refinancing and that the annual income from the fund be used to provide monies to finance the City’s capital program. It is further recommended that the City request special legislation that would allow the fund to be invested under the Trustees Act allowing for a broader range of investments than allowed under municipal legislation.

The investment process would operate in a manner similar to the two City pension funds with the actual investments outsourced to investment firms who would invest based upon a statement of investment policies and procedures established by the City. The performance of the investors would be monitored and reported upon on a regular quarterly basis through a trustee relationship.

The primary advantage to this type of structure is that the $200 million remains intact while providing a perpetual source of income to the City.

In addition to the refinancing of Hydro Ottawa, the City will also receive dividends on an annual basis. In order to leave flexibility for the utilization of some of these revenues within the operating budget in 2005, the Long Range Financial Plan has assumed that the first $12 million of dividends will be allocated to the operating budget and the remainder to capital. This will provide up to $7 million annually for the capital program.

Pay-As-You-Go and Debt

Each year monies are provided within the operating budget in the form of pay-as-you-go contributions to finance the capital program. These amounts have remained fairly constant over the years and in effect decreased from a spending power point of view. It is recommended that these contributions be increased based upon the increase in the Ottawa Construction Index which is used as an indexing for development charge rates. This will ensure that there is continued progress towards Pay-as-you-go each year.

As well, Council’s policy has been to approve new debt each year restricted to the amount of new debt that can be repaid each year within the existing repayment envelope. In effect, this has created a revolving debt fund that is used to fund some capital programs without adding costs to the overall tax bill. It is recommended that this practice continue without change in order to fund projects such as road reconstruction where the life of the asset is extended and used over a long period of time.

These revenues provide an estimated revenue stream over the ten-year period as shown below:

  $ million
Pay-as-you-go Contributions 1,113
Revolving Debt 400
GST Rebate 170
Hydro Dividends 57
Hydro Endowment Interest 200
Provincial Gas Tax 350
Federal Gas Tax 435
Total City Sources 2,725

Funding Strategy

In an effort to confine debt financing to only certain types of projects, the first Long Range Financial Plan contained the following recommendation:

  • "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 an effective financing mechanism for the City of Ottawa is that it allows major growth projects to be paid for over a number of years, similar to a mortgage on a home. It spreads the benefit of the capital project over a longer benefit period providing for the project to be paid for by a broader tax base, and it makes the development of required capital works within the 10 year time frame achievable.

In a publication entitled "Mind the Gap, Finding the Money to Upgrade Canada’s Aging Infrastructure" the TD Bank Financial Group in May 2004 addressed the national infrastructure problem and provided a number of proposals. When speaking of the use of debt they said, "Maintaining low debt-load may be a laudable goal, but if it comes at a cost of foregoing or delaying capital projects because non-debt sources of financing aren't available, then a low-debt strategy is counter-productive." and "Besides, a healthy level of borrowing passes the test of equity, since benefits, which are normally consumed over the life of several decades, are matched with the costs"

The question for the City is how can the use of debt be effectively used without increasing the costs on the property tax bill itself. What staff is recommending is the use of the new non-property tax revenues as a source of funding new debt that could be issued under the existing policy wording. The debt that would be eligible under the definition is predominately associated with the public transit and transportation areas and would be a natural tie into the use of gas tax revenues as a repayment source. It is recommended that debt financing be used to fund the growth portion of the expansion of rapid transit and other growth-related projects by debt financing some projects and using the future stream of gas tax payments to pay the debt charges.

The City of Ottawa is authorized under Section 401 of the Municipal Act, 2001 to issue debentures. The debt capacity limit for the repayment of long-term debentures is established by the Ministry of Municipal Affairs and Housing. The most recent limit provided by the Ministry, indicates that the City’s Annual Repayment Limit (ARL) which is the amount available each year to service new debt, is $262,385,885. This limit allows the City to undertake additional long-term borrowing of up to $2,780,000,000 depending on the interest rate and repayment terms, before exceeding the ARL.

The City of Ottawa is currently repaying $442 million in debt and has an additional $191 million in debt for projects that has been authorized but the project spending has not been completed. The principle and interest repayments in 2004 total $87.5 million of which, $73.6 is coming from taxation and $13.9 from the water/sewer rate. Therefore debt service costs, including the costs of the proposed issue, are well within this debt capacity limit.

As can be seen in the following table, since amalgamation the City has benefited from lower interest rates, as the debt being retired is being replaced with debt at lower interest rates. This has allowed the City to service more debt at a lower cost. As the debt servicing budget has been reduced since amalgamation and there are more taxpayers contributing to the debt repayments, the amount debt servicing represents on the tax bill has also been reduced. The decreases in the debt servicing envelope have been contributed to the contributions to capital reserves (PAYG). In 2005, the tax supported debt servicing is forecast to increase to $77 million, but the increase will be offset by a decrease to PAYG.

  2000 2001 2002 2003 2004 2005 (forecast)
Issued Debt ($ millions) 372 417 421 425 442 460
Cost of Issued Debt – Tax($ millions) 84 81 76 75 74 77
Cost of Issued Debt – Rate($ millions) 16 18 15 15 14 16
Unissued Debt ($ millions) 200 226 216 241 191 169
Yearly cost of debt servicing on an average tax bill ($) N/A 204 180 179 177* 180

*The $177 for debt servicing, as a portion of a $2,401 average tax bill, is higher than reported in the Budget Workbook as it includes transit and police debt servicing, which in the workbook is included in their functional lines.

The LRFP2 makes two recommendations that will affect the tax bill. The first is that the PAYG contributions will increase by the Infrastructure Price Index every year. In 2004, the PAYG contributions represented $345 (including transit and police) on an average tax bill. In 2005, the cost of the increase on the tax base is $3.35 million which is $8.63 on the tax bill.

The second recommendation is that the new debt to be issued, as per the strategy, be funded from the gas tax revenues to be received from the Province and the Federal government. This has the effect of keeping the tax-supported debt servicing budget fixed at the 2005 level of $77M. As the City grows and new taxpayers are added to the tax roll, if debt servicing does not grow at the same rate as new taxpayers are added, the cost per taxpayer will decrease.

Similarly, while the PAYG contributions have been targeted to increase every year, if the increase is the same as the growth in taxation, the amount on the tax bill will remain constant. Assuming 2% assessment growth every year from now until 2014, and assuming that the PAYG contribution will increase by 2% every year, by 2014 the PAYG portion of the tax bill would be $353 and the debt servicing portion will be $147. Combined this means the average taxpayer will pay $500 per year for capital costs in 2014 compared to $522 per year in 2004.

The City currently has an AAA credit rating from Moody’s and an AA(high) rating from DBRS. In establishing the City’s credit rating, the two agencies look at the debt burden and how it is funded. The authorization of $761 million in debt during the next ten-year timeframe may or may not affect the credit rating of the City, but as the increased servicing costs will not be reflected on the tax bill, any rating change should be minor.

Funding Priorities

Staff also recommend that the funding strategy for the overall capital program be to fund growth at 100% and split the balance of available funding between Renewal of City Assets and Strategic Initiatives with a goal of meeting full Renewal of City Assets needs as soon as possible within the ten-year plan.

The results of this recommendation and the others within the report are illustrated for each of the three project categories as shown in the following charts.

graphic illustrating the Identified Capital Needs vs. Funding for Growth Projects

This would result in the full funding of growth projects consistent with the development charge study and the Official Plan.

graphic illustraing the Identified Capital Needs vs. Funding for Renewal of City Assets

The chart shows dramatic movement towards the full funding of renewal needs reaching 100% within the period. Even in the early years 75% to 90% of the program can be met. Achieving 100% would place the City in an enviable position among municipalities in Canada.

graphic illustrating the Identified Capital Needs vs. Funding for Strategic Initiatives

The Strategic Initiative category is the area where the remaining funding shortfall is most obvious. The staff recommendation has an emphasis on meeting renewal needs leaving the shortfall here. The chart above splits out the Social Housing initiatives from the others for presentation purposes. Social Housing needs a specific funding strategy and greater participation by upper levels of government. Staff will be bringing a report forward recommending a specific housing funding strategy.

The options for the balance of the shortfall at this time are: (1) provide additional taxation for these over the 10-year period, (2) provide additional new tax supported debt financing if the initiative meets adopted debt policy (resulting in an increased tax requirement), and (3) develop a priority setting tool to establish annual program within available funding. The priority setting may become clearer as the corporate planning process is implemented and priorities established. This will not be in place for the 2005 budget but will assist in future years.

Operating Costs Resulting From the Capital Program

The capital program will bring additional operating costs as new programs are initiated and new facilities and infrastructure are constructed and operated. As part of the gathering of the cost information for the projects, the operating impacts were also identified and will be shown within the capital budget documents. On average over the ten years the capital program will bring additional operating costs of approximately $12 million annually. These costs vary significantly from year to year based on the projects being constructed. The assessment growth from new properties over each of the years will offset these costs.

SUMMARY

The following table provides a summary of the capital needs and funding available in the 2005 to 2014 period.

  $ million
Net City Tax Supported Requirement 3, 987
Less:
Traditional funding model (2,469)
Gas Tax supported debt (761)
Total Needs not met 757
Consisting of:
Housing Strategy to be developed 204
Remaining shortfall 553

The overall shortfall compares to an identified tax-supported shortfall of $1.2 billion in the first Long Range Financial Plan, even with significantly increased costs related to public transit and social housing.

The Long Range Financial Plan is to be updated on a three-year basis on the final year of each term of Council. The next update will therefore occur in 2006 and will provide updates regarding the solutions put in place. As well, each capital budget can be measured against the Long Range Financial Plan to identify the progress being made.

In summary, this plan and its recommendations accomplish the following:

  1. Advances and builds on the recommendations from the first Long Range Financial Plan
  2. Meets growth requirements without an increased burden on the property taxpayer
  3. Addresses deferred maintenance issues and moves to full life cycle funding
  4. Allows Hydro Ottawa refinancing payment to have long term impact on the capital program
  5. Maximizes the use of new Gas Tax revenues to meet transportation and growth needs now

The staff recommendations made to the Long Range Financial Plan Committee are:

That the Long Range Financial Plan Sub-Committee recommend 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 proceeding 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.
     
  6. The city established 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.
     
  7. That a future funding strategy be brought forward for future affordable housing initiatives.

Appendix 1 - Policy recommendations

Appendix 1 - Policy Recommendations Contained in the First Long Range Financial Plan

  1. Growth must pay its own way. Accordingly, development charges should be increased to the highest feasible level.
    Status: The Development Charges study that was presented in July to Council saw DC rates increase. The effect is that in this LRFP, DC’s are paying 68% of the net capital costs of growth compared to 54% in LRFP1.
  2. The City's tax rate should be split into two new rates: one for operating expenditures, and another for capital expenditures. This split establishes a direct link to the capital program through the tax bill and ensures that increases in property assessment are shared by operating and capital budgets.
    Status: This has not been implemented and should be revisited given the limited effect the recommendations in this LRFP have on taxation. Staff will come forward with a review of this recommendation.
  3. The City's capital planning process should identify the true lifecycle cost of City assets. Further, over time, additional funding should be provided to increase pay-as-you-go financing for lifecycle projects.
    Status: The Capital Asset Management Plans identify the true lifecycle costs of City assets. LRFP2 sees lifecycle funding increasing to 100% over the ten-year period.
  4. A study of capital standards in other municipalities should be undertaken to determine if savings can be found through appropriate standard adjustments.
    Status: A capital standards review was presented to committee in October, 2004.
  5. A new program review process should be established to provide a cyclical review of all departments, with one department being reviewed in detail each year.
    Status: All programs were reviewed as part of the UPR in 2003. A strategy to continue this process needs to be developed.
  6. A policy should be developed to identify the minimum closing annual balance for Reserve Funds to allow for reasonable financial flexibility.
    Status: Council has adopted a $50 million target for the closing balances of the tax supported reserves.
  7. To provide assistance to Council in its determination of capital priorities, future capital budgets should list projects by function and type using the following categories: growth, lifecycle, existing approved programs, and new initiatives. The City's capital program should be aligned with available funding on an annual basis. To identify possible reductions, a new step in the budget process needs to be put in place that will allow Council to determine overall funding priorities. Prioritization by Council should occur early in the budget process with priorities identified both by functional area and type. Capital projects identified between budget cycles should only be funded by substitution for another project within the same funding envelope.
    Status: Capital projects are identified in three categories: renewal of assets, growth and strategic initiatives. This LRFP proposes a broad funding priority strategy.
  8. Future operating costs for capital projects should be considered as part of the capital budget. Since these costs will carry over to future operating budgets, they must be clearly itemized to determine whether they will be covered by new money, or from within the existing tax base.
    Status: This LRFP identifies the operating impacts from capital and proposes they be covered from new tax revenues.
  9. Projects that create additional infrastructure should also generate an added pay-as-you-go contribution. This added pay-as-you-go contribution should also be incorporated for all assets built by others but whose ongoing costs are assumed by the City. These costs should be summarized clearly, with detailed tax and utility rate implications part of the budget documentation.
    Status: The PAYG contributions are being proposed to increase at basically the rate of inflation. Any funding shortages resulting from new assets can be addressed in the next update, which is scheduled to happen every three years.
  10. The urban or rural transit levy should be earmarked for operating and capital requirements of the transit service (such as buses, garages and other services that directly support the operation) within either the urban or rural areas. As a result, all residents would contribute to future transit extensions in the same manner as they contribute to roads.
    Status: The review of the transit levy areas is still pending.
  11. 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.
    Status: This LRFP sees new debt being used as a funding mechanism exclusively for growth projects and strategic initiatives that meet specific criteria. This debt is to be paid for with new revenues.
  12. Public-private partnership opportunities should be identified and investigated in both the City's capital and operating budgets. Investigation of these opportunities should include a review of the City's capital plan to bundle capital works into packages that present design-build-finance opportunities to the private sector. Any costs or savings of these public-private partnerships should be identified in future budget documents.
    Status: The City has adopted a P3 policy and has several P3 projects approved and in process of development.
  13. The City should establish a revenue policy that sets standards for fees and rates of programs and services. This policy would identify which costs are recovered from fees. Currently, most fees simply cover direct operating costs. They do not recover any capital or operating costs of facilities. The City's funding gap can be reduced somewhat if City policy changes to recover some or all capital and operating costs. Regardless, the proposed revenue policy must be applied on a consistent basis for new programs.
    Status: As part of the 2004 budget, Council adopted a broad policy that user fees should increase as costs increase. An overall policy still needs to be developed.
  14. A new federal/provincial/municipal funding formula and revenue-sharing agreement is required for Ontario's cities. Without a new revenue-sharing agreement, it may not be possible to support the current growth forecast. Support is required from upper levels of government to maintain the quality of municipal services. The City urgently requires a wider range of revenue-sharing options, rather than the regressive property tax it relies on now. These options include a share of gasoline taxes, a hotel occupancy tax, a portion of income taxes, exemption from federal and provincial sales taxes, a share of funds generated through vehicle licensing, and transferral of the provincial requirement to cost-share health and social service programs.
    Status: The gas tax sharing and GST exemption are in place. Work needs to continue on social housing and other revenue initiatives.
  15. If new revenues are not forthcoming from the federal and provincial governments, a funding gap will remain. Council will have to look at a range of potential solutions to address the gap, including: cutbacks in programs, changes in standards, adjustments in service levels, application of new revenues, continued deferral of infrastructure, and limiting growth. If these solutions are not sufficient, tax and rate increases will be required.

Recommendations from the Long Range Financial Plan committee October 2002

General

  1. Move to maximized pay-as-you-go.
    In order to expand upon the existing pay-as-you-go practice, movement to maximized pay-as-you-go needs to start now but also must recognize the taxpayers’ ability to bear sizeable tax increases.
     
  2. Prioritize capital envelopes.
    A new step in the budget process needs to be put in place, which allows Council to determine the overall multi-year funding priorities within the overall available funding. This prioritization would occur early in the process and the priorities would be identified both by functional area and by type (life cycle, growth etc.).
     
  3. Growth pays for growth.
    Development charges need to be increased to the full level allowed by legislation. Front-ending agreements, funded by development proponents, for growth area infrastructure should be encouraged. Growth must fully pay its own way or consideration be given to restricting future growth if sufficient revenues cannot be generated,
     
  4. Spending must be reduced.
    Until such time as sufficient funding is available to meet the capital program, the program must be reduced annually. To assist in identifying where the reductions should occur a review of standards including comparison to other similar municipalities, should be undertaken.
     
  5. Pursue the concept of public-private partnerships and/or the pooling of large projects so that significant design/build proposals can be sought from the private sector with the goal of reducing overall costs.
     
  6. Accelerate the existing program of rationalization and disposal of city buildings. Review alternate development proposals on surplus city properties in addition to the straight sale of properties by adding value to the property and increasing the financial return to the City.
     
  7. In instances where large capital works are constructed which may require an increase in rates or taxes for a period of time, consider establishing a separately identified surcharge for this purpose for the specified time period.
     
  8. The City’s tax rate should be split into two components: one for operating expenses, and another for capital expenses. This split establishes a direct link to the capital program through the tax bill and ensures that increases in property assessment are shared by operating and capital budgets through increased contributions to pay-as-you-go.
     
  9. The capital reserve funds should not be allowed to be fully depleted at any time. It is recommended that the goal for each budget year be that a minimum balance be maintained in both the tax supported and water and sewer supported capital reserve funds and that staff be directed to recommend an appropriate level.

Debt Financing
 

  1. A long-term goal should be to eliminate any debt funding for life cycle projects and new initiatives and move to a maximized pay-as-you-go funding model overall.
     
  2. It is recommended that in the future debt financing be restricted to specific project types. Debt financing should be restricted to projects related to capacity expansion or growth and those that leverage funding from others. Projects that would be eligible for debt financing would include those to be financed from development charges, future new non-traditional infrastructure projects, such as new transit programs, or projects that are to tied to third party matching funding. It is also recognized that these restrictions may have to be phased in to meet the short-term budget issues.

Funding from other governments

  1. Given that the city’s property tax base is required to share costs that other provinces do not impose on municipalities such as social welfare and health, additional tax sources need to be made available by or shared with the provincial and federal governments. The recommendations of the City’s Task Force on Property Assessment and Property Tax Issues in this regard should be re-endorsed.

Appendix 2 - Transfers to operating

Department - Public Works & Services

Branch - Infrastructure

Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
  Resurfacing 25,070 1,100 1,100   Review of recovery from capital for personnel costs supporting program
902567 Protective Plumbing Grant Assistance (Stormwater) 30 30   30 Ongoing program: grants to property owners wishing to install private property flood protection devices.

Branch - Solid Waste Services

Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
900337 Trail Road/Nepean Landfill-Perpetual Maintenance 265 265 265   Ongoing program: Repairing areas of severe settlement; re-vegetation areas prone to erosion; repairing storm water damage.
900343 Acquisition Of Recycling Bins/Containers 300 300 300   Ongoing program: purchase of front end recycling bins for apartments; replacement of blue and black box and apartment auto carts.
900349 Household Special Waste Mobile Depots 250 250 250   Ongoing program: annual cost of ongoing mobile depot system.

Branch - USB – Sewer

Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
901062 Municipal Drains Maintenance 25 25   25 Ongoing program: minor improvements or modifications to Municipal Drains when it is not practical to recover costs from landowners.
902961 Pumping Station Equipment Replacement 125 125   125 Ongoing program: minor capital equipment replacement.
900260 Operational Loss Control Program 150 150   150 Ongoing program: annual cost of ongoing mobile depot system.

Branch - Waste Water Collection

Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
901149 Protective Plumbing Grant Assistance (Wastewater) 20 20   20 Ongoing program: grants to property owners wishing to install private property flood protection devices.

Branch - Traffic & Parking

Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
902211 Transportation System Management 200 150 150   Review of recovery from capital for personnel costs supporting program
  Area Traffic Management 900 60 60   Review of recovery from capital for personnel costs supporting program.
903022 Cycling Facilities Programme 539 75 75   Review of recovery for personnel costs $30K, ongoing operating program $45K.

Branch - Transit Services

Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
902211 Light Rail Pilot Project 4580 4580 4580   The Light Rail Pilot Project began in October 2001 and was extended in 2003. Since the Pilot began, the Official Plan and accompanying growth management plans, especially the Rapid Transit Expansion Study, have been approved. As Council approved the North-South rail expansion as the top transit priority in the City in February 2003 and the federal and provincial governments have announced that they will provide $200 million each toward the expansion, it is time to "de-pilotize" the project and include light rail into the regular operational plans of OC Transpo. Recently, the Ontario Minister of the Environment has approved the terms of reference of the Environmental Assessment, and public hearings are beginning on October 19th

Department - Planning and Growth Management

Branch – Environment

Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
902353 Community Environmental Project Grants 50 50   50 Ongoing program: provides funding for small scale community based initiatives.

Department - Community and Protective Services

Branch - Parks and Recreation

Reference Program / Project Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
900763 Minor Capital 750 750 750   Ongoing program: Purchase of equipment to support the program requirements and operations of Parks & Recreation facilities. This includes items such as fitness equipment, basketball standards, hockey nets, tables, chairs, refrigerators, PA systems, etc..
Branch – Fire
Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
901038 Fire Agreement Forests Program 25 25 25   Ongoing program: Funds required to enhance public & employee safety. Appropriate equipment and training is required to ensure Fire Services can adequately respond in a quick, safe and efficient manner to potential wildfires and other activities such as hazardous fuels, fire breaks and other fire related situations.

Department - Corporate Services

Branch - Real Property & Asset Management

Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
901016 Real Property Environmental Remediation 2710 940 940   Annual monitoring costs at City owned contaminated sites being remediated.
901018 Landfill Assessment and Remediation 1050 600 600   Annual operating cost for monitoring former City owned landfill sites.
901040 Operational Response-Administrative Buildings 500 500 500   On going program requirements to deal with Health and Safety and tenant fit up issues.
901045 Program Properties Operational Responses 3800 2800 2800   The nature of these activities are repetitive and this realignment allows us to correctly fund standardize operational procedures as work was performed under capital programs within some of the former Municipalities.

Branch - Information Technology Services

Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
900569 Records Information & Management 3806 161 161   The transfer of costs relate to two FTEs, an EDMS Analyst and a Project Manager. These two positions will be needed in an on-going basis to support the Enterprise Content Management (ECM) initiatives planning, implementation & production support. ECM includes functionalities for web content management, electronic records management, and electronic document management. It is vital to the implementation of the Records Management Policy for electronic content, as well as the sustainment of the growing web publishing needs for the City web sites
900447 Network Infrastructure Improvements 1360 160 152 8 The transfer of costs relate to two Project Lead FTEs; their scope of work is greater than simply those initiatives funded from 900447. At any given time, the Project Lead will represent the Technology Infrastructure group on 10 to 15 projects concurrently
901040 Operational Response-Administrative Buildings SAP Platform Sustainment Program 4477 2477 2378 These costs are annual costs incurred by the SAP Support Centre to provide ongoing sustainment support. $527K - Eight Support Centre FTEs; $350K - Specialized consultant assistants are needed to support sustaining activities like T4 production, collective agreement changes, audits, and preventative maintenance not covered by SAP's online support services; $1.6M SAP Annual Maintenance.

Total

Reference Program / Project 2005 Total Capital Request Prior to Transfer $000 Recommended Transfers ('$000) Request Recommended Transfers ('$000) Tax Supported Recommended Transfers ('$000) Rate Supported Rationale
  Total 108,564 16,923 16,416 507  

Appendix 3 - Capital project summary - tax supported

   

 

10 Year Net City Cost ($000's)
Renewal of City Assets

Community & Cultural Services

106,793

Emergency & Protective Services

49,029

Health & Social Services

4,050

Corporate General

360

Information Technology Related

179,125

Real Property & Asset Management

398,215

Environment

8,970

Fleet Services

497,604

Solid Waste Services

4,650

Transit Services

16,140

Transportation

1,012,574

 

2,277,510
Growth

Community & Cultural Services

56,649

Emergency & Protective Services

11,085

Parks

800

Planning

354

Roads

32,047

Fleet Services

128,147

Transit Services

595,461

Transportation

45,322

 

869,865
Strategic Initiatives

Community & Cultural Services

278,069

Emergency & Protective Services

71,592

Health & Social Services

233,800

Corporate General

13,572

Information Technology Related

30,169

Real Property & Asset Management

11,250

Business Development

60,570

Environment

35,667

Planning

9,341

Research & Modeling

3,005

Roads

6,605

Sewers *

86

Water *

3,660

Fleet Services

5,390

Solid Waste Services

31,850

Transit Services

1,650

Transportation

44,154

 

840,430
Total
3,987,805

* Tax component of rate supported projects