Report to/Rapport au:
Environment Committee
Comité de l’environnement
and Council / et au Conseil
27 January 2012 /
le 27 janvier 2012
Submitted by / Soumis par: Marian Simulik, City Treasurer/Trésorière
municipale
Contact
Person/Personne ressource: Mona Monkman, Deputy City
Treasurer, Corporate Finance/ Trésorière municipal adjointe – Finances
municipales
Finance Department/ Service des Finances
613-580-2424 ext./poste 41723, Mona.Monkman@ottawa.ca
|
SUBJECT: |
LONG RANGE FINANCIAL PLAN IV - WATER AND
SEWER RATE SUPPORTED PROGRAMS |
|
OBJET : |
PLAN FINANCIER À
LONG TERME IV – PROGRAMMES FINANCÉS À PARTIR DES REDEVANCES D'EAU ET D'ÉGOUTS |
That the Environment Committee recommend that Council
1.
Receive and table the Long-Range Financial Plan
IV– Rate Supported Programs (Water and Sewer) at its meeting of January 31, 2012; and
2.
At its meeting of February 21, 2012, recommend
Council approve at its meeting of February 22, 2012:
a) The transfer of $10.0 million from the Water Reserve to the Sewer
Reserve;
b) Amendments to
the Fiscal Framework (2007) Targets for Debt as follows:
Principal and interest on water and sewer
rate supported debt to be limited to no more than 15% of rate revenues, and
that the water and sewer reserves maintain balances equal to one year’s debt
servicing charges;
c) Amendments to
the existing Administration of Capital Financing and Debt Policy, Primary
Objectives, Section 5, to reflect the following wording:
Match the Term
of the Capital Financing to the Useful Life of the Related Asset: The City’s
practice will be to issue debt for a term that is consistent with, but will not
exceed, the anticipated useful life of the underlying asset.
Que le
Comité de l'environnement recommande au Conseil :
1. Reçoive et dépose le Plan financier à long terme IV – Programmes financés par redevances
(eau et égouts) à sa réunion du 31 janvier 2012;
2. à sa réunion du 21
février 2012, recommande au Conseil d’approuver à sa réunion du 22 février 2012
a)
le transfert de 10,0 millions de dollars
de la réserve pour eau à la réserve pour égout;
b)
de modifier comme suit les cibles d'endettement du
Cadre financier (2007) :
Le principal et l'intérêt de la dette financée par les redevances d'eau
et d'égout ne doivent pas dépasser 15 % des recettes provenant des
redevances et le solde des réserves pour eau et pour égout doit être au moins
égal aux frais annuels de service de la dette;
c)
de modifier comme suit la Politique sur les dettes et
le financement, Objectifs primaires, section 5:
Faire coïncider la durée du financement d'immobilisation avec la durée
de vie utile du bien correspondant. La Ville aura pour pratique d'émettre un
titre de créance dont l'échéance sera conforme, mais non supérieure, à la durée
de vie utile prévue du bien immobilisé.
EXECUTIVE SUMMARY
Consistent
with Council’s strategic plan, and in keeping with sound financial planning
practices, this report establishes a long range financial plan (LRFP) for water
and sewer capital investment needs. The
report provides a series of financing strategies that balance the need to
maintain and build capital assets with the need to manage debt, reserve
balances and rate increases. The strategy reflects the capital
intensive nature of delivering these services with assets that last for
multiple generations.
The City’s current investment in water and wastewater assets is over $18 billion. This includes 8,000 kilometers in water, sanitary and storm sewer pipe inventory; two water purification plants (Lemieux and Britannia); and the Robert O. Pickard Environmental Centre (ROPEC), the City’s sewage treatment plant.
This LRFP identifies a significant increase in the capital needs detailed in the last LRFP in 2007. These increases are a result of new provincial legislation; the Ottawa River Action Plan; the impact of on-going condition assessments and risk mitigation work, and the advancement of renewal works through the Ottawa on the Move initiative established in the 2012 tax budget.
As part of the analysis, the annual reinvestment requirements for existing assets was determined using a risk based approach. The value of growth projects in the water and sewer systems was forecasted and strategic initiatives that Council has approved or as a result of new or changes regulatory requirements was also detailed. As a result, the City has estimated that its share of water and sewer capital needs over the next 10 years amounts to an investment of $2.7 billion. The funding plan developed moves the City towards this required level of investment over the 10 year period.
The funding plan was developed using the following principles:
·
Debt
servicing charges (principal and interest) for such a capital intensive program
should be set at a maximum 15% of the annual budget, a level which is greater
than the current Council limit of 7.5%
for other City services;
·
Debt will
be issued for terms that better match the life of the assets they are funding,
which has the effect of reducing the annual operating impact of debt issuance;
and
·
Required water and wastewater rate increases
will be minimized as much as possible and will be smoothed over the 10 year
forecast period in order to provide predictability for ratepayers.
In total the plan being proposed sees a city investment of $2.1 billion over the ten year period. The plan being put forward, which is reflected in the 2012 draft budget, deals with the higher level of capital investment required in the first four years by maximizing the use of reserves and debt. In the long term, adequate annual funding would be available to meet the annual capital investment requirement. Revenue increases required to support the plan are 6% in 2012, 7% in 2013 and 2014, 6% in 2015 and 2016 and 5% every year thereafter. These projected rate increases include inflation.
Council will review and adopt the operating and capital budgets on an annual basis. Future plans will reflect Council’s annual reviews. It should also be noted that spending needs and financing plans may also be adjusted in the future as a result of legislative requirements (Clean Water Act/Source Water Protection Act, Municipal Wastewater Effluent Standards legislation) and as a result of the City’s planning process such as the Official Plan, the Infrastructure Master Plans and Stormwater Master Plans.
SOMMAIRE
Conformément au plan stratégique du
Conseil et en fonction de saines pratiques de planification financière, le
présent rapport établit un plan financier à long terme (PFLT) pour les besoins
au titre des dépenses en immobilisations liées aux réseaux d’aqueduc et
d’égouts. Le rapport fournit une série de stratégies de financement qui
établissent un équilibre entre le besoin de maintenir et de construire des
immobilisations et la nécessité de gérer la dette, les comptes de réserve et
les hausses tarifaires. La stratégie reflète la nature exigeante en
investissements de la prestation de ces services avec des immobilisations qui
durent pendant de multiples générations.
Les investissements actuels de la
Ville dans les réseaux d’aqueduc et d’égouts s’élèvent à plus de
18 milliards de dollars. Ceci comprend un inventaire de
8 000 kilomètres de conduite d’aqueduc et d’égouts sanitaires et
pluviaux; deux usines de purification de l’eau (Lemieux et Britannia); le
Centre environnemental Robert‑O‑Pickard (CEROP), l’usine de
traitement des eaux usées de la Ville.
Le présent PFLT met en lumière des
augmentations importantes au titre des besoins en immobilisations spécifiés
dans le dernier PFLT en 2007. Ces augmentations découlent d’une nouvelle
législation provinciale; du Plan d’action de la rivière des Outaouais; de
l’incidence des évaluations continues de l’état et des travaux d’atténuation
des risques, et de l’avancement des travaux de renouvellement par le biais de
l’initiative Ottawa, on se déplace mise en place dans le budget 2012.
Dans le cadre de l’analyse, les
besoins annuels de réinvestissements pour des immobilisations existantes ont
été déterminés en utilisant une approche fondée sur le risque. La valeur des
projets liés à la croissance dans les réseaux d’aqueduc et d’égouts était
prévue. Des initiatives stratégiques que le Conseil a approuvées et qui
découlent de nouvelles exigences réglementaires ou de modifications ont
également été décrites. En conséquence, la Ville a évalué que pour les dix
prochaines années, sa part des besoins en immobilisations au titre des réseaux
d’aqueduc et d’égouts totalisait un investissement de 2,7 milliards de
dollars. Le plan de financement élaboré dirige la Ville vers le niveau requis
d’investissement pour la période de dix années.
Le plan de financement a été élaboré
en se fondant sur les principes suivants :
·
les frais de service de la dette (capital et intérêts) pour ce programme
à haute intensité de capital devraient être fixés au maximum à
15 p. cent du budget annuel, un niveau supérieur à la limite courante
du Conseil de 7,5 p. cent pour les autres services municipaux;
·
l’émission des titres de créance se fera pour une durée qui correspond
mieux à la durée de vie utile des immobilisations qu’ils financent, ce qui a
l’effet de réduire l’incidence sur le fonctionnement annuel de l’émission des
titres de créance;
·
les hausses tarifaires requises liées aux réseaux d’aqueduc et d’égouts
seront réduites autant qu’il sera possible de le faire et seront amorties sur
la période de prévisions de dix ans afin de fournir de la prévisibilité aux
contribuables.
Au total,
le plan proposé entrevoit un investissement municipal de l’ordre de
2,1 milliards de dollars au cours de dix ans. Le plan mis de l’avant, dont
il est tenu compte dans le budget provisoire 2012, traite d’un niveau
supérieur d’investissements en immobilisations requis au cours des quatre
premières années en optimisant l’utilisation des réserves et de la dette. À
long terme, un financement annuel adéquat serait accessible pour répondre aux
besoins annuels en dépenses d’immobilisations. Les hausses de revenus requises pour
appuyer le plan sont de 6 p. cent en 2012, de 7 p. cent en
2013 et en 2014, de 6 p. cent en 2015 et en 2016 et de
5 p. cent pour toutes les années subséquentes. Ces hausses prévues
incluent l’inflation.
Le Conseil révisera
et adoptera les budgets de fonctionnement et d’immobilisations sur une base
annuelle. Les plans futurs tiendront compte des examens annuels du Conseil. Il
est important de noter que les besoins en dépenses et les plans de financement
peuvent également être modifiés à l’avenir en conséquence des exigences
législatives (Loi sur l’eau saine/Loi sur la protection de l’eau de source, règlement municipal sur les
normes régissant les effluents des eaux usées) et du processus de planification
de la Ville, dont le plan officiel, les plans directeurs de l’infrastructure et
les plans directeurs des eaux pluviales.
INTRODUCTION
Long range financial plans (LRFP) are a hallmark of good financial
planning. The City of Ottawa has
undertaken three long range plans since amalgamation. These plans are updated at regular intervals to
reflect new information such as changed priorities, adjusted pricing and any
new legislated requirements. Since the
last long range plan for water and sewer services, presented in 2007, the City
has developed the Ottawa River Action Plan; has responded to the requirements
of new legislation such as the Clean Water Act; and has had system failures
which have required priorities to be adjusted.
More significantly, the 2012 tax supported budget included the Ottawa on the Move initiative which
advances reinvestment in the city’s water and sewer pipe infrastructure. As water, wastewater and storm water services
are all exclusively funded from revenues raised from the water bill, these
services can be planned and analyzed separately from other City services.
In 2011 funds provided for the capital program, either as contributions
to the capital reserves or for debt servicing repayments, represented 46% of
the $264 million rate budget. Given the
capital intensive nature of water and sewer services and aging of the assets, future
budgets will include significantly increased capital funding requirements. This LRFP refresh focuses on the capital
requirements and their impact on the water/sewer rate.
BACKGROUND
LRFP III (2007) provided a 4 year operating budget pressure forecast and
a 10 year capital forecast. The plan
forecast that in 2010 the operating budget would increase by $5.5 million,
primarily to maintain existing services.
The plan also forecasted that between 2007 to 2016, $1.581 billion would
be needed for capital works, with the renewal category at $1.255 billion. The plan identified that in order to fund the
capital needs identified at that time while also maintaining an average reserve
balance of $20 million over 10 years, a 9% combined net rate increase would be
required in the period 2007 to 2010; 5% in each of the three years 2011 to
2013; and a 2% combined rate increase for 2014 to 2016.
This new Long Range Financial Plan, LRFP IV demonstrates that the capital
renewal needs have increased significantly from LRFP III. These changes stem from growth in the network,
inflation, new needs that respond to recent system disruptions, additional regulatory
requirements, and the development of the Ottawa River Action Plan.
In 2010, the City prepared a long term financial plan for the water system, in accordance with Provincial legislation. That plan outlined the required capital works and associated funding requirements over the 2009 to 2019 period. The capital investment needs for the water system identified in the 2010 water plan have been incorporated into this LRFP. The spending needs identified in the 2010 water plan had resulted in forecasted water rate increase of 7% per year for the four year period 2011 to 2014 and 5% thereafter. A corresponding sewer plan was not required but background work conducted in 2010 has also assisted in formulating this LRFP.
Most other major Canadian cities have undertaken some form of long range
financial planning which has identified that the level of capital investment in
the water/sewer area is not sufficient to fully keep the assets in a good state
of repair. This has resulted in
water/sewer rate increases above inflation as cities seek to close this “gap”. In Ontario, the Region of York has approved a
rate increase of 10% for each of the next three years and the City of Kingston
has approved a water rate increase of 9.5% and a 5.0% sewer charge rate
increase for each of the next three years. Known annual rate increases across
Ontario vary in the 8% to 10% range.
Rate
supported capital works are mainly funded either from Contributions to Capital raised
from the water/sewer bill, debt financing which is repaid along with related
interest over extended periods of time from the water/sewer bill. Growth related projects are also funded from development
charges collected from new development.
Senior government funding may also be received in relation to specific
approved projects. All figures quoted
within this report refer to the City’s share of capital investments or net
capital investment required, meaning that figures exclude development charges
collected and senior government funding.
This
objective of this report is to detemine:
·
Net Capital investment
needs for the period 2012 to 2021
·
An appropriate funding
strategy that will meet those needs in the long term and reflects the capital intensive nature of delivering these
services through long lived assets that serve multiple generations.
Capital Asset Profile
The current value of the City’s water and wastewater assets is over $18 billion and accounts for approximately 50% of the City’s assets (excluding land). This includes over 8,000 kilometres of water, sanitary and storm sewer pipe inventory; two water purification plants (Lemieux and Britannia); and the Robert O. Pickard Environmental Centre (ROPEC) the City’s sewage treatment plant.
For financial reporting purposes, and in accordance with accounting policies prescribed by the Public Accounting Standard Board, these capital assets are stated at historical cost and are amortized over their useful life. At December 31, 2011 the historical cost of water and wastewater assets is $5 billion and is amortized at a rate of approximately $60 million per year. Of this historical cost value, approximately 6% was financed with debt.
A breakdown of these assets by category is as follows:
|
Approximate
Replacement Value |
||||||
|
$ ‘000 |
Total |
Linear
network |
Treatment/Storage |
|||
|
Water |
$ 6,845,000 |
37% |
$ 6,150,000 |
38% |
$ 695,000 |
34% |
|
Waste Water |
$ 6,430,000 |
35% |
$ 5,310,000 |
32% |
$ 1,120,000 |
54% |
|
Stormwater |
$ 5,125,000 |
28% |
$ 4,880,000 |
30% |
$ 245,000 |
12% |
|
Total |
$18,400,000 |
100% |
$16,340,000 |
89% |
$ 2,060,000 |
11% |
The City’s linear pipe infrastructure and treatment facilities have been acquired over time in relation to the City’s development.
The following chart shows the meters of pipe infrastructure in service today based on the decade in which it was acquired with most of the current infrastructure in service dating from 1950 and onward. The renewal pattern will not necessarily mirror the original investment pattern as described later under renewal.
Capital Investment Requirements
Investment requirements are a function of: renewal of existing assets to ensure they
remain in a state of good repair and comply with current service level
standards; growth related to new development; strategic initiatives established
by Council; or new regulatory requirements.
To quantify the investment required over the next ten years, City staff have analysed the inventory of existing water and sewer assets; reviewed forecasted growth projects; and referenced strategic initiatives and regulatory requirements to the extent known.
Both the Capital Investment Requirements and the Capital Financing Plan plans have been presented on a “net” City requirement basis. External revenue sources such as those received from other levels of government and development charges collected in relation to growth projects are excluded. This provides a clear view of the City’s own financial responsibility with respect to developing a funding strategy.
A total investment of $2.7 billion is required in this ten year timeframe for water and sewer infrastructure which equates to an annual investment of approximately $250 - $260 million in most years. A summary is as follows:
Renewal
A risk based approach has been taken in determining the infrastructure
renewal needs. While the age of the
infrastructure is taken into account, other factors such as pipe material, soil
types, condition assessment and watermain break history are taken into
consideration. As such, an “old” pipe does not necessarily imply a “high
priority” project nor does a “newer” pipe necessarily represent a “low”
priority project. For example, extending the service life of local, small
diameter watermains may increase the risk of a failure to occur prior to
replacement. However, when weighed in comparison to the
risk associated with the service life for singular larger diameter water
transmission mains the greater consequence on the community must be considered.
It is not deemed acceptable to “run to failure” large diameter transmission
mains and collectors as the regulatory and service impact to the community is
too significant. A more aggressive replacement requirement is necessary for
these larger pieces of infrastructure.
For this reason, the yearly capital renewal program includes major
projects to construct transmission mains prior to the projected end of service
life.
Of the $2.7 billion total needs identified,
the vast majority or $2.6 billion is for renewal. Linear (pipe) assets require
$2.1 million for renewal and includes: a
provision for the combined storage tunnel ($140 million) as part of the Ottawa
River Action Plan; an ongoing program
for a Condition Assessment of water and sewer assets; and an estimate
for works required as a result of the ongoing sewer and water reliability assessment
program. The remainder of the renewal needs, totalling
$0.5 billion, is regarding vertical assets such as water and wastewater
treatment facilities and pumping stations.
Growth
The capital growth needs were prepared based on projects that have been
identified in the Development Charge Background study. Only projects that have a development charge
component that is greater than 30% of the total authority requested have been
categorized as growth related. Projects
where the development charge component is 30% or less are usually classified as
renewal projects with replacement assets’ capacity expanded to service growth. These
are captured in the renewal category.
Strategic Initiatives/Regulatory
The strategic initiatives category includes Council-directed initiatives
identified in the City Corporate Plan. Strategic initiatives include projects
that implement the various City master plans or enhance services currently
being provided to residents, implement new legislative requirements, and
respond to changes in demand for service.
The Strategic Initiatives needs include $42 million identified in 2020 for
a Water Disinfection Program.
Updates
This ten year forecast has been updated from earlier plans to include the following:
·
Advancement of $178 million of water and
sewer infrastructure renewal through the Ottawa on the Move program.
·
An ongoing program to assess the
condition of water transmission mains and trunk sewers, totaling $60 million over
10 years and $200 million over 10 years to deal with the results of these
condition assessments
·
417 widening and resulting rate
supported infrastructure investments
·
Ongoing flood mitigation work
·
The Ottawa River Action Plan
Initiatives included in this ten year forecast may be subject to change. Council reviews and approves operating and capital budgets on an annual basis. Capital investment requirements and related financing plans may also be adjusted as a result of new regulatory requirements (i.e. Clean Water Act/Source Water Protection Act, Municipal Wastewater Effluent Standards legislation) or as a result of the City’s own planning process such as updates to the Official Plan and Infrastructure Master Plan, and development of the Stormwater Master Plan.
Capital Financing Strategy, Goals and Assumptions
Currently,
the City’s operating revenues provide funding of approximately $120 million
annually; $104 million as cash contributions towards new water/sewer capital investments;
and $18 million towards debt service payments for previously financed capital
investments. With a forecast of approximately
$250 million on average per year for capital investment requirements, this
leaves approximately $130 million per year to be financed through a combination
of reserve funds, debt financing and rate increases.
The funding strategy aims to strike the optimal balance between these sources and is guided by the following principles:
·
Debt financing
for the capital program will be set at a level sufficient to fund needed
capital investment while not impacting the City’s credit rating.
·
A limit
for debt servicing levels for the water and wastewater program will be set
independently from those of other city services to reflect the more capital
intensive nature of water and wastewater services.
·
Longer
terms for debt financing will be established for water and wastewater projects
to better match the life of the assets they are funding. This will result in lower annual debt service
payments that will be funded over a longer time period by both the current and
future residents who will benefit from these assets.
·
Capital
reserves targets will be established from a long term perspective with the
intention that they be achieved over a period of years. Reserves will be leveraged
to the fullest possible extent to allow needed capital projects to proceed
without delay.
·
Reserve
fund balances should have a target balance equal to one year’s debt servicing
costs for liquidity purposes.
· Rate increases required to fund water and wastewater programs will be minimized as much as possible and smoothed over the 10 year forecast period. This will provide ratepayers with some predictability of what increases they can anticipate from year to year.
Capital Financing Plan
The funding strategy allows the City to invest $2.1 billion in water and wastewater assets over the ten year period through a combination of operating revenues and debt financing. By the year 2019, the City will have achieved a funding level of $240 million per year from its own revenues. This funding level is based on the adoption of the funding strategies outlined in this document.
Of the proposed $2.1 billion investment program, $1.675 billion of funding will be raised from water and wastewater fee revenues, with the balance of $460 million to be funded from issuing new debt.
Based on the above plan, annual debt servicing costs as a percentage of rate supported operating revenues grows from 7.9% to 12.8 % over the forecast period. When viewed from the context of the City’s overall debt picture, combined debt service costs as a percentage of total municipal revenues are limited to 8.5% which is viewed as reasonable and sustainable.
The impact of the Ottawa on the Move (OTM) program established in the 2012 budget is included in the above figures. The Ottawa on the Move (OTM) program requires $178 million in rate supported funding. This will include $75 million from debt financing and $103 million from “cash” sources including existing reserves and annual capital contributions from operating revenues. Combined with debt previously approved under the tax component of OTM, total debt will be $200 million against the $340 million investment program. Debt will be issued in 2012 with debt servicing commencing in 2013.
Debt Servicing Targets
Current debt service costs of $18 million per year will increase to approximately $61 million or 12.8% of the annual water and wastewater operating budget by 2021.
Debt Servicing Costs ($ millions) / As a Percent of Rate Revenues
This report recommends that Council amend the Fiscal Framework (2007) Targets for Debt to allow for principal and interest on rate supported debt to be limited to no more than 15% of rate supported revenues. This differs from the existing fiscal framework which requires that both the rate and tax supported debt service charges be limited to no more than 7.5% of revenues.
Water and wastewater services are primarily delivered through substantial capital investments that are used by many generations. To date, the degree of asset investment financed by debt has been relatively minimal, with only 6% of assets having been funded through debt. However, given the extent of renewal required in the upcoming years, debt financing must be considered as a greater part of a funding strategy. To limit the amount of debt that can be used to purchase or renew these assets puts a huge burden on current day ratepayers. The unique nature of these services necessitate a separate debt servicing level from those of other city services that are more labour rather than capital intensive. This is consistent with other utilities. For instance, a 2008 Survey: NACWS – Financial Survey -.A National Survey of Clean Water Agency Financing and Trends was published by the National Association of Clean Water Agencies (US) and showed that debt service represented 28% of 2007 utility expenditures. The city’s proposed plan remains well below such debt service levels.
As the City does not have a separate credit rating for water and wastewater services the impact of this change to the rate debt limit needs to be assessed in the context of the City’s overall debt levels.
The rate revenues currently represent about 12% of combined rate and tax revenues. If rate supported debt servicing reaches the forecasted 13% of rate revenues, the combined city debt servicing limit for rate and tax supported debt would be 8%. Even if the maximum limit of 15% for rate supported debt was reached, which is not forecasted within this plan time period, this would result in a combined 8.5% debt servicing percentage.
In conclusion, this proposed change in the debt servicing limits for rate supported spending is expected to have a manageable impact on the City’s overall debt servicing as a percentage of revenues.
Reserve Fund Levels
Water and Wastewater reserve balances are forecasted to be $56 million at the end of 2011.
The funding strategy sets a target for the reserve funds balances equivalent to one year of debt service payments. This provides a liquidity measure ensuring financial stability and which would support the City’s favourable credit rating.
This is a long-term target with the intention that it be achieved over a period of years and provides flexibility in the annual use of reserves to fund needed capital projects to proceed without delay. Starting in 2017, reserves will reach the set target level equating to one year’s debt servicing (principal and interest) payment requirement
Projected
Year End Reserve Fund Balances ($ millions)
The Water and Wastewater (Sewer) reserves
had been managed as a single entity until 2007 when the Clean Water Act required
that the water reserve be segregated. Staff
have reviewed the projected spending needs and existing reserve balances of
each program and are recommending that a transfer of $10 million be made from
the Water capital reserve fund to the Wastewater (Sewer) reserve. This transfer will address the current
imbalance between the two reserves and provide adequate funding for each
program to meet their projected investment requirements.
Credit Ratings
The City currently maintains an Aaa credit rating with Moody’s Investors Service and an AA+ rating from Standard and Poor’s.
The credit rating agencies look for the following items in preparing their credit analysis:
·
A strong regulatory environment - which is the case in Ontario
·
The strength of the local economy –
Ottawa has a high income, stable work force
·
A municipal Council that is willing to
increase rates to meet its capital investment needs
·
A commitment to long term financial
planning
·
That debt servicing costs are reasonable
in relation to revenues, so that the City can meet its debt repayment
obligations
·
That liquidity is built into the
financial framework through the use of reserves and investments
·
Total debt levels as a percentage of the
total budget are manageable.
The funding strategy being proposed respects these requirements while ensuring that the necessary capital works can be undertaken.
Projected Revenue Increases
The funding strategy contemplates a continued need to increase water and sewer revenues over the 10 year program. These increases are smoothed over the period so that there is some predictability for the public on the expected rate increase from one year to the next.
The following table shows the projected revenue increases over the ten year period. It is important to note that the projected rate increases include inflation.
Projected Annual Rate %
Increases / Projected Annual Rate Revenues ($ millions)
It should be noted that the above rate increases assume that consumption patterns remain constant. Council has directed staff to bring forward a report on the rate structure by 2013. The projections above reflect annual revenue requirements without consideration of changes to the rate structure.
As previous reports on the rate structure have indicated, there is a need to review the current rates which are entirely variable with consumption volumes as compared to expenditures that are largely fixed in nature. As capital spending increases and debt servicing becomes a larger proportion of the budget, this variable revenue source to fixed cost differential will only increase.
Administration of Capital Financing and Debt Policy
This report recommends that the current Administration of Capital Financing and Debt Policy - Objective 5, be revised to state the following: “The City’s practice will be to issue debt for a term that is consistent with, but will not exceed, the anticipated useful life of the underlying asset.”
In 2007, Council approved the
Administration of Capital Financing and Debt Policy. The policy established objectives, standards
of care, authorized financing instruments, reporting requirements and
responsibilities for the prudent financing of the City’s operating and
infrastructure needs. The
Policy states that debt funding is considered an appropriate way to finance
longer-life capital projects since future taxpayers who will benefit from the
project will pay for it through future debt charges.
The Policy
(Objective 1) requires that the City adhere to Statutory Requirements. Accordingly, in accordance with Provincial
legislation, the term of capital financing may not exceed the lesser of 40
years or the useful life of the underlying asset. This requirement will remain as stated in the
Capital Financing and Debt Policy.
The Policy
(Objective 5) states that the City will match the term of the capital financing
to the useful life of the related asset. The existing policy also states that
the City’s normal practice will be to issue debt for a term that does not
exceed 20 years.
Water and Wastewater assets are long lived assets. They deliver services
to today’s residents and to future generations.
For example, water main pipes, storm pipes and sanitary pipes may last
up to 90 years, depending on the type of material used in their construction.
Given that
many water and wastewater assets have useful lives that extend beyond 20 years
this current limitation does not match the term of the debt with the useful
life of the assets. By extending the
debt term, future generations who benefit from these assets will also assist in
funding these assets.
It is anticipated that debt will be issued
for terms of 10, 20 or 30 years, depending on the useful life of the underlying
asset. Debt issuance will not exceed a
term of 40 years consistent with Objective 1 of the Policy and in compliance
with the statutory limit established by the Municipal Act. In this LRFP, the debt term is assumed to be
30 years.
There are no rural implications as a result of this report.
The public consultation process will be incorporated with the review process for the 2012 Rate supported budget.
Comments by the Ward Councillor(s)
Not applicable.
LEGAL IMPLICATIONS
There are no legal impediments to receiving and tabling this report and subsequently approving the recommendations at a later meeting.
Not applicable.
The Strategic Plan includes an
objective of updating the Long Range Financial Plan: Water and Sewer Rate. This document establishes the goals and policy
framework to guide water and wastewater rate increases over the next 10-years.
Technical Implications
Not applicable.
FINANCIAL IMPLICATIONS
Financial implications are identified within the report.
Accessibility Implications
Not applicable.
Not applicable.
Information contained in this report will be utilized during the annual budget setting process.