Report to/Rapport au :
Council / et au Conseil
7 July 2011 / le 7 juillet 2011
Submitted by/Soumis par : Marian Simulik, City Treasurer/Trésorière municipale
Contact Person/Personne ressource : Joanne Farnand, Manager, Financial Services/ Gestionnaire, Services Financiers
Finance Department/Service des finances
613-580-2424 ext./poste 22712, Joanne.Farnand@ottawa.ca
|
Ref N°: ACS2011-CMR-FIN-0039 |
SUBJECT: |
|
|
|
|
OBJET : |
PLAN FINANCIER À LONG TERME DU TRANSPORT EN COMMUN |
REPORT RECOMMENDATION
That Council receive this report for information.
RECOMMANDATION DU RAPPORT
Que le conseil municipal prenne connaissance de ce rapport.
EXECUTIVE SUMMARY
At the beginning of each term of Council the Long Range Financial Plan is updated to provide information valuable in the decision making process. For Transit this is particularly important as the City is at the point of making the largest capital investment in its history. A separate LRFP for Transit was developed as Transit’s sources of funding are dedicated to that purpose and cannot be used to fund other services.
The City defines affordability from the point of view of current and future taxpayers and transit users. The parameters to determine affordability include:
· Transit taxes and transit fares will not increase by more than the rate of inflation
· Annual debt servicing will not exceed provincial and city limits
· Debt used to purchase an asset will be fully retired before the end of the asset’s useful life
· The city can operate, maintain in a good state of repair and expand the service to meet future needs
· The future transit expansion as defined in the Transportation Master Plan will be completed to service growth needs.
In order to test these parameters a financial model was constructed that includes both operating and capital needs for the bus and light rail system over a 38 year time period. Assumptions built into the model are generally conservative in that increases in revenue are constrained while increases in cost are not. Using the direction established by Council for the next three years, inflation has been assumed at 2.5%. The model assumes that any transit taxes raised that are not required for operating and maintaining the system are available to fund capital works. In total $26 billion of operating costs are forecast over the 38 year timeframe with transit taxation of $10 billion available for capital.
In total $18.6 billion in capital investments is forecast to be required including all of the transit capital projects identified in the Transportation Master Plan. As the timing of the revenue inflows for capital does not match the spending required in the capital plan the City will need to issue $5.2 billion in debt to make up the difference. This debt is repaid from federal/provincial gas tax revenues, development charges and transit taxation.
The model shows that with the debt required to fund the transit capital plan, the debt servicing limits set by the Province and the City are easily met with only inflationary increases to both transit taxes and fares. A sensitivity analysis was performed on the various assumptions to determine their impact on the affordability of the plan. The analysis showed that the plan is affordable only with the continued contributions from senior levels of government and that transit taxes and fares need to increase at the same rate as inflation.
The City can afford to invest and operate the transit system in keeping with the strategic directions tabled in the Transportation Master Plan including the first increment of the Light Rail Transit system.
RÉSUMÉ
Au début de chaque mandat du Conseil, le plan financier à long terme du transport en commun est mis à jour afin que le Conseil ait toute l’information nécessaire pour prendre des décisions éclairées. Pour le transport en commun, cette mise à jour est particulièrement importante, car la Ville est sur le point d’engager le plus important investissement en immobilisations de son histoire. Un plan financier à long terme distinct a donc été élaboré pour le transport en commun, car les sources de financement du transport en commun sont affectées exclusivement au transport en commun et ne peuvent être utilisées pour financer d’autres services.
La Ville détermine la capacité financière du point de vue des contribuables actuels et futurs et des usagers du transport en commun. Les paramètres utilisés pour déterminer la capacité financière sont :
· L’augmentation des taxes servant à financer le transport en commun et des tarifs ne peut dépasser le taux d’inflation.
· Le montant du service annuel de la dette ne doit pas excéder les limites fixées par la province et la Ville.
· Les emprunts contractés pour l’achat d’un bien sont entièrement remboursés avant la fin de la vie utile du bien.
· La Ville peut exploiter le service, le maintenir en bon état de fonctionnement et l’agrandir pour répondre aux besoins futurs.
· L’expansion future du transport en commun, définie dans le Plan directeur des transports, sera effectuée de manière à répondre à la croissance des besoins.
Pour vérifier ces paramètres, un modèle financier a été mis au point qui tient compte des besoins financiers et des besoins en exploitation du réseau d’autobus et de train léger sur une période de 38 ans. Les hypothèses émises dans le modèle sont généralement conservatrices et tiennent compte d’une croissance limitée des revenus, et d’une augmentation sans limites des coûts. Selon les directives établies par le Conseil pour les trois prochaines années, un taux d’inflation de 2,5 % a été pris en compte. Le modèle pose comme hypothèse que toutes les taxes imposées au titre du transport en commun qui ne sont pas nécessaires à l’exploitation et à l’entretien du réseau peuvent servir au financement de travaux d’immobilisations. Au total, on prévoit que les coûts d’exploitation s’élèveront à 26 milliards de dollars sur la période de 38 ans, et que la somme de 10 milliards de dollars en taxes perçues au titre du transport en commun sera disponible pour les immobilisations.
On prévoit que les dépenses en immobilisations s’élèveront à 18,6 milliards de dollars, cette somme comprend tous les projets d’immobilisations présentés dans le Plan directeur des transports. Puisqu’au moment d’engager les dépenses requises dans le plan d’immobilisations, les entrées de revenus affectés aux immobilisations ne seront pas suffisantes, la Ville devra émettre 5,2 milliards de dollars en titres de créances pour combler l’écart. La dette est remboursée grâce aux revenus générés par les taxes sur l’essence provinciale et fédérale, les redevances d’aménagement et l’imposition au titre du transport en commun.
Le modèle indique que, compte tenu des emprunts nécessaires pour financer le plan d’immobilisations du transport en commun, il n’y aura pas de problème à respecter les limites établies pour le service de la dette par le gouvernement provincial et l’administration municipale moyennant que les augmentations des taxes au titre du transport en commun et des tarifs suivent le taux d’inflation. Une analyse de sensibilité a été effectuée concernant les différentes hypothèses afin d’en déterminer l’incidence sur la capacité financière du plan. L’analyse indique que le plan est abordable seulement s’il y a un apport continu des instances supérieures des administrations publiques et que les taxes perçues au titre du transport en commun et les tarifs augmentent au même rythme que l’inflation.
La Ville peut se permettre d’investir et d’exploiter le réseau de transport en commun selon l’orientation stratégique présentée dans le Plan directeur des transports y compris la première étape du réseau de train léger sur rail.
BACKGROUND
At the beginning of each term of Council the Long Range Financial Plan (LRFP) is updated to provide information valuable in the decision making process. For Transit this is particularly important as the City is at the point of making the largest capital investment in its history and changing the way the City operates for generations to come.
The LRFP V has been divided into three parts, reflecting the funding silos that exist within the City. Transit is an area-specific tax so the funds raised from that levy cannot be used for any purpose other than Transit. Similarly the gas taxes and development charges used to fund transit capital projects are only available for transit purposes. For that reason a separate LRFP for transit is being presented.
In October 2009, a memo was issued to Council that used a financial model to determine the affordability of the Downtown Transit Tunnel and the Tunney’s to Blair light rail project. That same year OC Transpo presented a tactical plan that detailed the impact on operations of the move from buses to light rail. Earlier this year a 10 year business plan was adopted by the Transit Commission and a four year capital plan. This report puts both the operating and the capital works together and looks at the impacts of the proposed capital plan over a long-range financial horizon.
The transit financial model used in 2009 has been significantly expanded with the assistance of PricewaterhouseCoopers LLP (PWC). Inputs to the model have been provided by Transit, the Rail Office, Transportation Planning, Infrastructure Services and Finance. The model is both comprehensive and sophisticated, allowing the impacts of single or multiple assumptions to be assessed. Assumptions in the model are generally conservative in that increases in revenue are constrained while increases in cost are not.
The model covers a 38 year period which allows for all of the transit capital works identified in the 21 year Transportation Master Plan (TMP) to be included. By going out 38 years the impacts of these capital investments on operations can be modeled. Equally important is that going out 38 years brings the planning horizon to the point that the full useful life of the trains purchased for the first phase of the LRT will be reached allowing their complete lifecycle to be modeled and assessed.
DISCUSSION
How does the City define Affordability?
In order to come to a conclusion as to whether the City can afford the capital plan identified in the TMP, including the first phase of light rail, the meaning of affordable had to be defined. As a public service affordability has to be defined from the perspective of current and future taxpayers and transit riders. The following paragraphs outline what parameters need to be assessed to determine affordability. All parameters need to be met in order to be considered affordable.
While transit taxes are area-specific and therefore cannot be used for any other purpose, they form part of the overall property tax bill, which generally is limited to rising at the rate of inflation before it is considered unaffordable. If the transit portion of the tax bill increases by more than inflation other areas of the City would have to be reduced in order to keep the overall tax increase at an inflationary level. Consistent with the approach just adopted by Council for the next three years the affordability parameter with respect to taxation was defined as:
· Transit taxes will not increase by more than the rate of inflation
Similar to taxation there is a limit as to how much transit fares can increase before the service is considered unaffordable. To be consistent with taxation the affordability parameter with respect to transit fares was defined as:
· Transit fares will not increase by more than the rate of inflation.
While significant Transit funding sources are not accessible by other services within the City (i.e. transit taxes, development charges raised for Transit and provincial gas taxes), debt is the one source of capital funding that is not specific to Transit. As the City has a provincially imposed limit on the total debt that can be issued and Council has set other limits on debt, these parameters need to be met. In addition the use of debt needs to be controlled so that future generations are not paying for assets that are no longer in service. The parameters for affordability with respect to debt were therefore defined as:
· The total City cost of servicing debt will not exceed the annual Provincial Debt Servicing limit of 25% of own source revenues
· The amount of debt servicing funded from transit taxation will never exceed 7.5% of City own source revenues
· The debt issued for any capital work will be fully retired before the end of the assets useful life.
The last affordability parameter deals with duration and capacity. Decisions on capital investments result in increased operating and maintenance costs which, if not accounted for, can affect the ability to expand services in the future. Affordability cannot be just one point in time as the City must be able to afford to operate the system, maintain the system assets at an appropriate level and expand the system over time to meet the needs of future residents. In the case of Transit, this is particularly important as this involves a network that must be coordinated to ensure it operates both effectively and efficiently across the system. The TMP identifies all of Council’s current transit priorities so these projects must be commenced within the plan’s timeframe. The affordability parameter for duration and capacity is defined as:
· The future expansion of the transit system, as defined in the Transportation Master Plan, will be completed to service growth needs
· The City will be able to both operate and maintain the transit system and expand the system to meet future needs.
How the Financial Model Addresses these Parameters
In order to address all the affordability parameters the model was expanded to 38 years. For reporting purposes the results are presented in two time periods. The first period reflects the 21 years of the TMP and the next 17 years is the time required to reach the end of the useful life of the first LRT trains. The two time periods have been used for purposes of reporting.
The costs of operating and maintaining the transit and light rail systems were also incorporated in the model so that the affordability of the entire system could be assessed. A number of assumptions were adjusted to either be more precise or reflect current thinking about future cost increases. As Council has set the tax rate increase at a maximum of 2.5% for the next three years, the general inflation rate in the model has been assumed at 2.5%. All of the assumptions were then tested for sensitivity to determine how much they could change before they negated one or more of the affordability parameters. The revenue and expenditure inputs and assumptions built into the model are described below.
Operating Revenues Cost and Assumptions
A major general assumption in the model is that transit operations are funded first and any funds not required are then used to fund capital. For this reason the model starts with the development of the operating costs and revenues.
Transit operations are primarily funded from two sources, fares and taxes. Additionally, minor revenues are received from advertising and $16.3M of provincial gas tax revenue is applied towards operations annually. In the future, it is assumed that transit fares and transit tax rates will increase in keeping with a 2.5% rate of inflation. The contribution from the province’s permanent gas tax funding is held constant and the other minor revenues are increased at the general rate of inflation of 2.5%.
Taxes will also increase by growth to the assessment base. While Ottawa is still a growing city assessment increases are forecasted to gradually decline over the longer term. The forecasted assessment growth in the model is as follows.
Table 1 – Forecasted Assessment Growth
|
Period |
2011 - 2015 |
2016 - 2020 |
2021 - 2025 |
2026 - 2048 |
|
Rate of Growth [1] |
2% |
1.5% |
1.25% |
1.0% |
[1]Average increase per annum
Transit fare revenue also increases as ridership increases. The forecast number of riders is determined by looking at population growth projections, employment projections, and transit service offered. The population projections used in this model and the resulting ridership are as follows.
Table 2 – Forecasted Population, Labour Force and Ridership Growth
|
Period |
2011 - 2015 |
2016 - 2020 |
2021 - 2025 |
2026 -2031 |
2031 -2048 |
|
Population increase [1] |
1.2% |
1.1% |
1.0% |
0.9% |
0.7% |
|
Labour Force increase [1] |
1.3% |
1.1% |
0.9% |
0.9% |
0.7% |
|
Ridership increase [1] |
2.1% |
3.8% |
2.0% |
2.0% |
1.0% |
[1]Average increase per annum
Higher ridership increases are anticipated in the period 2016 to 2020 as the opening of light rail line will remove constraints on transit ridership that are currently being caused by the restricted capacity, extended travel times and unreliability of the bus service operating on downtown streets. With the removal of these constraints and the general improvement to the transit experience from light rail, it is expected that system-wide transit ridership will grow by 5.35% in each of the years 2019 and 2010.
Applying the growth in assessment, ridership and the inflationary increases to both taxes and fares, the model shows revenue for transit purposes as follows.
Table 3 – Forecasted Revenue
|
|
Period 1 (2011-2031) $Billions |
Period 2 (2032-2048) $Billions |
Total
$Billions |
|
Transit Fares Revenue |
6.066 |
10.410 |
16.476 |
|
Other Operating Revenue |
.552 |
.554 |
1.106 |
|
Transit Taxes |
7.431 |
11.416 |
18.847 |
|
Total Funds |
14.049 |
22.380 |
36.429 |
The long range financial plan includes the costs to operate the existing transit system and then reflects the changes in the cost structure as the City moves key segments from a bus system to a rail system. The first 10 years of the operating projections are based on the OC Transpo 2011 Business Plan adopted by the Transit Commission and Council but updated to reflect the approved expansion of the O-Train service, and updated operating and maintenance costs for Light Rail and diesel fuel.
The cost of running the transit system is largely a function of the number of service hours required to accommodate ridership. Service hours are calculated based on the projected ridership, route length, and the size and speed of the bus or train, and the composition of the transit fleet placed in service (i.e. regular 40 foot bus, high capacity bus, O-Train, light rail train). Service hours included in the model are shown in the following chart with the points where LRT comes on-line identified.
Chart 1 – Bus service hours
As can be seen in the chart the number of service hours increases as ridership increases. The number of service hours decrease as transitions are made to high-capacity light rail trains. Some changes in service hour projections are also based on the faster speed of light rail than buses through downtown, the slower speed of the overall bus system as the transitway is gradually converted to rail, and by the retirement of some high-capacity buses as rail takes over from buses on the main corridors and buses are increasingly used on feeder services.
The cost of a service hour is different between rail and bus type but includes: costs for operators, energy source (diesel fuel or electricity), and maintenance. Operators and maintenance hourly rates are expected to increase at the 2.5% rate of inflation. Fuel costs, which have been increasing rapidly in the past few years, have been increased at the rate of 10% until 2014 and then 4.7% until 2025. These higher than general inflation increases reflect the diminishing supply of oil as an energy source.
As escalating fuel costs tend to spur innovation and efficiency, it was considered reasonable that by the time the majority of the bus fleet needs to be replaced in 2025, there will be a change either in the type of fuel being used or in the fuel efficiency of buses. This is similar to what is being experienced today where replacement buses are up to 30% more fuel efficient than the buses they are replacing. Current thinking is that natural gas, which is both plentiful and cheap, may be the fuel of the future. There is a 35% difference between the price of natural gas and diesel fuel at this time. To reflect this projected change, in 2025 the total cost of fuel is reset downwards by 35% and then continues to increase at the general rate of inflation of 2.5%. In order to facilitate this move to another fuel source an additional $100 million in capital works have been included in the 4 years prior to 2025 to allow for a premium on the cost of these new buses and modifications that will be required to maintain these buses.
Inflation on all other transit costs such as overhead and administration have also been increased by the general rate of inflation assumed at 2.5%. Additional capital investment of approximately $100 million has been included in the model as it is presumed that there would be a requirement to also update and convert other supporting infrastructure related to this change.
The result of this modeling shows the costs to run the transit system can be accommodated within inflationary increases to revenue while providing sufficient funding to contribute to the capital program. The analysis also shows that the amount of taxes required to subsidize operating the system declines over time, from 39% in 2011 to 28% in 2048. This moves the Revenue/Cost ratio to the levels Toronto experiences of 70%. This should be expected as the City grows, ridership rises and productivity increases with LRT.
Table 4 – Summary of Forecasted Revenue and Costs
|
|
Period 1 (2011-2031) $ Billions |
Period 2 (2032-2048) $Billions |
Total
$Billions |
|
Total Funds Available |
14.049 |
22.380 |
36.429 |
|
Bus Costs |
7.038 |
9.147 |
16.185 |
|
Rail Costs |
1.065 |
2.694 |
3.759 |
|
All Other Costs |
2.713 |
3.495 |
6.208 |
|
Total Operating Costs |
10.816 |
15.336 |
26.152 |
|
Total Available for Capital |
3.233 |
7.044 |
10.277 |
Capital Revenue Sources and Assumptions
The development of the operating portion of the financial model derived the amount of revenue contributed towards capital from taxes and fares. In addition to this source of capital funding both provincial and federal gas taxes are used for transit. The federal gas tax is approximately $50 M per year and the provincial gas tax is $36M of which $16M is contributed towards operating. Both gas taxes are assumed to remain fixed over the life of the financial model. However, as a fixed contribution, the receipt of gas taxes diminishes in value over time through inflation. An alternative funding strategy such as new user fees has not been considered as a funding source for transit capital investments.
Assumed in the model is a combined 66% funding from the senior levels of government on all major new transit system infrastructure. This excludes the purchase of growth buses and other supporting infrastructure such as park and rides etc. but includes rail vehicle purchases related to openings of new rail segments. The first increment of LRT has a fixed Federal and Provincial subsidy of $1.2 billion, which represents 57% of the estimated cost of $2.1 billion.
The City collects development charges (DC’s) from new construction to pay for the capital investments required by the City to service new development. Transit is one of 15 services that are included in the overall development charge. Separate charges are established for: inside the greenbelt, outside the greenbelt, rural, and non-residential. In each of these four development charges areas, the size of the transit component varies. For “inside the greenbelt” the transit component of the charge is 25%, whereas for “outside the greenbelt” the transit component is 15% of the charge. Council has over the years repeatedly endorsed policy statements that growth is to pay for itself.
For purposes of the model the percentage of growth capital works that are to be funded by development charges is set at 43% of the municipal share of the project. The 43% represents the current 53% attributable to growth on transit projects identified in the Development Charge background study, less a statutory 10% reduction. For major transit projects, 2/3 funding is provided from senior levels of government leaving the remaining municipal share at 1/3. Growth related capital requirements of $13.3 billion are projected over the 38 year planning timeframe. With corresponding senior government funding of $5.7 billion, this leaves $3.3 billion (43%) of transit growth projects to be funded from development charges.
Under existing legislation the current DC by-law cannot include the full cost of the change from a bus system to a light rail system, as growth spending is only allowed based on historical costs. As such, the transit component of the current by-law does not generate sufficient funds to cover the $3.4 billion required over the life of the plan. For modelling purposes, collections from the transit development charge have been adjusted upwards by 40% in each of the next four by-law reviews in order to ensure that growth pays for itself. It is important to note that an increase in transit DC collections does not necessarily mean the quantum of the charge has to increase as this can also be accomplished by changes to policies including:
· Revisiting policy decisions around the collection of the transit component of the development charge such as the non-statutory exemptions and the non-residential discounting policy.
· Approach the Province to allow greater collaboration with adjacent municipalities.
Changes to the transit portion of the DC rate could be accomplished by:
· Eliminating the reductions in the calculations of the rate for post-period capacity.
· Approaching the Province to provide the same DC legislation as was given to Toronto-York that eliminated the 10% statutory reduction and allowed the calculation to be based on a more relevant forward average service level rather than the historical average service level as currently required in Ottawa’s DC calculations.
As was noted before, transit is only one component of the City’s development charge rates, accounting from a low of 10% to a high of 25% of the overall charge. An increase of 40% to the transit component would result in an overall increase to the DC rates in the range of approximately 4% ($458) to 10% ($1,372). As the City of Ottawa’s DC rates are lower than the average and the median DC rates across the rest of the province[1] there is limited concern that these increases will make development in Ottawa uncompetitive. For example the current Single Detached Dwelling DC rate in the GTA is on average $14,000 higher than the highest rate in Ottawa. Additionally at each by-law review council has the opportunity to explore and revisit how it will raise the transit share of growth needs.
Using the assumptions for all of the various sources of capital revenue generates the following amounts within the model.
Table 5 – Forecasted Capital Funds
|
|
Period 1 (2011-2031) $ Billions |
Period 2 (2032-2048) $Billions |
Total
$Billions |
|
Canadian and Provincial Governments |
3.100 |
2.673 |
5.773 |
|
City of Ottawa |
3.233 |
7.044 |
10.277 |
|
Federal and provincial gas tax |
1.434 |
1.168 |
2.602 |
|
Development charges |
1.256 |
3.016 |
4.272 |
|
Total |
9.023 |
13.901 |
22.924 |
Capital Costs and Assumptions
The most recent Transportation Master Plan (TMP), issued in 2008, identified a variety of bus rapid transit (BRT), light rapid transit (LRT) and transit priority capital projects for the next 21 years or to 2031. See Document 1 for an entire listing. All of these projects have been included in the model. In addition growth needs beyond this period to 2048 have also been considered to accommodate anticipated ridership numbers in light of extended population and employment projections to 2048. Cash outflows for major capital projects are assumed to be procured by the City on the basis of design-build. Any public-private partnership opportunities for the delivery of transportation infrastructure and services would be assessed at the detailed planning stage of a major capital project.
The model includes recent decisions such as the acceleration of the first LRT project and the O-Train service expansion and the cash flow requirements now reflect these changes. In addition to the capital works for the first LRT project, approximately $166 million for the costs of disruption during the construction period has been identified and included in the model. These costs include the need for additional buses to maintain service levels while the transitway is closed. Similar disruption costs have been added to subsequent phases.
The costs required to renew the system assets, both those that exist today or are planned for the future, were developed with the objective to maintain them in a good state of repair. Strategic initiatives have been included in the renewal number for presentation purposes.
As not all the capital works use the same type of inputs and inflation varies by type of input, an analysis was undertaken to break each project down into its major components. These included
labour, materials, vehicles, property and overhead. Using Ottawa specific data from the Engineering News – Record, a publication that provides data and analysis for construction industry professionals, the various components were inflated up to 2029 (mid point in the model) by these individual rates. The resulting rates presented in the table below average of 3.25%.
Table 6 – Rates of Inflation
|
Component |
Rate of Inflation |
|
Labour |
3.10% |
|
Materials |
3.60% |
|
Overhead |
3.20% |
|
Vehicles |
3.20% |
|
Property |
3.20% |
|
Average |
3.25% |
After 2029, capital project costs were inflated equally at the rate of 2.9%, the current construction price index factor. It was considered unlikely that the cost of construction would inflate at such a higher rate than general inflation for such an extended period as the items that impact the cost of capital works also influence the general inflation rate. As with fuel, increases in prices result in innovation and new technology which reset and reduce costs. In the next 19 years it is likely that such innovation and/or technological and productivity changes will occur in the construction industry to moderately slow inflation.
In summary, capital project investments required for Transit and included in the model are identified in the following table.
Table 7 – Forecast of Capital Investments
|
|
Period 1 (2011 – 2031) $ Billions |
Period 2 (2032-2048) $Billions |
Total
$Billions |
|
Growth |
7.018 |
6.328 |
13.346 |
|
Renewal |
2.731 |
2.542 |
5.273 |
|
Total |
9.749 |
8.870 |
18.619 |
Renewal requirements decline over time as high capacity buses are replaced with standard 40 foot buses as buses increasingly service “feeder” routes. Hence, the replacement buses and their cost of refurbishment decline over the longer term. Additionally, the rail vehicles which serve as “trunk” routes have a longer life of 30 years as opposed to 15 years for buses. This also reduces the renewal costs of the system over the longer term.
This modelling exercise will be revisited upon consideration of the next Transportation Master Plan in 2013. This exercise will benefit from further information including an extensive origin-destination survey to be conducted in 2012-2013 and updated development plans.
Use of Debt
In the first 21 year period ending in 2031, the required capital investments, including the conversion to light rail, exceeds the amount of funds available from all sources to fund capital. Essentially, investment is required at the front end of the period to secure the operational savings of moving from bus to train operations. In order to pay for the investment, any shortfall is funded through issuing debt.
The amount of transit capital investment, capital funding, and corresponding amount of debt to be issued is detailed by period in the following table.
Table 8- Comparison of Capital Funds vs. Capital Investments
|
|
Period 1 (2011 – 2031) $ Billions |
Period 2 (2032-2048) $Billions |
|
Capital Funds |
9.023 |
13.901 |
|
Capital Investments |
9.749 |
8.870 |
|
Debt to be Issued |
3.817 |
1.420 |
The debt servicing costs per funding source for each period is detailed in the following table.
Table 9 – Sources of Debt Servicing
|
|
Period 1 (2011 – 2031) $ Billions |
Period 2 (2032-2048) $Billions |
|
Federal and Provincial Gas Taxes |
1.138 |
1.168 |
|
Development Charges |
1.345 |
1.862 |
|
Transit Taxes |
0.685 |
1.357 |
|
Total Debt Servicing |
3.168 |
4.387 |
Additional criteria are normally considered in establishing the amount and term length of debt issued and these have been applied in the model. These include the useful life of the asset, and debt servicing limits established by the Province and by Council’s own policy.
(a) Useful life of asset – Council has established a policy regarding debt which states that the term of the debt should be less than the useful life of the asset which it is intended to finance. This ensures that the generations that benefit from the use of the asset to share in paying for its cost. Also, since longer debt terms mean more interest is paid, any flexibility that exists to shorten the term of the debt is considered and made at the time of each debt issue. The City has debt terms that range from 10 to 30 years in keeping with varied useful lives of assets. Interest rates differ depending on the debt term. The rates have been assumed at 4.5% for a 10 year term, 4.75% for a 20 year term and 5% for a 30 year term. As most of the assets for transit will last 30 years or more, the most common debt term used is 30 years.
(b) Debt servicing limits – Province - Long-term debt for a municipality is restricted by the Municipal Act. Long term debt can only be used to fund capital works, and the City is limited in how much debt servicing (repayment of principle and interest) it can enter into by the provincially established Annual Debt Servicing Limit. The annual debt servicing limit is 25% of own source revenues, which is defined as all revenues other than those provided by the senior levels of government or from the value of contributed assets. At the end of 2010 the City was at 6% of the 25% limit and could issue an additional $6.3 billion of debt for 30 years at 5% before the limit would be exceeded.
(c) Debt servicing limits – City Policy - Council has established a secondary set of criteria to ensure that debt is well managed in the City. Council’s concern is focused on the amount of debt that is serviced from taxes and fees it collects. Council has established a limit of 7.5 % of the amount raised from taxes and fees that can be used for debt servicing. The difference between the two limit values are that the City’s limit considers solely taxes and fees (i.e. largely fares in the case of transit) whereas the provincial limit also considers development charges and gas tax funding that could be applied towards debt servicing.
In order to assess against the provincial limits the debt servicing requirements identified in the model has been added to an estimate of the total amount of City debt servicing required for all of the remaining City’s capital requirements. The estimate for other City debt servicing was developed by inflating the current amount of debt (excluding transit) by 2.5% every year and by the percentage increase in assessment and adding a further 1% as a proxy for financing of capital renewal. Capital renewal is expected to increase over time as the City’s asset base grows and as replacement costs continue to increase. City own source revenues have also been calculated using the same assumptions regarding tax and fee increases as established for transit. The results in the chart below show that the debt issued for these transit projects and all other city programs reaches a maximum of 14% of own source revenues ( red triangle marked line) compared to the 25% provincial limit (dashed red line). The chart also shows that the transit debt servicing funded from taxation reaches a maximum of 3% (solid blue line), leaving 4,5% for other city services before Council’s 7.5% limit is exceeded (blue square marked line).
Chart 2 – Debt Servicing Limits Analysis
 |
Of particular importance is that the model results indicate that the amount of transit debt declines over the period analyzed, confirming that the City is more than capable of meeting its annual debt servicing requirements in each year through to 2048.
Table 10– Debt Continuity Schedule
|
|
Period 1 (2011 – 2031) $ Billions |
Period 2 (2032-2048) $Billions |
|
Debt – beginning of period |
.408 |
2.534 |
|
New Debt Issued |
3.817 |
1.420 |
|
Debt Repaid (Principal) |
1.691 |
2.593 |
|
Debt – End of Period |
2.534 |
1.361 |
|
Debt – Interest Costs |
1.476 |
1.793 |
Sensitivity Analysis
The model results show that from 2043 forward transit funding available to the City exceeds its requirements for funding operations, maintenance, debt servicing and identified capital requirements. As a result, the City would have a cash balance of $2.1 billion at hand at the end of 2048. This cash balance provides flexibility to potentially: absorb additional costs if required; undertake unforeseen projects; reduce the anticipated rate increase in the transit portion of development charges; reduce the term of the debt that is issued and effectively reduce interest costs; or reduce the rate increases in the taxes and fares forecasted in those latter years.
In order to understand the impact of changes to the assumptions, PWC conducted numerous sensitivity scenarios where one or more assumptions were changed. The results of this analysis indicate a number of fundamental requirements for transit to remain affordable. These include:
a) Necessity of senior government funding for transit – Ongoing gas tax funding and senior government grants for major infrastructure projects are required in order to make this plan affordable. In the event of major withdrawal of support by senior orders of government for infrastructure, every municipal government across the country would have to fundamentally reassess its capital plans. The announced intention of the Federal Government is to legislate the gas tax transfer. It is possible the legislation will include a formula or provision for growth in gas tax revenue which, although not included in the model, would further improve the affordability of transit plans. Provincial commitment to the gas tax transfer is also expected to remain as those funds replace previous capital support programs for Transit.
b) Alignment of rate increases with inflation – Another significant finding is the scenarios where inflation rates increase and taxes and fares are not adjusted accordingly. In these scenarios the plan becomes unaffordable. This is a decision that rests with Council every year at budget time.
It was not possible to fully test a decrease to the population forecasted as that would have required identifying which growth capital projects would be deferred. What is known is that a decrease to the population forecast would reduce revenues from assessment growth, ridership and development charge collections. Correspondingly costs would also reduce as service hours would not increase and major expansions of the system would not be required in the timeframe envisioned. In general, a decrease to the population forecast was considered to have a neutral impact.
Conclusion
The results of the modelling exercise show that the City can afford to invest and operate the transit system in keeping with the strategic directions established in the current Transportation Master Plan including the first increment of the Light Rail Transit system.
RURAL IMPLICATIONS
NA
CONSULTATION
The Finance Department consulted with the Deputy City Manager, Infrastructure Services and Community Sustainability and all City Departments involved in the planning, operation, and maintenance of the Transit system – namely; Planning and Growth Management, Rail Implementation Office, OC Transpo, and Infrastructure Services. Each department provided input and validated assumptions with regards to their respective areas used in the formation of this report.
COMMENTS BY WARD COUNCILLOR(S)
NA
LEGAL IMPLICATIONS
There are no legal impediments to receiving this report.
CITY STRATEGIC PLAN
The Long Range Financial Plan directly and indirectly supports the following objectives of the Transportation Master Plan and Council’s draft strategic objectives:
TM1. Ensure sustainable transit services
TM3. Provide infrastructure to support mobility choices.
FS1. Align strategic priorities to Council’s tax and user fee targets.
FS2. Maintain and enhance the City’s financial position.
TECHNICAL IMPLICATIONS
NA
FINANCIAL IMPLICATIONS
The report outlines the investment requirements and financial operations of the City’s transit system based on the assumptions outlined within this report.
The detailed modelling exercise undertaken by the City with the assistance of PricewaterhouseCoopers LLP supports the conclusion that the City can afford to invest and operate the transit system in keeping with the strategic directions established in the current Transportation Master Plan including the first increment of the Light Rail Transit system.
SUPPORTING DOCUMENTATION
Document 1 – Extract from the Transportation Master Plan
DISPOSITION
NA