DOCUMENT 1
LRFP IV (Part 1)
Introduction
The City of Ottawa is committed to producing updated
long-range financial plans at the beginning of each term of Council or whenever
there is a significant change in a source of funding that requires adjustment
to the current plan. The development and
receipt of these plans in the past has proved beneficial as they:
·
provide an understanding of the City’s financial
condition,
·
provide the framework for development of the yearly budgets,
and
·
identify strategies that can be pursued to reduce any
funding gaps and increase financial sustainability.
A review of previous plans shows that their delineation
has increased over time, as sources of funding are assessed against the needs
they are dedicated towards. A review
also shows that the City has been fairly successful in advancing a number of
strategies identified in the plans.
1.
The City’s first Long Range Financial Plan (LRFP) was
developed in 2002. That plan dealt
solely with capital infrastructure and its importance in ensuring economic
prosperity for the region, province and nation and therefore the need for an
ongoing commitment from the two upper levels of government to contribute
towards their renewal. The capital
funding gap identified in the document was $1.6 B for all programs.
2.
With the announcements of federal and provincial gas
tax contributions, an increased GST rebate and a new development charges by-law
the Long Range Financial Plan was updated again in 2004 with a separate report
for rate supported capital works. That
plan resulted in the establishment of the Endowment fund and the contribution
of its earnings towards capital works. LRFP
2 identified a capital gap of $1.2 B for the tax supported programs.
3.
The third LRFP the City produced in 2006 further
segregated the capital needs by funding and included a needs and funding
schedule for Transit and solid waste in addition to City-wide tax supported and
rate supported capital works. This plan
also forecasted the term of Council operating budget needs. The results of this plan included the special
capital levy that was implemented in 2008 and 2009 and in the Fiscal Framework, which detailed the
City’s strategies with respect to all aspects of its financing. LRFP 3 identified a capital funding gap,
including strategic initiatives of $1.9 B for tax supported programs and $431 M
for rate supported programs.
This will be the
fourth long-range financial plan that is being presented to Council. One of the most significant changes since the
development of the last LRFP has been the inclusion of tangible capital assets
in the financial statements. This work
laid the foundation for a more comprehensive assessment of capital renewal
needs as it required all capital assets to be identified, valued and a useful
life established. From this work staff
are developing a state of asset reporting system so that a more rigorous
approach can be taken to determine capital renewal needs.
The new Council has already provided some direction
with respect to the development of a Long Range Financial Plan. At the December 18, 2010 Council meeting the
following motion was adopted.
WHEREAS this
Council is committed to promoting a culture of fiscal responsibility at City
Hall; and
WHEREAS this
Council wishes to proceed with the development of its 2011 Budget as soon as
possible; and
WHEREAS
budget directions with respect to any taxation target have not yet been
provided to either staff or Standing Committees responsible for preparing and
reviewing budget submissions; and
WHEREAS City
Council’s first budget will set the pace and tone for all four budgets we will
fashion together; and
WHEREAS
Council is mindful of the tough choices many of its citizens must make every
day in this economy and is prepared to make the same tough choices when
deciding how to spend taxpayers’ dollars in 2011 and beyond; and
WHEREAS the
Long Range Financial Plan that is to be developed after the adoption of the
2011 budget provides a term of Council forecast of the City’s financial
situation;
THEREFORE BE
IT RESOLVED that the 2011 Draft Budget for all of the City’s tax-supported
programs be prepared on the basis of a maximum 2.5% total tax increase; and
BE IT
FURTHER RESOLVED that the Mayor and the City Manager present a budget overview
report to Council that details how that tax target objective can be achieved at
a Special Meeting on January 19, 2011; and
BE IT
FURTHER RESOLVED that City Council direct each Standing Committee to work
within the funding envelope for the budgets in their mandates, and that any additions to the budget will require
offsetting reductions; and
BE IT
FURTHER RESOLVED that City Council request the Ottawa Police Services Board and
the Ottawa Public Library Board deliver budgets that would have no more than
2.5% increase on their tax requirement;
and
BE IT
FURTHER RESOLVED that the Long Range Financial Plan be developed with a maximum
tax increase of 2.5% for the years 2012 to 2014.
This plan will be presented in four sections,
reflecting the unique capital needs and dedicated funding sources in the City. The first section of the LRFP in this report
deals with the 2012 to 2014 operating budget forecast and the strategy to stay
within the 2.5% tax target over the term of Council. The capital section of this report only speaks
to the funding envelopes for capital strategic initiatives for the term of
Council.
The Transit operating and capital long range plan
will come forward in conjunction with the reports on the cost of the new Light
Rail project and will provide an assessment of the overall Transit
affordability for the next 30 years. In
the fall the rate (water/sewer) supported long-range plan will come forward as
will the long-range capital plan for city-wide funded projects. The last two reports have been delayed in
order to benefit from a rigorous internal review of capital needs through the development
of a state of asset report and asset management framework. The capital section of this report outlines
the work to be undertaken in preparation of the capital LRFP.
Operating Budget – 2012-14 Forecast
Based on Council’s direction that the LRFP be developed
with a maximum 2.5% increase over the term of Council, an overall strategy has
been developed for Committee and Council consideration which is summarized in
Table 1 below.
Table 1
2012 - 2014 Budget Strategy |
|||
|
|
|
|
|
2012 |
2013 |
2014 |
Assessment Growth -
2.00% |
(24,706) |
(25,818) |
(26,979) |
Tax Increase - 2.5% |
(30,882) |
(32,272) |
(33,724) |
Reduction In PIL
Revenues |
- |
- |
5,000 |
(55,588) |
(58,090) |
(55,703) |
|
Target Allocation |
|||
Police |
(9,450) |
(9,875) |
(9,470) |
Public Health |
(500) |
(523) |
(501) |
Library |
(1,668) |
(1,743) |
(1,671) |
Transit |
(9,450) |
(9,875) |
(9,470) |
(21,068) |
(22,016) |
(21,111) |
|
Balance Available
to City Operations |
(34,520) |
(36,074) |
(34,592) |
Allocations for: |
|||
Provincial Uploads |
(2,635) |
(5,135) |
(5,010) |
Service Ottawa
Savings |
(7,559) |
(8,459) |
(3,950) |
Revenue Growth |
(3,000) |
(3,000) |
(3,000) |
(13,194) |
(16,594) |
(11,960) |
|
City Operations
Target |
(47,714) |
(52,668) |
(46,552) |
Maintain &
Growth Envelope |
45,079 |
47,533 |
41,542 |
Strategic
Initiatives Envelope |
2,635 |
5,135 |
5,010 |
Total Envelope |
47,714 |
52,668 |
46,552 |
To set the overall funding framework, a forecast of
additional tax revenues derived from the 2.5% increase was developed. To this was added the projected additional 2%
of tax revenues from assessment growth based on a review of the trend in
assessment growth since amalgamation.
Table 2 provides a history of assessment growth increases covering the
period from 2001 to 2011
Table 2
Assessment Growth – 2001-2011
Year |
Growth |
2001 |
4.3% |
2002 |
3.5% |
2003 |
3.0% |
2004 |
2.5% |
2005 |
2.5% |
2006 |
2.5% |
2007 |
2.2% |
2008 |
1.8% |
2009 |
2.0% |
2010 |
1.6% |
2011 |
1.9% |
Average |
2.5% |
Under these assumptions, taxation revenues would be
projected to increase in 2012 by $55.6 million, $58.1 million in 2013 and by
$60.7 million in 2014. However, in 2014
the City is expected to lose approximately $5 million in Payment-in-lieu of
taxation revenues as a result of the Province’s decision to reduce business education
taxes. Education taxes on PIL properties
are retained by municipalities to offset the costs of providing City services
so therefore a reduction to provincially determined education tax rate will
result in lost revenues to the City.
With the funding framework proposed, each of the City
services governed by either a Board or Commission, namely Police, Public
Health, Library and Transit services, would be allocated a proportionate share
of this projected increase in taxation revenues based on their net taxation
requirements. The remaining balance
would be available to fund all other tax supported City services.
This balance would be further augmented to arrive at
an overall City Operations Target as a result of:
·
The continuing uploading of Ontario Works (OW) costs
(from 2010 to 2018);
As a
result of the Provincial-Municipal
Fiscal and Service Delivery Review agreement signed on October 31, 2008 the Province agreed to upload the cost of all social
assistance benefits by 2018 and pay the portion of Ontario Works benefits
currently paid by municipalities. Prior
to 2010, the Province paid approximately 80 per cent of Ontario Works benefits
and the municipalities 20 per cent. This 20 per cent municipal share will be
reduced according to the chart below and is projected to save the City $30
million by 2018. In the meantime the Province has announced yearly OW rate
increases of 2% per year, which results in the City costs for this program
increasing before the Province fully assumes it.
|
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
OW Benefits |
- |
3% |
6% |
14% |
29% |
43% |
57% |
71% |
86% |
100% |
·
Efficiency savings from the implementation of Service
Ottawa initiatives;
Efficiency
targets resulting from the Service Ottawa initiatives are built into each
year’s budget and if not achieved in the year are carried forward. The efficiency savings are available within
the departments that generate them to offset costs pressures in the department.
·
Projected revenue growth from increases in various
fees and charges.
Revenue
assumptions included are:
· No
recreation fee increases for youth programs
· Garbage
fee decreases as the service is moved to
bi-weekly
· General
rate of inflation on other fees and charges
· General
growth in fees as a result of increased usage.
It is proposed that the annual taxation capacity
created by the Provincial uploading be utilized to create a funding envelope to
address any new needs or strategic initiatives that Council may wish to pursue
as a result of setting its term of Council priorities. These funds would be in addition to the strategic
initiative funds that have already been established in the 2011 base operating
base as outlined in Table 3. Council
could choose to realign some of the funds allocated to 2011 initiatives and
shown as on-going in future years towards new initiatives.
Table 3
2012-2014
Strategic Initiatives Strategy (Operating) |
|
|||
|
|
|
|
|
Operating -
Strategic Initiatives |
2011 |
2012 |
2013 |
2014 |
Public Health –
Suicide Prevention & Brain Injury |
450 |
450 |
450 |
450 |
Senior &
Veterans Free Transit Service |
1,400 |
1,400 |
1,400 |
1,400 |
Transit Service
Reliability |
1,116 |
1,116 |
1,116 |
1,116 |
Sub-total Boards and Commissions |
2,966 |
2,966 |
2,966 |
2,966 |
Housing |
10,000 |
10,000 |
10,000 |
10,000 |
Recreational Fee
Freeze (net) |
600 |
600 |
600 |
600 |
Forestry |
1,543 |
1,543 |
1,543 |
1,543 |
Economic
Development Initiatives |
2,000 |
2,000 |
2,000 |
2,000 |
Community
Development |
700 |
700 |
700 |
700 |
To Be Allocated |
- |
2,635 |
7,770 |
12,780 |
Sub-Total City
Operations |
14,843 |
17,478 |
22,613 |
27,623 |
TOTAL |
17,809 |
20,444 |
25,579 |
30,589 |
With the upload allocated towards strategic
initiatives the remaining balance of the City Operations target would be
available as a ”Maintain / Growth” envelope to address budgetary expenditure
and revenue pressures to maintain City services at current Council approved
standards along with funding growth pressures.
With this proposed strategy, the key question is
whether this envelope will be sufficient to fund costs to maintain services and
to address growth pressures over the 2012-14 time period.
In order to determine this staff have developed operating
budget forecasts for 2012-14. An assessment
of the various projected expenditure and revenue pressures, along with
opportunities and risks that are likely to be encountered during this period has
been prepared based on the best available information at this time.
Cost increases to maintain services have been
estimated using the assumptions as presented in the Table 4. These include the major cost drivers in the
provision of City services – compensation and benefits, including the announced
premium increase in OMERS rates, energy, case load, inflation, contributions to
capital reserve funds etc.
Table 4
2012-2014 Assumptions
|
2012 |
2013 |
2014 |
|
|
|
|
COLA + Benefits |
2.0% - 3.0% |
2.0% –
3.0% |
2.0% –
3.0% |
OMERS premium increase |
1.00% |
0.90% |
- |
General Inflation |
2.0% –
3.0% |
2.0% -
3.0% |
2.0% -
3.0% |
Hydro
Increase |
7.0% -
9.0% |
5.0%
- 7.0% |
5.0%
- 7.0% |
Fleet Reserve
contributions |
5.00% |
5.00% |
5.00% |
City Wide
Reserve contributions – Construction
Price Index |
2.90% |
2.90% |
2.90% |
Fleet Parts
and Repairs |
5% |
5% |
5% |
Fuel |
10% |
10% |
10% |
Ontario Works Rate Increase |
2.00% |
2.00% |
2.00% |
Ontario Works Caseload Increase |
2.50% |
2.50% |
2.50% |
An estimate of growth pressures has been developed
based on a review of historical information to develop a range for 2012-2014. In addition increases in debt servicing costs
have been estimated based on current and projected debt issues required to
finance Council approved capital works with debt authority.
By utilizing the above assumptions, staff have developed possible budgetary pressure scenarios ranging
from the low end (best case) to the high end (worse case). This matrix of possible outcomes has been
summarized in Table 5 in order to provide Committee and Council with a sense of
the magnitude of budgetary pressures that could face the City in the next 3
years.
Table 5
2012 - 2014 Forecast - Budget Strategy
|
2011 |
2012 |
2013 |
2014 |
|||
Budgetary Pressures |
Base |
Low |
High |
Low |
High |
Low |
High |
Maintain |
1,578,518 |
31,000 |
44,000 |
32,000 |
45,000 |
32,000 |
47,000 |
Growth |
12,941 |
10,000 |
16,000 |
13,000 |
18,000 |
8,000 |
16,000 |
Combined Total Range |
41,000 |
60,000 |
45,000 |
63,000 |
40,000 |
63,000 |
|
Maintain / Growth Envelope |
47,714 |
52,668 |
46,552 |
||||
Excludes - Police, Library, Public Health
& Transit |
As can be seen from this table, the “Maintain /
Growth” envelope falls within the projected high / low cost range for maintain
and growth pressures. Although this
would imply that this envelop should be sufficient to fund the projected
pressures and enable Council to stay within its desired tax increase target, it
must be recognized that the envelope is at the lower end of the range. Increased
costs for growth is limited and may result in some decline in service levels
standards. The investment in Service
Ottawa may allow some of these service declines to be offset by increased
productivity;
Should economic conditions change and increases for
major cost items such as compensation, energy and caseload, exceed the best
case scenario, it could create a significant challenge to maintain the tax increase
target.
In order to maximize Council’s ability to achieve its
stated taxation direction and to minimize potential risk factors, staff are
recommending the following in the establishment of the 2012-14 draft budget
estimates.
1.
Boards and commissions be directed to stay within their allocated budget targets;
2.
Strategic initiatives be limited to the amount of tax
room made available from any upload and are determined through the priority
setting process currently under way;
3.
The non-discretionary costs associated with the
maintenance of existing city services should be considered first in terms of
funding priorities;
4.
The budget development process should be lead by the
City Manager and the Mayor’s office and as in 2011, a report should be tabled
as part of budget tabling that would
describe any strategies that needed to be implemented in order to stay within
the tax target;
5.
In some areas, more risk may be taken in developing
the budget knowing that there are reserve funds, such as the Winter Maintenance
Reserve, to smooth fluctuations in expenditures where necessary;
6.
The budget would not include any one-time sources of
revenue unless they are to fund expenditures that are also of a one-time nature;
7.
Approach the Province to provide a solution for the
loss of PILT revenue in 2014.
Capital
The City of Ottawa is the steward of public assets
valued on a historical cost basis at $14 Billion. On a replacement value basis these assets
would cost approximately $30 B for the City to replace today. The inventory of City continues to increase
as the City continues to grow. In 2010
the City purchased, constructed or had contributed by developers $1.1 B of
assets. The annual operating costs for
the repair of these assets and for the programming associated with the assets, are
included in the operating budget. The
regular renewal of these assets forms part of the capital budget. The following table shows the acquisition
value and accumulated depreciation (amortization) by asset type as at Dec 31,
2010.
Table 6
Tangible
Capital Assets
Asset Type |
Acquisition value $'000 |
Accumulated Depreciation $'000 |
Net Book Value $'000 |
Buildings |
1,670,588 |
595,315 |
1,075,273 |
Roads |
2,515,857 |
1,069,774 |
1,446,083 |
Water/wastewater |
4,199,506 |
1,025,592 |
3,173,914 |
Land |
2,628,570 |
|
2,628,570 |
Land Improvement |
496,855 |
151,589 |
345,266 |
Machinery, Plant, Equipment |
1,113,265 |
363,131 |
750,134 |
Vehicles |
837,976 |
259,147 |
578,829 |
Assets Under Construction |
877,168 |
|
877,168 |
TOTAL |
14,339,785 |
3,464,548 |
10,875,237 |
Like all other Canadian cities, Ottawa has never had
the resources to spend at the level of renewal that a simple analysis would
suggest. As the assets depreciate by
just over $200 M per year on a historical cost basis, moving that to a current
replacement basis would suggest that $600 M should be spent per year. This type
of analysis assumes assets were added on an equal basis each year, when it fact
growth in the asset base is not constant.
The analysis also assumes all assets are replaced at the end of their
useful life established through the Tangible Capital Asset accounting policies. Reality has shown that some assets need to be
replaced well in advance, whereas others exceed their life expectancy.
Funding of Capital Strategic Initiatives
Council is currently establishing their term of
Council priorities, some of which may require capital investment. This category
of capital investment, which is neither works associated with growth or
the renewal of existing assets, has had an annual $34 M envelope of funds
created for the term of Council.
The tax funding allocated to strategic initiatives in
the 2011 capital budget was approximately $34 million as shown below. For 2012 to 2014; the budget document had
identified a similar envelope and indicated projects that would be funded from
the envelope, with some funds remaining uncommitted.
Given the funding for renewal and capital growth
needs, as identified in prior LRFP reviews, it is prudent that the annual
capital budget envelope for Council’s Strategic Initiatives be limited to the
$34 million envelope as identified in the 2011 capital budget.
The following table shows the capital initiatives
already identified and remaining uncommitted balance for the next three years. The amounts shown as pre-committed are all
subject to Council approval through the budget process.
Table 6
Capital
budget envelope for Council’s Strategic Initiatives
Capital – Strategic Initiatives |
Forecast in 2011 Budget $000 |
||
Budget
Year |
2012 |
2013 |
2014 |
Service Ottawa |
15,000 |
14,908 |
14,036 |
Accessibility |
2,000 |
2,000 |
2,000 |
Housing |
4,000 |
4,000 |
4,000 |
Parks & Recreation Facilities
Upgrades |
1,000 |
1,000 |
1,000 |
Cycling |
2,000 |
2,000 |
2,000 |
TMIP - Richmond Road |
250 |
300 |
350 |
Child Care Capital Grants |
750 |
750 |
750 |
Environmental Management Envelope |
500 |
500 |
500 |
Animal Shelter |
100 |
100 |
250 |
Trees & Forests Program |
170 |
- |
- |
Fire - Nederman Exhaust System |
100 |
- |
- |
Unallocated / Balance |
8,330 |
8,742 |
9,464 |
TOTAL |
34,200 |
34,300 |
34,350 |
It is important to note that these strategic
initiatives relate to tax supported services but excludes Transit along with
Water and Sewer related initiatives that are rate supported. Both of these service areas have their own
respective reserve funds from which to fund any initiatives that Council may
establish as a priority during its term of office.
The Corporate Asset Management Framework and SOAR
As stated
previously, both the
rate supported long-range plan, and the long-range capital plan for city-wide
funded projects, will come forward later in the year. The last two reports have been delayed in
order to benefit from a rigorous internal review of capital needs through the
development of a state of asset report and asset management framework.
The Infrastructure Services Department, in partnership
with city departments, is currently undertaking a multi faceted review of the
City’s Asset Management Framework.
Included in that work is a first step to prepare a State-of-the-Asset
report (SOAR) that will inform our spending and servicing needs with respect to
the City’s capital assets.
This work will give us the opportunity to discuss our
capital maintenance needs in the context of service levels; cost and
affordability.
This work is currently underway and it is anticipated
that some of the elements of this review will be available for Q3 of 2011. Part 2 of the LRFP IV will include the
results of this preliminary review.
The intent of the Asset Management Framework work
presently being undertaken is to provide an overall framework where the efforts
and knowledge gained can be leveraged across the organization, to demonstrate
how investment decisions are linked to corporate priorities and to provide
consistency in terms of asset reporting.
The following figure provides a draft of the overall
asset management framework that shows the connection between key elements.
For 2011, the proposed priorities are:
To formalize a governance structure that supports the
management of the City's assets.
The objective will be to develop a governance
structure that provides oversight for 2-key element: the development of
specific asset management initiatives which tend to be project specific with
clear deliverables and timeliness, and the application of these asset
management initiatives by the business units which is intended to be an ongoing
process.
To produce key deliverables that will promote
awareness and consistency. These include:
Asset
Management (AM) Policy: this is intended to be a Council approved document that
will define key policy statements and set expectations as to how assets are to
be managed. It will also provide context on what information will be provided
to assist in making infrastructure investment decisions.
State-of-the-Asset
Report (SOAR): this is intended to be a fact-based document that provides the
current state of the City's assets and an indication of sustainability based on
projected investment levels. The intent is to present this document to Council as
it will complement the financial information provided in the LRFP.
Asset
Management (AM) Strategy: this document is intended to build on the
expectations set in the AM Policy and the understanding of the state of assets
in SOAR to set the future direction to achieve sustainability.
Asset
Management Plan (AMP) framework: the intent is to develop a framework for AMPs
so that these can then be developed in a consistent manner across services
(i.e. water service, wastewater service, transportation service, etc). The AMPs
will be structured to answer the following questions:
1. What we own?
2. What is it worth?
3. What is its condition and expected remaining
service life?
4. What is the level of service expectation?
5. What needs to be done and when does it need to be
done?
6. How much will it cost and what is the acceptable
level of risk?
7. How do we ensure long-term sustainability?