Executive SummaryThe Long-Range Financial Plan: First Steps offers a financial outlook for the City of Ottawa over the next ten years. The report was prepared at the request of City Council, and is intended to increase understanding of solutions to the challenges the City faces as it grows, and to present a number of approaches for City Councillors to consider as they determine what we can do to manage growth in Ottawa in order to continue to provide high quality services to residents. Cities have always been centres of economic activity and growth. With the advent of free trade, cities have become key drivers of national economies, and investments in municipal infrastructure provide significant benefits to communities beyond urban boundaries. In Canada, more than 60 per cent of Canada's total employment growth over the last four years has occurred in just ten urban regions. Ottawa is one of the most desirable cities in Canada in which to live. Over the past 20 years, the City has seen its population grow by a staggering 41.6 per cent. These people, in turn, have propelled significant economic development in the City -- Ottawa has enjoyed strong employment creation between 1993 and 2001, averaging 3.5 per cent growth each year. In 2001, the number of new jobs peaked at 28,000. At present, the City receives an estimated seven cents of every new tax dollar generated here, with federal and provincial governments receiving 93 cents. It is not reasonable that cities should be required to pay over 80 per cent of the costs of growth infrastructure with only 7 per cent of the revenue generated from this growth. Every effort has been made to meet the needs of the City within the current framework. Indeed, most Ottawa taxpayers have seen their property taxes frozen or cut for eleven consecutive years. When adjusted for inflation, the average urban resident now pays 20.5 per cent less in property taxes than in 1993, and the average rural resident pays 21.9 per cent less. Amalgamation has placed the City in a stronger position to meet the challenges it faces. By collapsing twelve administrations into one, it has made it possible for the City to reduce administrative overhead, provide streamlined, cost-effective services and make sure residents received some direct benefits in the form of a cut to the property tax rate. Moreover, savings resulting from amalgamation have allowed the City to absorb significant costs associated with inflation and provincial downloading of services. Amalgamation has also made it possible for City staff to form a more realistic long-range picture of current and anticipated operating and capital needs than was possible with 12 separate, competing local governments. The picture emerging is clear: reducing expenditures and achieving administrative efficiencies alone has not met current needs, nor will it address future challenges. As a result, the City's capital forecast estimates a $270 million funding gap by 2006. This gap continues and increases throughout the following five-year period. A careful examination of the City's long-term capital program reveals that over half of the requirement is needed to simply take care of the assets we already have, and over 25 per cent is needed to take care of the requirements of growth. The remainder provides support for the City's ongoing programs, like traffic control and safety and sports field development, and for some new initiatives like investing in more ambulances to improve response times and addressing new requirements arising from changes in provincial legislation, such as those arising from the events in Walkerton. Economic growth in cities is critical to the success of the national economy. It creates significant tax revenue for both the federal and provincial governments but not, ironically, for the municipalities that drive the growth. Growth creates massive demands on services and infrastructure that cities alone must fund. In 2001, a KPMG study found that, between 1998 and 2000, economic growth in the City generated $753 million in new tax revenue for the federal and provincial governments, with only an additional $77 million for the City itself. A clear consensus has emerged among economic and policy experts that Canada's cities lack the legislative and financial tools needed to fund the services and programs they must deliver. Indeed, while federal and provincial governments pay for programs in a number of ways-including income, payroll, sales, corporate, and fuel taxes-municipalities in Ontario are permitted to fund their services only through property taxes, development charges, and user fees. Moreover, while revenues from income and sales taxes are bolstered during periods of strong economic growth, revenue from property taxes is not. The development of this Long-Range Financial Plan can help the City to meet its challenges directly and with foresight. Between now and 2011, the City of Ottawa will need to continue to find innovative ways to improve services and reduce costs and, at the same time, carefully examine and cultivate new sources of revenue. Without these new sources of additional revenue, and despite the City's best efforts, the funding gap will only continue to grow. Ottawa is not alone in this regard. The TD Economics report, A Choice Between Investing in Canada's Cities or Disinvesting in Canada's Future, graphically conveys the predicament faced by Canada's municipalities:
In the urban millennium, a nation's cities must thrive globally if that nation is to compete economically. Cities are also expected to be centres of innovation and education, and they must provide the highest possible quality of life to residents. To that end, the United States and Europe have been making large-scale investments in municipal infrastructure. In Europe, infrastructure funding comes from the European Union, national and local governments, and public-private partnerships. The 2002-2006 European Regional Development Fund (ERDF) makes up one-third of the entire European Union budget, and helps fund transportation infrastructure, environmental and water projects. The ERDF is just one of a number of funds available to support the strengthening of municipal infrastructure across the European Union. The United States federal government is also making impressive investments in urban infrastructure. The Transportation Equity Act for the 21st Century of 1999 has earmarked US$217 billion for transportation infrastructure over six years. A number of other federal grant and loan programs provide stable, long-term funding for wastewater, drinking water, housing, and community development projects in American cities. The investments made in cities in Europe and the United States are paying off. In January 2001, the 2nd Report on Economic and Social Cohesion to the European Commission concluded that reinvestment in cities was an effective means of mobilizing private capital and loans, and led to increased competitiveness and productivity of urban regions. The Role of Metro Areas in the US Economy notes that American cities' ability to compete in the global marketplace is largely due to the benefits of renewed infrastructure. Indeed, unlike other parts of the American economy, metropolitan areas continued to grow during the recent recession. Some provincial governments in Canada have begun to demonstrate an understanding of the importance to municipal governments of having more flexible financial and legislative mechanisms within their reach. The governments of British Columbia, Newfoundland and Labrador, Alberta, Manitoba, Nova Scotia and Quebec have all either given municipalities authority to raise new revenues or transferred to municipalities portions of sales, income and fuel taxes. In some cases, provincial governments have done both. Further, Alberta has given cities natural person powers, which allows Alberta's cities greater flexibility to enter into legal agreements. Perhaps most promising is British Columbia's proposed Community Charter, which will, if enacted, give municipalities clear authority to make decisions and raise new revenues without having to secure provincial approval. As more and more experts agree that with no change in the current distribution of revenue and authority among federal, provincial and municipal levels of government, cities cannot sustain growth, it is also clear that the City of Ottawa must continue to find solutions in areas it controls. The City of Ottawa must adopt a more sustainable approach to development and growth. The City cannot resolve 21st century issues with 19th century institutions and models of revenue generation. Property taxes can no longer fund the bulk of services that municipalities deliver, and development charges are not designed to recover growth costs in full. Unless stable, long-term funding is secured, and until the City is given appropriate authority and financial tools, severe limitations will exist on its ability to manage growth. The City must now devise a new revenue policy that accommodates the changing needs of residents, institutes clear standards for program and service fees and rates, and secures an appropriate and reliable base of funding into the future. Recommendations and Options 1. Use Hydro Ottawa revenue generated from interest and dividends, using stable rate structures. Hydro Ottawa is a valuable asset to the City and should be utilized to maximize its value to both the City and taxpayers by returning the interest and dividends to help finance the capital program. Hydro Ottawa revenue could reduce the capital funding gap by $242.6 million in the next ten years. 2. Reduce the impact on capital reserve funds by ensuring that development charges are increased to recover as much of development costs as possible. The City's funding model assumes that exercising this option will reduce the impact on capital reserves by ten per cent of growth costs. The development charge option could reduce the capital funding gap by $119.7 million in the next ten years. 3. Ensure that the capital program receives a fair share of new assessment growth. Capital contributions received from the growth in assessment should help pay for growth-related costs, as well as recover a portion of growth costs that cannot be recovered from non-residential development charges. The fairer sharing of assessment growth revenue between operating and capital budgets could reduce the capital funding gap by $138.5 million in the next ten years. Together, these three options would provide additional tax-supported funding totalling $131.8 million over the first five years of the ten-year planning period and $497.2 million over the full period. Even with this revenue, however, a shortfall is evident over the long term. A new federal/provincial/municipal funding formula and revenue-sharing agreement is required for Ontario's cities. Without a new revenue-sharing agreement, it may not be possible to support the current growth forecast. Support is required from upper levels of government to maintain growth and the quality of municipal services. The Governments of Ontario and Canada will see consequent reduction in economic growth and in their own revenues if growth is slowed or stopped. The City urgently requires a wider range of revenue-sharing options, rather than the regressive property tax it relies on now. To that end, the report also recommends Council: 4. Ask the Government of Ontario to take over full funding responsibility for mandated health and social services programs, as has been done in other provinces. Transferral of full funding responsibility for these programs to the province would reduce the City's tax levy by $186.2 million and completely close the funding gap. 5. Continue to work with other Canadian municipalities in requesting the total tax base be shared more equitably among federal, provincial and municipal governments. For example, if the City received a full refund of its Goods and Services Tax payments, five cents of the gasoline tax within Ottawa, ten dollars for each registered vehicle in the City, and funds equal to one per cent of personal income tax revenues from residents, the total would be $100.1 million each year. (As a comparison, Calgary receives $83 million annually and Edmonton $68 million annually from the province of Alberta's fuel tax.) If new revenues are not forthcoming from the federal and provincial governments, a funding gap will remain. As such, unless other revenue sources become available-such as those outlined in options four and five-the capital program will have to be reduced. Without additional revenue, the City will have to review its growth objectives and assess its ability to continue to provide services at levels enjoyed today. Lifecycle spending levels will need to be slowed to match funding capability, and new initiatives and programs restricted to match available funding. Growth spending will have to be reduced to lower future operating costs. If not, standards within new growth areas cannot be maintained at today's levels, and a capital surtax or tax and rate increases may need to be considered. The City of Ottawa has worked to build an enviable quality of life for the people who live and work here. It's imperative we continue to do our part to manage growth by building on our successes with efficiencies and streamlining. This Long-Range Financial Plan: First Steps and those that will follow provide some clear options and potential tools that will help make sure we are doing as much as we can to compete in the global economy and continue to provide high quality and cost-effective services to residents. But Ottawa, like all cities in Canada, won't be able to reach its full potential without long-term stable funding from the federal and provincial governments. The federal and provincial governments receive dramatically greater revenues from growth than the City and bear few of the costs. Growth in cities pays dividends for these levels of governments, and the taxpayers who fund that growth should reap the full benefits of their investment. The next steps for the City of Ottawa will include submission of the draft 2003 budget estimates, an asset management review for transportation, water and wastewater infrastructure, and a final version of the City's Official Plan. A second phase of the long-range financial plan will be developed based on this information and the results of the City's other growth plans (the human services plan, the arts and heritage plan, the economic plan, and the corporate strategic plan). This second report will provide a more detailed ten-year forecast that will be submitted to Council in late 2003, along with the 2004 draft budget estimates. |
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