Potential New Revenue SourcesA Single, Comprehensive Development Charge Bylaw The City will carry out a review of Amalgamation has provided an opportunity to review existing development charge bylaws and determine ways of addressing the costs of growth. Starting in late 2002, the City will carry out a review of these bylaws to develop a single, comprehensive bylaw by August 2004. This review coincides with the expiry of the existing bylaws and will require establishment of service level standards for the City, along with preparation of a work plan and funding model to deliver required infrastructure. With amalgamation, all eligible costs can now be included in a single work plan, establishing a clear understanding of the future budgetary demands of growth. Clearly, a key objective of the review will be to assess any impact of moving toward full recovery of eligible costs. Historically, rates have been set at a level lower than necessary to maintain affordability in the internal market and a competitive place in the external market. City Council's current fiscal direction, supported by Ottawa 20/20 - Charting a Course, places fiscal sustainability as a top priority. A move toward a cost-recovery model will be a significant shift in the City's approach to growth management. This model, however, will be more easily achieved in a single-tier governance structure. According to this model, major growth projects in the capital plan that are not currently included in a development charge study or bylaw are included in the upcoming bylaw update. These projects, therefore, are shown as development charge funded to the limit possible under legislation. Revenue projections have been increased accordingly. Public-private sector partnerships are Public-Private Sector Partnerships When structured properly, P3s provide public services throughout the term of a contract. Moreover, they are effective in establishing long-term relationships between public and private sector partners, encouraging valuable and enduring cooperation. Ideally, P3s are most effective when a private-sector partner invests directly in the service it provides and, as a result, enhances service quality, develops additional services, and achieves greater efficiencies over time. There are many kinds of P3s: design-build; design-build-finance; design-build-finance-operate; and design-build-finance-operate-transfer. Prior to the development and implementation of P3s, each must be assessed-first with regard to the City's goals and objectives, and then with respect to the risk tolerance and financial structure of the partnership itself. While there are no firm rules governing when to utilize a particular P3, some projects are more suited to certain types of partnerships. For example, design-build P3s are appropriate when projects are large and complex, require different construction methods and materials, and involve complex production schedules. Design-build P3s are also suited for projects in which it is relatively easy to assess the quality of the finished product, for projects that are relatively passive in nature, and for projects not subject to short-term lifecycles. These partnerships also maximize access to private sector experience, reduce construction time, provide single-point accountability, and result in fewer construction claims. Development of successful, enduring P3s can be complex, requiring careful assessment by all parties. This is due to a number of factors, notably the initial formation of a P3, its management, and a transfer of assets to fund it. Distribution of risk and an array of other financial issues must also be addressed. Nevertheless, combining the expertise of both the public and private sectors to deliver public services often results in lower overall costs to taxpayers. As such, P3s have received increasing attention from all levels of governments as a means to address budgetary demands. Immediate construction of a community asset through private sector financing, in return for some form of annual payment or contribution by the City, is perhaps the most appealing feature of P3 initiatives. These initiatives are particularly attractive when access to capital dollars is limited. While P3s do not necessarily result in lower overall financial costs to the City, they can provide public facilities in a more timely fashion. P3s, however, require the City to budget and finance an additional annual commitment, above and beyond previous years' base operating budgets. Normally, though, properly structured P3s result in lower overall costs to municipalities. Indeed, most P3s allow for user fees or alternative revenue sources that cover all, or part, of related capital and operating costs. Moreover, the City can offer added value to P3s by supplying development property, changing zoning designations, waiving development fees, assuming some risks, and creating strong financial covenants to attract additional financing. Additionally, private sector partners possess project-specific expertise, offer greater flexibility in meeting procurement and resource needs, and are able to access particular financial tools, such as asset depreciation, which are not available to the public sector. Five criteria are being suggested to Council to identify possible P3 projects for the City. First, projects must already be outlined in the City's five-year capital plan. Second, private sector partners must either add value to a project or create a new revenue stream to reduce the City's net contribution. Third, projects must leverage existing City assets, services and abilities to reduce the need for capital funds. Fourth, in return for ongoing annual funding support from the City, projects must reduce or eliminate the need for initial capital investment by the City. Fifth, projects must represent an acceptable risk to the City and meet overall City objectives. Development of successful public-private partnerships is a complex process requiring intense effort. It would be premature at this early stage of the long-range planning process for City staff to identify a comprehensive list of potential P3s projects or calculate the specific benefits that would accrue to the City from them. Hydro Ottawa is a valuable asset to the City Hydro Ottawa Ownership of Hydro Ottawa gives the City a rate of return on the equity value of the utility. The City holds a note payable from Hydro Ottawa worth $237,825,000, with interest at 6.9 per cent. Interest payments began on May 1, 2002. From this note, the City will receive annual payments of $16,400,000. The note may be called by the City or refinanced by Hydro Ottawa at any time. In addition to the note payable, the City holds 177,076,000 Hydro Ottawa class A common shares valued at $190,628,000. Holders of common shares are entitled to receive dividends at a time selected by the utility's board of directors. Any invitation to the public to purchase shares of the utility is prohibited. As a shareholder, the City should expect to receive a return on its investment. As such, City staff asked the City's fiscal agent, CIBC World Markets, to determine what Hydro Ottawa could be expected to generate in terms of dividends. CIBC World Markets compared dividend structures of a number of utilities to calculate Hydro Ottawa's expected rate of return. In making its recommendation, CIBC also reviewed Hydro Ottawa financial forecasts to include any of the utility's capital requirements that require funding. CIBC's recommendation to the City is as follows:
CIBC's analysis forecast a dividend flow outlined in the following table:
A cautionary note must be raised. Since Ontario's electricity industry operates in a regulated environment, regulatory changes can affect rate structures and profitability. Accordingly, dividend revenue should not be considered guaranteed revenue. Instead, dividend revenue should be committed only to those capital projects that could be deferred should funding be unavailable. As the sole shareholder of Hydro Ottawa, the City always has the option to sell. Given the provincial requirement to claw back one-third of the sale price through transfer taxes, however, this is not an option City staff would recommend. Between 2002 and 2011, Hydro Ottawa is expected to provide approximately $30 million per year of interest earnings and dividends between 2007 and 2011-revenue that could be allocated toward a capital shortfall. In summary, between 2002 and 2011, Hydro Ottawa is forecast to contribute over $270 million in towards the City's capital needs. A New User Fees Policy The Government of Ontario retains considerable power over municipalities' abilities to establish fees. The new Municipal Act, that comes into force on January 1, 2003, will allow the province to restrict user fees and will require municipalities to adhere to guidelines on how fees are approved. In addition, the new law will include reporting requirements. The province has already filed two regulations on fees under this new act. The first regulation concerns fees and charges not covered in the Planning Act, and introduces new criteria and processes local governments must follow when implementing these fees and charges. Fees for wastewater collection and disposal, sewers, water consumption, fire protection permits and inspections, and police will be limited to cost recovery and subject to strict process rules. The regulation, however, does not define cost recovery. Further, under this regulation, municipalities must give 21 days notice and hold at least one public meeting before passing a bylaw implementing these types of fees. All other municipal fees will be subject to less stringent notice and disclosure rules, and will not be limited to cost recovery. The City needs a revenue policy that The second regulation maintains business license exemptions for certain business classes. The section in the new act governing license fees requires that the total amount of fees charged for a class of business must not exceed cost recovery. The City needs a revenue policy that institutes clear standards for program and service fees and rates. Fees can be established for a number of purposes, including:
The policy would identify which costs are to be recovered through fees while taking into account the purpose for which fees were established. Debt Recommended situations where debt could be most effective are outlined below.
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