Addressing the Capital Funding Gap

The City's capital funding gap has been calculated based on policies and revenues used to develop the 2002 Budget. These policies and revenues include:

• A capital formation envelope (debt charges and pay-as-you-go contributions), funded by the City's tax base, which will remain the same over the planning period;
• Interest on Hydro Ottawa's promissory note in 2002 and 2003 applied to fund the capital program;
• SuperBuild funding on approved projects;
• Transit Capital Renewal, an ongoing program funding one-third of eligible programs;
• Transit Investment Partnership, an ongoing program, with the federal government participation beginning in 2004, bringing senior government funding to 67 per cent on eligible projects; and
• An emergency medical services facility constructed through a public-private partnership.

Appendix 416 contains continuity schedules of capital funding sources for tax, rate and development charge supported programs, including the expenditure levels described in this report. Cumulative funding gaps are shown in the table below.

These models indicate the magnitude of the shortfall that exists between the capital program and available funding. The shortfall is substantial and cannot be solved simply.

The above table shows the capital expenditure reductions that would be required in each of the tax and rate supported programs to achieve a $20 million ending reserve fund balance for each of the two programs.

Options to Fund the City's Capital Program
Presented here are six options to fund the City's capital program. The first three options are fully within the control of Council; the last three require actions by other governments.

Option 1: Hydro Ottawa Interest and Dividends
Use Hydro Ottawa revenue generated from interest and dividends. A portion of this revenue will fluctuate, which makes its use in the capital budget more appropriate than in the operating budget. This revenue should be used to fund tax-supported programs. Hydro Ottawa revenue will reduce the capital funding gap by the following amounts:

Option 2: Reduce Growth Share Borne By Property Taxes
Reduce the impact on capital reserve funds by ensuring that development charges are increased to recover as much of developments 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. If implemented, this option will reduce the capital funding gap as outlined in the following table.

Option 3: Tax Rate for Capital
Reduce the capital funding gap by allocating a portion of taxes from new assessment to the City's capital budget. Rates should receive similar treatment. 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 following chart shows the incremental revenues that would accrue to the capital fund if a separate capital tax and utility rate were established.

A Summary of Options 1, 2 and 3
Together, these options would provide additional tax and rate 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. Revised continuity schedules, which look at the overall financial picture for the three funding sources with all of the options included, are in Appendix 6. In addition two large rate projects - Lemieux Island Transmission Lines and the Central Storage Tunnel - are shown as financed by long-term debt. This corresponds with the short-term recommendations on debt funding of the capital program.

Expenditure Reductions Required
After Implementing Options 1, 2 and 3
to achieve Fund Closing Balances of $20 Million

Even with this revenue, however, a shortfall is evident over the long term. As such, unless other revenue sources become available, the capital program will have to be reduced. Without additional revenue, the City will have to review its growth objectives and 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. It is in this area where other governments can provide help.

Option 4: Redistribute Funding Responsibilities
As outlined earlier, Ontario is the only province that requires municipalities to fund significant health and social services programs on a property tax base. Other provinces have abandoned this requirement, allowing the property tax base to support only those programs where municipalities have direct responsibility. Transferral of full funding responsibility for health and social services programs to Ontario would reduce the City's tax levy by $186.2 million and completely close the funding gap.

Option 5: Sharing the Tax Base
The federal and provincial governments receive dramatically greater revenue resulting from growth than does the City. A more fair revenue sharing arrangement would significantly reduce the forecast funding gap.

The following table shows the impact of sharing existing provincial and federal revenues.

Revenue-generating powers noted in the table are examples of powers ceded by provincial governments to municipalities outside Ontario. Although any new revenue sharing arrangement with Ontario and the federal government will help the City over time, as long as legislative power over municipalities remains with the provincial government, any new revenue streams are inherently unreliable.

Option 6: Annual Capital Surtax
The City's primary revenue source is property taxes. The following chart shows the effect of creating a one per cent capital surtax on the total property tax bill and a one per cent capital surtax on the utility bill. It should be clearly understood that this solution impacts the ability to raise these rates to find additional operating budget solutions.

Inclusion of options 1,2,3,5 & 6 as new revenue sources still does not meet the capital funding needs. Potential new revenues from the senior levels of government (option 5) have been applied to tax-supported programs.

Expenditure Reductions Required After Implementing
Options 1, 2, 3, 5 & 6 to achieve Fund Closing Balances of $20 Million

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