Conclusions and Policy Recommendations

The City's Capital Budget Challenge
The City's capital program is determined by four key factors: the need to provide services to growth areas; the need to sustain services in established areas; the desire to improve service levels in established areas; and the need for lifecycle renewal of existing assets. Until additional funding is identified, however, the City's current capital program cannot be afforded.

To stay within the City's available capital funding, a significant component of budget processes from now on must involve identifying services that may be discontinued or privatized. A comparison of capital standards in other cities may also assist in the reduction of the spending requirements.

Even then, the property tax base alone cannot support the City's capital program. As is clearly identified right across the country, to sustain the growth of Canada's major cities, significant provincial and federal funding must be provided on a stable, long-term basis. If this funding is not made available, the City's ability to grow is jeopardized. Moreover, if such funding does not materialize and the capital program is not reduced, the City's revenue base must increase and a capital surtax would need to be considered.

The City's Operating Budget Challenge
Expenditures within the City's operating budgets are forecast to rise to meet the needs of rapid growth, to accommodate provincial downloading, to sustain the City's high quality of life, and to preserve the City's current infrastructure investment. Operating costs will continue to increase with population growth and inflation.

The City's operating budget forecast identifies ongoing budgetary pressures on services. After more than ten years of reduced or frozen tax rates, however, it is increasingly difficult for the City to absorb new costs within its existing budget base. Further, future operating costs associated with new capital facilities and services, and their potential impact on tax or water and sewer rates, should be taken into consideration when approving the City's capital budget. Furhter, future budget decisions will require a choice between tax increases and program reductions. To assist in this decision, a new program review process should be established. This process would see a thorough review of one department each year outside the budget process.

Policy Recommendations

1. Growth must pay its own way. Accordingly, development charges should be increased to the highest feasible level.
   
2. The City's tax rate should be split into two new rates: one for operating expenditures, and another for capital expenditures. This split establishes a direct link to the capital program through the tax bill and ensures that increases in property assessment are shared by operating and capital budgets.
   
3. The City's capital planning process should identify the true lifecycle cost of City assets. Further, over time, additional funding should be provided to increase pay-as-you-go financing for lifecycle projects.
   
4. A study of capital standards in other municipalities should be undertaken to determine if savings can be found through appropriate standard adjustments.
   
5. A new program review process should be established to provide a cyclical review of all departments, with one department being reviewed in detail each year.
   
6. A policy should be developed to identify the minimum closing annual balance for Reserve Funds to allow for reasonable financial flexibility.
   
7. To provide assistance to Council in its determination of capital priorities, future capital budgets should list projects by function and type using the following categories: growth, lifecycle, existing approved programs, and new initiatives. The City's capital program should be aligned with available funding on an annual basis. To identify possible reductions, a new step in the budget process needs to be put in place that will allow Council to determine overall funding priorities. Prioritization by Council should occur early in the budget process with priorities identified both by functional area and type. Capital projects identified between budget cycles should only be funded by substitution for another project within the same funding envelope.
   
8. Future operating costs for capital projects should be considered as part of the capital budget. Since these costs will carry over to future operating budgets, they must be clearly itemized to determine whether they will be covered by new money, or from within the existing tax base.
   
9. Projects that create additional infrastructure should also generate an added pay-as-you-go contribution. This added pay-as-you-go contribution should also be incorporated for all assets built by others but whose ongoing costs are assumed by the City. These costs should be summarized clearly, with detailed tax and utility rate implications part of the budget documentation.
   
10. The urban or rural transit levy should be earmarked for operating and capital requirements of the transit service (such as buses, garages and other services that directly support the operation) within either the urban or rural areas. As a result, all residents would contribute to future transit extensions in the same manner as they contribute to roads.
    
11. Long-term debt financing should be restricted to specific project types. Debt funding for lifecycle projects should be reduced and ultimately eliminated. Instead, debt financing should be employed on projects related to capacity expansion or growth, projects financed by development charges, future new non-traditional infrastructure projects, and projects tied to third party matching funding. These restrictions may have to be phased in to meet short-term budget challenges.
    
12. Public-private partnership opportunities should be identified and investigated in both the City's capital and operating budgets. Investigation of these opportunities should include a review of the City's capital plan to bundle capital works into packages that present design-build-finance opportunities to the private sector. Any costs or savings of these public-private partnerships should be identified in future budget documents.
    
13. The City should establish a revenue policy that sets standards for fees and rates of programs and services. This policy would identify which costs are recovered from fees. Currently, most fees simply cover direct operating costs. They do not recover any capital or operating costs of facilities. The City's funding gap can be reduced somewhat if City policy changes to recover some or all capital and operating costs. Regardless, the proposed revenue policy must be applied on a consistent basis for new programs.
    
14. 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 the quality of municipal services. The City urgently requires a wider range of revenue-sharing options, rather than the regressive property tax it relies on now. These options include a share of gasoline taxes, a hotel occupancy tax, a portion of income taxes, exemption from federal and provincial sales taxes, a share of funds generated through vehicle licensing, and transferral of the provincial requirement to cost-share health and social service programs.
    
15. If new revenues are not forthcoming from the federal and provincial governments, a funding gap will remain. Council will have to look at a range of potential solutions to address the gap, including: cutbacks in programs, changes in standards, adjustments in service levels, application of new revenues, continued deferral of infrastructure, and limiting growth. If these solutions are not sufficient, tax and rate increases will be required.

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