1 PREVIOUS REPORTS PERTINENT TO THIS MATTER I

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1 2 Operational Costs: The 2 Year Plan anticipated annual operating costs to increase from $17 million in 1999 to $23 million in 22. This increase as based in part on compounded anticipated groth of less than 7% over the 2 to 24 period. The plan assumed that operating costs ould not escalate more than the anticipated groth rate. n contrast the increases approved over the past five years have been equivalent to 36% of the approved 42.9% five year rate. The major contributing factors to the increased operating costs have been the addition of the customer billing costs from London Hydro, transferring costs to the seer rate as part of a move toards full cost accounting, higher than expected increases in materials, supplies, electricity and natural gas and uncontrollable flo through costs. The City is in a much stronger position to properly operate and maintain the asteater and treatment system, hoever, this increase in operating costs has reduced the financing available for Capital Works. Capital Works n 1999 the total 2 year forecast for all capital needs as $5 million. This plan anticipated a high level of activity in the first 5 years of the plan. $155 million, or 31%, of the total 2 year plan activity as anticipated to take place in this time frame. An analysis of the specific projects contemplated in 1999 compared to the current situation is included in Appendix A. Over the past five years $187 million of capital projects have been approved, in part in response to significant unexpected events. Many issues have been addressed including projects to reduce significant flooding, upgrades to the Greenay Pollution Control Plant electrical system, the rebuilding of the Gordon Avenue system and the implementation of the industrial strategy. No additional rate increases ere provided to undertake these projects and the increased operational program leading to the need to issue additional debt. Discussion: The folloing five issues have been identified as having significant impact on the development of the updated 2 Year Financial Plan. These issues are briefly highlighted in this report ith the intention that future reports ill be prepared to provide options and recommendations for Council s consideration and approval. The outcome of these reports ill be incorporated as part of the submission for the updated 2 Year Plan.. Life cycle projects The 24 Wasteater and Treatment Budget report noted that the system currently has a replacement value of $2.6 billion and that approximately $34 million ould be required every year to maintain the system based on average lifecycle needs. The introduction and phase in of the Seer mprovement Tax from 1996 to 999 resulted in comparatively little being spent capital projects in relation to the demand. Over the past five years the City has approved $95 million, or an average of $19 million per year, for life cycle replacement orks. While this is beginning to address the demand there is still a lot of ork to be done to catch up hich has a direct impact on future rates. While it is unlikely that the city can move immediately to full life cycle,replacement it ill be important to establish a plan to ramp up to address the needs in the system. 2. System improvements System improvements include orks such as flooding remediation, seer separation projects, the construction of combined seer overflo facilities, ater course remediation projects and the upgrading of treatment plants and pump stations, These orks are triggered by basement and surface flooding, increasing public concern respecting overflos to the City s ater courses, and the need to meet more stringent effluent, safety and environmental criteria in keeping ith provincial legislation. These orks are important and they compete ith other projects that the City needs to undertake. One of the objectives ill be defining a ranking system that guides the City in determining the timing and priority of these orks. 3. ndustrial groth The Year Plan recommended a 1.2% tax increase to cover the cost of orks that support industrial groth in lieu of having an industrial development charge. n 21 the

2 J TO: CHAR AND MEMBERS ENVRONMENT AND TRANSPORTATON COMMTTEE MEETNG ON OCTOBER 12,24 > FROM: SUBJECT PETER W. STEBLN, P.Eng. GENERAL MANAGER OF ENVRONMENTAL AND ENGNEERNG SERVCES AND CTY ENGNEER NTRODUCTON N PREPARATON FOR THE UPDATED WASTEWATER AND TREATMENT 2 YEAR PLAN 1 RECOMMENDATON That, on the recommendation of the General Manager of Environmental and Engineering Services and City Engineer, this report BE RECEVED and reported to Municipal Council for their information and that more time be taken by staff to revie the long term plan and to determine options and the implications of the long term issues prior to approving the plan. 1 PREVOUS REPORTS PERTNENT TO THS MATTER None BACKGROUND Purpose: The City has completed the first five years of the 2 year financial plan approved by Council for Wasteater and Treatment (WWT) in Significant changes have occurred over the past five years leading to the need to undertake a major update of the plan for the next 2 years. This ork has been completed by the Administration in draft ith the conclusion that there are significant policy decisions that need to be made by Council before the updated 2 year financial plan can be submitted for approval. The purposes of this report.is to highlight to Council here e are today, ho e got here and identify the significant policy issues that ill be brought forard in future reports for discussion and direction. These policies, in conjunction ith the Sanitary and Storm Master Plan updates and having regard for the Sustainability Act legislation, ill serve as the frameork for completing the updated 2 year financial plan. Context: Prior to 1996, funding for seage orks as primarily through property taxes ith a small portion from an environmental charge on the ater bill that as introduced in This represented approximately 7.4% of the funding required for WWT ith the balance being borne by taxes. Seer surcharge rates ere approved by Council on October 16, 1995, for the year 1996 ith a plan to phase-in increases and shift to a user-pay approach over the subsequent 5 years up to 2. The 2 Year Plan (1999) as a first cut at a long range financial plan for the seer utility. t put forard the need for increased intensive investment in seer infrastructure and laid out a plan for significant capital investment in the short to mid term ith decreasing needs in the long term. The result as that Council approved a five year (2 to 24) schedule of 7.4% annual Seer mprovement Tax increases. The Seer mprovement Tax rate as based on a projection of operating and capital costs to manage the sanitary and storm ater systems, exclusive of capital required for the ndustrial Land Strategy. The five year compounded rate increase amounted to a total of 42.9% over the 999 rates. The 2 Year Plan also included a 1.2% tax increase in 2 to finance industrial groth capital forecasts in lieu of an industrial developmerit charge. Residential, commercial and institutional groth capital forecast needs ere included in the respective Development Charge and Urban Works Reserve Fund,rates.

3 3 ndustrial Land Development Strategy (LDS) recommended further tax increases in order to support this strategy, of hich a portion covered the cost of seer orks. n 22 costs for these seerage industrial orks ere shifted from the tax base to the seer rate ithout a corresponding increase in the rate. The projected costs for sanitary seerage orks alone over the next 2 years is anticipated to be in the order of $7 million (in $24). Very preliminary estimates indicate that an overall increase of approximately 8% to 1% ill be required to address City borne industrial costs. One option may be for the City to identify and bear these costs through the rate as an industrial charge to all users to be implemented over a number of years. The City may also ish to consider alternative forms of funding given the impacts that these orks have on the seer rate. 4. Full cost accounting The province passed the Sustainability Act but has yet to pass the accompanying regulations. t is expected that these regulations ill have a significant impact on both seer and ater rates. The principles of sustainability and full cost accounting are becoming more idely understood and ill likely need to be incorporated in future rates. This includes a revie of overhead costs, Le. hat is appropriate to be borne by rates vs. taxes, ho much, ho quickly and ho and hen the City should move to becoming sustainable. The City ill need to consider the impact of moving to full cost accounting in recognition of the fact that these additional costs aggravate the problems ith the rate given the competing needs that need to be addressed. 5. Financial principles: a) Debt Servicing: The increasing reliance on borroing has burdened the Wasteater and Treatment budget ith debt servicing costs in relation to revenue that comprise a significant factor of the overall operating budget. n 1999, debt servicing cost represented 9% of the overall seer operating budget hereas in 24, debt servicing costs are expected to represent 14% of the overall operating costs The increase is a direct result of funding unexpected capital projects ith debt financing. dapital projects such as orks for significant flooding, upgrades to the Greenay Pollution Control Plant electrical system, the rebuilding of the Gordon Avenue system and the implementation of the industrial strategy have significant debt financing costs attached to them. The debt servicing ratio is anticipated to rise to, but not to exceed, 25% ithin the next five years hich is the Legislative limit placed on debt service. There is a need to balance efforts to attain a more appropriate ratio of debt servicing ith the need to undertake key orks to maintain and improve the system in a timely manner to efficiently serve the needs of the community. b) Stabilization Reserve for the operating budaet: Wasteater and Treatment revenues can fluctuate year over year based on eather conditions driving ater consumption and thus asteater revenues. n order to smooth out these potential shortfalls in annual operating revenue, introducing a Waste Water Operating Stabilization Reserve Fund should be considered to manage fluctuations in revenue that occur because of unusual eather patterns such as a cool et summer. c) Pay As You Go: The City of London has embarked through its Strategic Financial Planning discussions upon a plan to move to a pay as you go system for Life Cycle Maintenance in its taxbased budget. By doing so it is recognized that the current generation should pay the cost for these types of Capital orks. The WWT 2 year plan should also consider the principles and implementation strategy to move to a pay as you go philosophy for appropriate orks. d) Reserve funds: The current reserve funds are very lo and thus effectively function more like a pay as you go system for small portions of the capital cost of the projects ith the majority of the financing being paid for by debentures. The p(inciples and appropriate levels for

4 4 development of reserve funds for unexpected emergencies and/or to balance payment by cash ith the appropriate use of debt needs to be considered. Reserves may also be used to smooth increases for planned major replacement projects provided the City matches the timing of the collection of the funds ith the benefit of the use of the facilities. This could take place provided this use remains consistent ith any reserve fund policies that may be brought forard. Conclusion: The net result, from the first five years of the Year Plan, is that the City is in a much stronger position to operate and maintain the asteater and treatment system. Progress has been made toard full cost accounting. n addition, the City has undertaken a number of capital projects that ere of significant immediate concern to Council and the community, Financially, hoever, the City is facing a rate increase in 25 of 6.2% just to cover uncontrollable costs and increased debt servicing. This does not include any alloance for needed operational improvements and capital projects. The staff have also had an opportunity to undertake:a preliminary analysis of the ork that needs to be done to address current and future environmental and legislative requirements. The conclusion is that a significant increase in capital orks ill likely be required over and above hat as contemplated in the first 2 Year Plan. The City ill likely restle ith these significant issues in the development of the updated 2 Year Financial Plan. Next Steps: t is appropriate to take more time over the coming year to examine the options and the implications of these issues through position papers that ill be presented to Council. As part of these outcomes the City may ish to consider the implications of gradual annual increases verses a larger one time increase in order to best address the needs of the system. The intention is that these policy papers ill be developed in conjunction ith the appropriate departments for discussion and direction throughout 25, culminating in an updated 2 year financial plan for Council approval prior to the approval of the 26 budget. The report entitled Proposed Amendments to the Storm Seer mprovement Tax Charges has been submitted to the October 12, 24 meeting of Environment and Transportation Committee for the purpose of expanding the base. f approved, this ill aide in mitigating projected rate increases. Council may also ish to consider an initial industrial surcharge as part of the 25 Budget. t is the intention of the Administration to prepare the 25 Budget ith the accompanying projections for 26 to 29 using the information from the draft ne 2 Year Plan ith the recognition that orks and costs beyond 25 may be modified as a result of the deliberations relating to the above noted issues. Acknoledgements: This report as prepared ith the assistance of SHaron Houde, EESD Administrative Services, and revieed by Martin Hayard and Larry Palarchio, Financial Planning and Policy. PREPARED BY: RECDMMENDED BY: il RON STANDSH, P. Eng. DRECTOR, WASTEWATER AND TREATMENT PETER W. STEBLN, P.Eng. GENERAL MANAGER OF ENVRONMENTAL AND ENGNEERNG SERVCES AND CTY ENGNEER

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